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CHAPTER-4
RATIO ANALYSIS

Current Ratio

CA/CL

Question: Current Assets Rs. 2,00,000; Inventories Rs. 1,00,000; Working Capital Rs. 1,20,000;
Calculate Current Ratio.

Solution : Current liabilities = Current Assets – Working Capital

= Rs. 2,00,000 – Rs. 1,20,000 = Rs. 80,000
Current Ratio = Current Assets/ Current liabilities
= Rs. 2,00,000/Rs. 80,000
= 2.5:1

QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

Liquid assets/CL

Question 1: Liquid Assets Rs. 6,80,000, Inventories Rs. 1,90,000, Prepaid Expenses Rs. 10,000, Working
Capital Rs. 2,00,000. Calculate the Current Ratio and Quick Ratio.

Question 2. The Quick Ratio of a company is 2:1. State giving reason, which of the following would
improve, reduce or not change the ratio:

(i) Purchase of Stock-in-trade(costing Rs.10,000) for Rs. 11,000.

(ii) Sale of an office furniture (Book value Rs. 10,000) for Rs. 9,000.

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(iii) Payment of Dividend.

(iv) Issue of Equity shares.

SOLVENCY RATIOS

Debt/ Equity
Question: From the following information. Calculate Debt-equity Ratio:

Equity Share Capital 1,50,000

Preference Share capital 1,00,000
Reserves and Surplus 1,50,000
Long-term Borrowings 6,00,000
Long-term Provisions 2,00,000

Solution:
Debt = Long-term Borrowings + Long-term Provisions
= Rs. 6,00,000 + Rs. 2,00,000 = Rs. 8,00,000

Equity = Equity Share Capital + Pref. Share Capital + Reserves & Surplus
= Rs. 1,50,000 + Rs. 1,00,000 + Rs. 1,50,000 = Rs. 4,00,000

Debt-Equity Ratio = Debt/Equity = Rs. 8,00,000/Rs. 4,00,000= 2:1

Question: X ltd. Has a liquid ratio of 1.5:1. Its Net working Capital is Rs. 1,20,000 and its inventories
are Rs 80,000. Total Assets Rs. 3,80,000. Total Debt Rs. 2,80,000. Calculate Debt-Equity Ratio.
(Ans. 2:1)
Total Assets to Debt Ratio

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Question: From the following information, calculate Proprietory Ratio:

Share Capital Rs. 2,50,000 Reserves & Surplus Rs. 1,50,000
Non-current Assets Rs. 11,00,000 Current Assets Rs. 5,00,000.
Solution : Rs. 4,00,000/Rs. 16,00,000 X 100 = 25%

INTEREST COVERAGE RATIO

EBIT/Fixed int charges
Question : P ltd has a long term loan Rs. 10,00,000. Interest on the loan for the year is Rs. 1,25,000
and its profit before interest and tax is Rs. 5,00,000. Calculate Interest coverage ratio.

Solution : Interest coverage ratio = 5,00,000/1,25,000

= 4 times.
TURNOVER OR ACTIVITY OR PERFORMANCE RATIOS
INVENTRY TURNOVER RATIO

COGS/AVG inventory
Question: Calculate Inventory turnover ratio:
Cost of goods sold/Revenue from operations Rs. 9,00,000
Inventories in the beginning Rs. 2,00,000
Inventories at the end Rs. 2,50,000
Solution: Inventory turnover ratio = 9,00,000/2,25,000
= 4 times

Trade receivables/Debtors turnover ratio

Net credit sales/ avg accts receivables

Question: Calculate Trade receivable or Debtors turnover ratio and Average collection period.

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Credit revenue from operation for the year is Rs. 12,00,000, Debtors Rs. 1,00,000; Bills receivable Rs.
1,00,000.

Solution: Debtors turnover ratio = 12,00,000/2,00,000

= 6 times
Average collection period = No. of days in a year/Trade receivable ratio
=365/6
= 61 days approx..

Trade payables/Creditors turnover ratio

Net credit purchases/avg accounts payables

Question: Closing Trade Payables Rs. 45,000, Net Purchases Rs. 3,60,000, Cash Purchases Rs. 90,000,
Reserve for Discount on Closing Trade Payables Rs. 5,000. Calculate the Creditors Turnover Ratio.
Solution: Creditors Turnover Ratio = (Rs. 3,60,000 – Rs. 90,000)/Rs. 45,000
= 6 times
Average Payment Period = 12 months/Creditors turnover ratio = ……..months

Working capital turnover ratio

Working Capital/net sales

Questions: Calculate Working capital turnover ratio from the following:
Cost of revenue from operations Rs. 3,00,000
Current Assets Rs. 2,00,000
Current liabilities Rs. 1,50,000
Solution: Working capital turnover ratio
= 3,00,000/50,000

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= 6 times.
PROFITABILITY RATIOS
Gross Profit Ratio:
Gross profit/net sales *100
Question: Calculate Gross Profit Ratio:
Revenue from operations – Rs. 6,00,000
Gross profit 25% on cost.
Solution: Let the cost = Rs.100
Gross profit = Rs. 25
Revenue from operations = Rs.125
Cost of revenue from operations = 100/125 X 6,00,000
= 4,80,000
Gross Profit = 6,00,000 – 4,80,000
= 1,20,000
Gross Profit Ratio = 1,20,000 /6,00,000 X 100
= 20%

Operating Profit Ratio

Operating profit/net sales
Question: Revenue from operations Rs. 6,00,000, Operating Cost Rs. 5,10,000. Cost of Revenue form
operations Rs. 4,00,000. Calculate Operating Profit Ratio.

