RATIO

ANALYSIS
Name: Sahil Jain Class: XII D
Roll No: 24 Year: 2023-2024
Subject: Accounts Project 1
 CONTENTS:
INTRODUCTION 03
BALANCE SHEET 05
STATEMENT OF PROFIT AND LOSS 06
RATIO CALCULATIONS 07
CONCLUSION 12
BIBLIOGRAPHY 13
ACKNOWLEDGEMENT 13

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INTRODUCTION
WHAT IS RATIO ANALYSIS?
Ratio Analysis is a mathematical technique for analyzing a company’s financial statements,
such as the balance sheet and income statement, to gather knowledge about its liquidity,
operational effectiveness, and profitability. Fundamental equity research is built on ratio
analysis.

ADVANTAGES OF RATIO ANALYSIS

1. Forecasting and Planning: The trend in costs, sales, profits and other
facts can be known by computing ratios of relevant accounting figures of
last few years. This trend analysis with the help of ratios may be useful
for forecasting and planning future business activities.
2. Budgeting: Budget is an estimate of future activities on the basis of past
experience. Accounting ratios help to estimate budgeted figures. For
example, sales budget may be prepared with the help of analysis of past
sales.
3. Measurement of Operating Efficiency: Ratio analysis indicates the
degree of efficiency in the management and utilization of its assets.
Different activity ratios indicate the operational efficiency. In fact,
solvency of a firm depends upon the sales revenues generated by utilizing
its assets.
4. Communication: Ratios are effective means of communication and play
a vital role in informing the position of and progress made by the business
concern to the owners or other parties.

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 LIMITATIONS OF RATIO ANALYSIS:
Historical Information: Information used in the analysis is based on past results that the
company releases. Therefore, ratio analysis metrics do not necessarily represent future
company performance.
Inflationary effects: Financial statements are provided on a regular basis, thus there are
time gaps between each publication. If there has been inflation between periods, actual
prices are not represented in the financial accounts.
Changes in accounting policies: If the company’s accounting standards and practices have
changed, this may have a substantial impact on financial reporting.
Operational changes: A company’s operational structure can alter dramatically, from its
supply chain strategy to the product it sells. When large operational changes occur,
comparing financial indicators before and after the change may lead to inaccurate
inferences about the company’s accomplishments and various reports.

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 Balance Sheet as on 31.03.2022 and 31.03.2023
SAHIL Ltd.
ARNAV LTD

PARTICULARS NOTE 31.03.2022 31.03.2023

NO.
EQUITY AND LIABILITIES
1. Shareholders Fund
a. Share Capital 1 55,00,000 60,00,000
b. Reserves and Surplus 2 20,00,000 15,00,000
2. Non - Current Liabilities
a. Long – Term Borrowings 3 3,00,000 5,00,000
b. Long – Term Provisions 4 1,20,000 1,00,000
3. Current Liabilities
a. Short – Term Borrowings 5 5,00,000 2,00,000
b. Trade Payables 6 2,00,000 3,00,000
c. Other Current Liabilities 7 4,00,000 6,00,000
d. Short – Term Provisions 8 2,50,000 1,00,000

Total 92,70,000 93,00,000

ASSETS
1. Non – Current Assets
a. Property, Plant and Equipment and
Intangible Assets
i. Property, Plant and Equipment 9 25,00,000 30,00,000
ii. Intangible Assets 10 17,00,000 15,00,000
b. Non-Current Investments 11 16,00,000 18,00,000

2. Current Assets
a. Current Investments 12 6,90,000 7,00,000
b. Inventories 13 3,00,000 2,00,000
c. Trade Receivables 14 4,00,000 1,00,000
d. Cash and Bank Balance 15 7,10,000 8,00,000
e. Short – term Loans and Advances 16 8,50,000 7,00,000
f. Other Current Assets 17 5,20,000 5,00,000

Total 92,70,000 93,00,000

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 Statement of Profit and Loss for the year
SAHIL Ltd.
ARNAV LTD

