Chapter 4
Financial Statement Analysis
Net profit
1. Return on equity =
Equity
= Net profit Total revenues Total assets
x x
Total revenues Total assets Equity
1
= 0.05 x 1.5 x = 0.25 or 25 per cent
0.3
Debt Equity
Note : = 0.7 So = 1-0.7 = 0.3
Total assets Total assets
Hence Total assets/Equity = 1/0.3
2. PBT = Rs.40 million
PBIT
Times interest earned = = 6
Interest
So PBIT = 6 x Interest
PBIT – Interest = PBT = Rs.40 million
6 x Interest = Rs.40 million
Hence Interest = Rs.8 million
3. Sales = Rs.7,000,000
Net profit margin = 6 per cent
Net profit = Rs.7000000 x 0.06 = 420,000
Tax rate = 60 per cent
420,000
So, Profit before tax = = Rs.1,050,000
(1-.6)
Interest charge = Rs.150,000
So Profit before interest and taxes = Rs.1,200,000
Hence
1,200,000
Times interest earned ratio = = 8
150,000
,4. CA = 1500 CL = 600
Let BB stand for bank borrowing
CA+BB
= 1.5
CL+BB
1500+BB
= 1.5
600+BB
BB = 1200
1,000,000
5. Average daily credit sales = = 2740
365
160000
ACP = = 58.4
2740
If the accounts receivable has to be reduced to 120,000 the ACP must be:
120,000
x 58.4 = 43.8days
160,000
Current assets
6. Current ratio = = 1.5
Current liabilities
Current assets - Inventories
Acid-test ratio = = 1.2
Current liabilities
Current liabilities = 800,000
Sales
Inventory turnover ratio = = 5
Inventories
Current assets - Inventories
Acid-test ratio = = 1.2
Current liabilities
, Current assets Inventories
This means - = 1.2
Current liabilities Current liabilities
Inventories
1.5 - = 1.2
800,000
Inventories
= 0.3
800,000
Inventories = 240,000
Sales
=5 So Sales = 1,200,000
2,40,000
7. Debt/equity = 0.60
Equity = 50,000 + 60,000 = 110,000
So Debt = Short term bank borrowing = 0.6 x 110,000 = 66,000
Hence Total assets = 110,000+66,000 = 176,000
Total assets turnover ratio = 1.5
So revenue from operations = 1.5 x 176,000 = 264,000
Cost of goods sold as a percentage of total revenues = 80 per cent
So Cost of goods sold = 0.8 x 264,000 = 211,200
Days’ sales outstanding in trade receivables = 40 days
revenue from operations
So trade receivables = x 40
360
264,000
= x 40 = 29,333
360
Cost of goods sold 211,200
Inventory turnover ratio = = = 5
Inventory Inventory
So Inventory = 42,240
As short-term bank borrowing is a current liability as well,
, Cash and cash equivalents + trade receivables
Acid-test ratio =
Current liabilities
Cash and cash equivalents + 29,333
= = 1.2
66,000
So Cash and cash equivalents = 49867
Plant and equipment = Total assets - inventories – trade s receivables – cash and cash equivalents
= 176,000 - 42240 - 29333 – 49867
= 54560
Putting together everything
Balance Sheet
Equity capital 50,000
Retained earnings 60,000
Short-term bank borrowing 66,000
176,000
Plant & equipment 54,560
Inventories 42,240
Cash and cash equivalents 49,867
Trade receivables 29,333
176,000
Sales 264,000
Cost of goods sold 211,200
8.
(i) Current ratio
= Current assets/ Current liabilities
45,000,000
= = 1.5
30,000,000
Note: Please note that for the purpose of calculation of current ratio and acid –test ratio, we have
to include short-term bank borrowings in current liabilities.
Financial Statement Analysis
Net profit
1. Return on equity =
Equity
= Net profit Total revenues Total assets
x x
Total revenues Total assets Equity
1
= 0.05 x 1.5 x = 0.25 or 25 per cent
0.3
Debt Equity
Note : = 0.7 So = 1-0.7 = 0.3
Total assets Total assets
Hence Total assets/Equity = 1/0.3
2. PBT = Rs.40 million
PBIT
Times interest earned = = 6
Interest
So PBIT = 6 x Interest
PBIT – Interest = PBT = Rs.40 million
6 x Interest = Rs.40 million
Hence Interest = Rs.8 million
3. Sales = Rs.7,000,000
Net profit margin = 6 per cent
Net profit = Rs.7000000 x 0.06 = 420,000
Tax rate = 60 per cent
420,000
So, Profit before tax = = Rs.1,050,000
(1-.6)
Interest charge = Rs.150,000
So Profit before interest and taxes = Rs.1,200,000
Hence
1,200,000
Times interest earned ratio = = 8
150,000
,4. CA = 1500 CL = 600
Let BB stand for bank borrowing
CA+BB
= 1.5
CL+BB
1500+BB
= 1.5
600+BB
BB = 1200
1,000,000
5. Average daily credit sales = = 2740
365
160000
ACP = = 58.4
2740
If the accounts receivable has to be reduced to 120,000 the ACP must be:
120,000
x 58.4 = 43.8days
160,000
Current assets
6. Current ratio = = 1.5
Current liabilities
Current assets - Inventories
Acid-test ratio = = 1.2
Current liabilities
Current liabilities = 800,000
Sales
Inventory turnover ratio = = 5
Inventories
Current assets - Inventories
Acid-test ratio = = 1.2
Current liabilities
, Current assets Inventories
This means - = 1.2
Current liabilities Current liabilities
Inventories
1.5 - = 1.2
800,000
Inventories
= 0.3
800,000
Inventories = 240,000
Sales
=5 So Sales = 1,200,000
2,40,000
7. Debt/equity = 0.60
Equity = 50,000 + 60,000 = 110,000
So Debt = Short term bank borrowing = 0.6 x 110,000 = 66,000
Hence Total assets = 110,000+66,000 = 176,000
Total assets turnover ratio = 1.5
So revenue from operations = 1.5 x 176,000 = 264,000
Cost of goods sold as a percentage of total revenues = 80 per cent
So Cost of goods sold = 0.8 x 264,000 = 211,200
Days’ sales outstanding in trade receivables = 40 days
revenue from operations
So trade receivables = x 40
360
264,000
= x 40 = 29,333
360
Cost of goods sold 211,200
Inventory turnover ratio = = = 5
Inventory Inventory
So Inventory = 42,240
As short-term bank borrowing is a current liability as well,
, Cash and cash equivalents + trade receivables
Acid-test ratio =
Current liabilities
Cash and cash equivalents + 29,333
= = 1.2
66,000
So Cash and cash equivalents = 49867
Plant and equipment = Total assets - inventories – trade s receivables – cash and cash equivalents
= 176,000 - 42240 - 29333 – 49867
= 54560
Putting together everything
Balance Sheet
Equity capital 50,000
Retained earnings 60,000
Short-term bank borrowing 66,000
176,000
Plant & equipment 54,560
Inventories 42,240
Cash and cash equivalents 49,867
Trade receivables 29,333
176,000
Sales 264,000
Cost of goods sold 211,200
8.
(i) Current ratio
= Current assets/ Current liabilities
45,000,000
= = 1.5
30,000,000
Note: Please note that for the purpose of calculation of current ratio and acid –test ratio, we have
to include short-term bank borrowings in current liabilities.