Solution: Operating Profit = Rs. 6,00,000 – 5,10,000 = Rs. 90,000

Operating Profit Ratio = Rs. 90,000/Rs. 6,00,000 X 100
= 15%

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Operating ratio
Operating cost/Net sales
Question: From the following information calculate operating ratio
Cost of revenue from operation = Rs. 6,00,000
Operating expenses = Rs. 40,000
Revenue from operation = Rs. 8,20,000
Revenue return from operations = Rs. 20,000
Solution:
Operating ratio =( 6,00,000 + 40,000/8,00000)X100 = 80%
Net profit ratio
Question: Revenue from Operations Rs. 10,00,000, Gross Profit Ratio 25%, Operating Ratio 90%,
Operating Rs. 1,00,000, Non-operating Expenses Rs. 5,000, Non-operating income Rs 55,000. Calculate
Net Profit Ratio.
Solution:
Operating Profit Ratio = 100 – Operating Ratio = 100 - 90% = 10%
Operating Profit = Rs. 10,00,000 X 10/100 = Rs. 1,00,000
Net Profit = Operating Profit + Non-operating Incomes – Non-Operating Expenses
= Rs. 1,00,000+Rs. 55,000 – Rs. 5,000 = Rs. 1,50,000
Net Profit Ratio = Rs. 1,50,000/Rs. 10,00,000 X 100 = 15%

Return on Investment or Return on Capital Employed =

EBIT *100
Capital Employed

Question: From the following information calculate Return on Investment

Net profit after interest and tax – Rs. 1,20,000
Tax – Rs 1,20,000

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Net fixed Assets – Rs.. 5,00,000

Long term trade investment – Rs. 50,000
Current assets – Rs. 2,20,000
12% debentures – Rs. 4,00,000
Equity share capital – Rs. 50,000
10% preference share capital – Rs. 50,000
Reserve and surplus – Rs. 1,00,000
Current liability – Rs. 1,70,000
Solution : Return on Investment = 1,20,000+ 1,20,000 + 48,000
5,00,000 + 50,000 + 50,000 = 6,00,000
= 2,88,000 X 100
= 48%

QUESTIONS: 4 marks
1. From the following information calculate:
(i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio
(v) net Profit ratio (vi) Working Capital Ratio
Revenue from operations Rs. 25,20,000
Net Profit Rs. 3,60,000
Cost of Revenue from operations Rs. 19,20,000
Long-term Debt Rs, 9,00,000
Trade Payables Rs. 2,00,000
Average Inventory Rs. 8,00,000
Other Current Assets Rs. 7,60,000
Fixed Assets Rs. 14,40,000
Current liabilities Rs. 6,00,000
Net Profit before interest and tax Rs. 8,00,000

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2. From the following calculate :

(a) Net Profit Ratio
(b) Operating Profit Ratio
Revenue from operations Rs. 2,00,000
Gross Profit Rs. 75,000
Office Expenses Rs. 15,000
Selling Expenses Rs. 26,000
Interest on Debentures Rs. 5,,000
Accidental Losses Rs. 12,000
Income from Rent Rs. 2,500
Commission received Rs. 2,000
( Ans Net profit ratio = 10,75% and Operatin profit ratio = 18%
3. Find the value of current liabilities and current assets if Current Ratio is 2.5:1. Liquid Ratio is
1.2:1 and the value of inventory of the firm is Rs. 78,000.
(Ans. Current Assets = Rs. 1,50,000; Current liabilities = Rs. 60,000)

4. Current Ratio is 3.5. Working Capital is RS. 90,000. Calculate the amount of Current Assets and
Current Liabilities.

Hint: Current Assets – 1,26,000

5. Shine Limited has current ratio 4.5:1 and quick ratio 3:1; if the inventory is Rs. 36,000, calculate
current liabilities and current assets.

Hint: Current Assets – 1,08,000

6. Current liabilities of a company are Rs. 75,000. If current ratio is 4:1 and liquid ratio is 1:1,
calculate value of current assets, liquid assets and inventory.

Hint: Inventory – 2,25,000

7. Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is
2:1. Calculate current ratio.

Hint: Current Ratio: 2:4:1

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8. Calculate Debt-Equity ratio from the following information:

Total Assets Rs. 625000

Total Debt Rs. 500000

Current Liabilities Rs. 250000

Hint: Debt Equity Ratio – 2:1

9. Calculate following ratios from the following information:

i. Current Ratio

ii. Acid – Test Ratio

iii. Operating Ratio

iv. Gross Profit Ratio

Current Assets Rs. 35000

Current Liabilities Rs. 17,500
Inventory Rs. 15,000
Operating Expenses Rs. 20,000
Revenue from Operaions Rs. 60,000
Cost of revenue from Operations Rs. 30,000
Hint: 2:1, 1.14:1, 83.3%, 50%
10. Akshara Ltd. has 8% Debentures of Rs. 5,00,000. Its profit before interest & tax is Rs. 2,00,000.
Calculate Interest Coverage Ratio.

Hint: 5 times

Chapter 5

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