PARTICULARS NOTE FIG. AT THE FIG. AT THE

NO. END OF PRP* END OF CRP*
I. Revenue from Operation 12,00,000 15,00,000
II. Other Income 3,00,000 4,00,000
Total Income (I + II) 15,00,000 19,00,000
III. Expenses
a. Purchase of stock in Trade 3,00,000 5,00,000
b. Change in Inventories of Stock in 2,00,000 1,00,000
Trade
c. Employ Benefit Expenses 1,20,000 2,30,000
d. Finance Costs 3,00,000 4,50,000
e. Depreciation and Amortization 2,40,000 3,10,000
Expenses
f. Other Expenses 40,000 50,000
Total Expenses 12,00,000 16,40,000
IV. Profit before Tax (Total Income – Total 3,00,000 2,60,000
Expenses)
Less: Tax @ 30% 90,000 78,000
Profit after Tax 2,10,000 1,82,000

1. Employment Benefit Expenses = 20% (Direct)

2. Interest on Long Term Borrowings = 8%
3. Face Value of Equity Shares = 100 Rupees
4. Market Price of Equity Shares = 10 Rupees
5. 50,000 Equity Shares @ Rs. 100 each
6. 10,000 Preference Share @ Rs. 100 each (12% Preference Share Capital)

NOTE:

*PRP – Previous Reporting Period

*CRP – Current Reporting Period

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 CALCULATION OF RATIOS
2023
1. Liquidity Ratio:
a. Current Ratio = Current Assets / Current Liabilities
= 30,00,000/12,00,000
= 2.5 : 1
Current Assets = Current Investments + Inventories + Trade Receivables + Cash and Bank bal. +
Short term loans and advances + Other Current Assets
= 7,00,000 + 2,00,000 + 1,00,000 + 8,00,000 + 7,00,000 + 5,00,000
= 30,00,000
Current Liabilities = Short-term Borrowings + Trade Payables + Other Current Liabilities + Short-
term Provisions
= 2,00,000 + 3,00,000 + 6,00,000 + 1,00,000
= 12,00,000

b. Quick Ratio = Quick Assets / Current Liabilities

= 28,00,000/12,00,000
= 2.33 : 1
Quick Assets = All current assets – Inventories
= 30,00,000 – 2,00,000
= 28,00,000
Current Liabilities = 12,00,000 (from a.)

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 2. Solvency Ratio:
a. Debt to Equity Ratio = Debt or Long-term Debt/ Equity or Shareholder’s fund
= 6,00,000/75,00,000
= 0.08 : 1
Debt = Long-term borrowings + Long-term provisions
= 5,00,000 + 1,00,000
= 6,00,000
Equity = Share Capital + Reserves and Surplus
= 60,00,000 + 15,00,000
= 75,00,000
b. Proprietary Ratio = Shareholders’ Fund or Equity/ Total Assets
= 75,00,000/ 93,00,000
= 0.806 : 1
SHF = 75,00,000 (from a.)
Total Assets = All Non-Current Assets + All Current Assets
= (30,00,000 + 15,00,000 + 18,00,000) + (7,00,000 + 2,00,000 + 1,00,000 + 8,00,000 + 7,00,000
+ 5,00,000)
= 93,00,000
c. Debt to Total Assets Ratio = Debt/ Total Assets
= 6,00,000/ 93,00,000
= 0.065 : 1
Debt = 6,00,000 (from a.)
Total Assets = 93,00,000 (from b.)

d. Interest Coverage Ratio = Net profit before tax & Interest / Fixed Interest Charges
= 3,24,000/64,000
= 5.062 times
Net profit before tax & interest = 1,82,000 + 78,000 (tax) + 64,000 (interest) = 3,24,000
Fixed Interest Charges = 8% of 5,00,000 + 3,00,000 = 64,000

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 3. Activity Ratio:
a. Inventory Turnover Ratio = Cost of Revenue from Operations/ Average Inventory
= 6,00,000/ 2,50,000
= 2.4 times
COGS = Purchase of Stock in Trade + Change in Inventory = 6,00,000
Average Inventory = 2,00,000 + 3,00,000 / 2
= 2,50,000
b. Trade Receivable Turnover Ratio = Credit Revenue from Operations / Average Trade
Receivables
= 15,00,000/2,50,000
= 6 times

Credit Revenue from Operation = Revenue from Operations – Cash Sales

I. Credit RFO = 15,00,000 – 0 (Assuming all sales are on credit)
Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivable / 2
= 4,00,000 + 1,00,000/ 2
= 2,50,000

c. Trade Payable Turnover Ratio = Net Credit Purchases/ Average Trade Payable
= 4,00,000/2,50,000 = 1.6 times
Purchases = 2,00,000 – 3,00,000 + 5,00,000 = 4,00,000
Average Trade Payables = 2,00,000 + 3,00,000 / 2 = 2,50,000

d. Working Capital Turnover Ratio = Revenue from Operations/ Working Capital

= 15,00,000 / 18,00,000 = 0.83 times
Working Capital = Current Assets – Current Liabilities = 30,00,000 – 12,00,000 = 18,00,000

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 4. Profitability Ratio:
a. Gross Profit Ratio = Gross Profit/ Revenue from Operations * 100
= 9,00,000/15,00,000 * 100
= 60%
Gross Profit = Revenue from Operations – Cost of Revenue from Operation
= 15,00,000 – 6,00,000
= 9,00,000

b. Operating Ratio = Cost of Revenue from Operation + Operating Expenses – Operating

Income / Revenue from Operations * 100
= 6,00,000 + 10,40,000/ 15,00,000 * 100
= 109.33%
Operating Expenses = Employ benefit Expenses + Financial Cost + Depreciation and
Amortization Expenses + Other expenses
= 2,30,000 + 4,50,000 + 3,10,000 + 50,000 = 10,40,000
Operating Income = (not given)

c. Net Profit Ratio = Net Profit / Revenue from Operations * 100

= 1,82,000 / 15,00,000 * 100
= 12.133%

d. Operating Profit Ratio = Operating Profit/ Revenue from Operations * 100 =

(1,40,000)/15,00,000 * 100
= 9.33% (loss)
Operating Profit = Gross Profit – Operating Expenses + Operating Income = 9,00,000 –
10,40,000 = (1,40,000)

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 e. Earnings Per Share = Net Profit (after interest, tax and dividend on preference shares)
/ No. of Equity Shares
= 1,82,000 – 1,20,000 / 50,000
= Rs. 1.24 per share
Dividend on Preference Share = 10,00,000 * 12% = 1,20,000

f. Price Earnings Ratio = Market price of the Equity shares / Earning Per Share
= 10 / 1.24
= 8.064 times

g. Return on Investment = Net Profit Before Interest and Tax / Capital Employed * 100
= 3,24,000/ 81,00,000 * 100
= 4%
Capital Employed = Shareholder’s Fund + Non-Current Liabilities – Non-trade Investments
= 75,00,000 + 6,00,000 = 81,00,000

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 CONCLUSION
Every firm must analyse its financial statements if it wants to expand and
generate more money. Since it improves business operations' efficiency, it
shouldn't be sacrificed. The deep analysis process might be aided by improved
procedures and knowledgeable analysts.
There is frequently an excessive amount of data and information that can aid a
business in making decisions. A business might combine various figures in a
comparison in order to make better use of their knowledge. A corporation can
improve its understanding of how it is performing over time, in comparison to
the competition, and in relation to internal goals by using a method called ratio
analysis. Although ratio analysis can be done using non-financial data, it is
typically based mainly on financial measures.

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 BIBLIOGRAPHY
1. https://www.shiksha.com/online-courses/articles/all-about-financial-statement-
analysis/
2. https://www.investopedia.com/terms/r/ratioanalysis.asp
3. T.S. GREWAL – ACCOUNTS BOOK
4. D.K. GOEL – ACCOUNTS BOOK

ACKNOWLEDGEMENT

I WOULD LIKE TO EXPRESS MY SPECIAL THANKS OF

GRATITUDE TO MY ACCOUNTS TEACHER, WHO GAVE
ME THE GOLDEN OPPORTUNITY TO DO THIS
WONDERFUL PROJECT ON THE TOPIC “RATIO
ANALYSIS”.
SECONDLY I WOULD ALSO LIKE TO THANK MY
PARENTS AND FRIENDS WHO HELPED ME A LOT IN
FINALIZING THIS PROJECT WITHIN THE LIMITED TIME
FRAME.

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