Intermediate (IPC)Course Paper 3 Part 2 Financial Management Chapter 3 CA. N Raja Natarajan, B.Com, PGDBA, ACA


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1 Intermediate (IPC)Course Paper 3 Part 2 Financial Management Chapter 3 CA. N Raja Natarajan, B.Com, PGDBA, ACA
2 Classification of Ratios Liquidity Ratios Capital Structure / Leverage Ratios Activity Ratios Profitability Ratios
3 Liquidity Ratios Current Ratio Quick Ratio Cash Ratio / Absolute Liquidity Ratio Basic Defense Interval Ratio
4 LIABILITIES ASSETS CURRENT LIABILITIES CURRENT ASSETS
5 Current Ratio Current Liability Current Asset Working Capital
6 Current Ratio DANGER ZONE Current Liability Current Asset Working Capital
7 Scenario I II III Current Asset Current Liability Net Working Capital Current Ratio 2:1 1:1 0.67:1
8
9 350 Quick Ratio / Acid Test Ratio Current Liability Current Assets Liquid Assets 0 Working Capital
10 CURRENT ASSET 300 QUICK ASSETS 200 CURRENT LIABILITY 300 QUICK RATIO = QUICK ASSETS / CURRENT LIABILITY = 200/300 = 0.67:1
11 360 Preferable Liquidity Position Current Liability Current Assets Liquid Assets Working Capital
12
13 Absolute Liquid Ratio Current Liability Absolute Liquid Assets 0 Working Capital
14 CURRENT ASSET 350 LIQUID ASSETS 250 ABSOLUTE LIQUID ASSET 150 CURRENT LIABILITY 300 ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS / CURRENT LIABILITY = 150/300 = 0.50:1
15
16 CASH EXPENSES P.A DAYS = CASH EXPENSE PER DAY CASH RESOURCES AVAILABLE CASH EXPENSE PER DAY NO. OF DAYS BASIC DEFENSE INTERVAL
17 Capital Structure Ratios Equity Ratio Debt Ratio Debt to Equity Ratio
18 Share Holders Funds 100 Total Capital Employed 400 EQUITY RATIO = Share holder Funds Total Capital Employed = 100/400 = 25%
19 DEBT (OUTSIDE LIABILITIES) 400 TOTAL CAPITAL EMPLOYED 500 DEBT RATIO =DEBT (OUTSIDE LIABILITIES) TOTAL CAPITAL EMPLOYED = 400/500 = 80%
20 DEBT (OUTSIDE LIABILITIES) 400 EQUITY 100 DEBTEQUITY RATIO =DEBT (OUTSIDE LIABILITIES) EQUITY (SHARE HOLDERS FUNDS) = 400/100
21 DEBT EQUITY RATIO TIMES PERCENTAGE% 400/ /100 x 100 4:1 DEBT 4 TIMES OF EQUITY 400% DEBT 400% OF EQUITY
22 Coverage Ratio Debt service coverage Ratio (DSCR) Interest Coverage Ratio Preference Dividend Coverage Ratio Capital Gearing Ratio
23 Interest on Loan = 100 Installment = Total Debt Obligation = 200 PBDIT = 400 DSCR = Profit Before Depreciation and Interest Interest + Installment = 400/200 = 2 times
24
25 Profit before depn ; Interest and Tax (PBDI T) = 400 Interest on Loan =100 Interest coverage ratio = PBDIT Interest on loan = 400/100 = 4 times
26
27 PAT = 100 Preference Dividend Liability = 25 Preference Dividend Coverage Ratio = Profit After Tax Pref. Dividend Liability = 100/25 = 4 times
28
29 Calculation : Share holders funds = 200 Interest Bearing Funds = 700 Capital Gearing Ratio = Interest Bearing Funds Share holders funds = 700/200 = 3.5 times
30 Activity Ratios Capital Turnover Ratio Fixed Asset Ratio Total Asset Turnover Ratio Working capital Turnover Ratio
31 Calculation I II III Sales Capital Employed Capital Turnover Ratio 1 Time 2 Times 0.5 Times
32
33 Fixed Asset Turnover Ratio = Sales Average Fixed Assets
34
35 Calculation I II III Sales Opening Assets Closing Assets Average Assets Nil Total Assets Turnover Ratio 1.33 Times 0.80 Times 1 Times
36 Working Capital Ratio Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio
37
38 Calculation I II III Cost of Sales Opening Inventory Closing Inventory Average Inventory Inventory T/O Times 2.67 Times 1.60 Times Profit Good Best Reasonable
39
40 Cost of Goods Sold = Cost of Goods Sold per No. of. Days in a Year Day No. of. Days of Inventory = Average Inventory Cost of Goods Sold per day
41
42 Calculation I II III Sales Cash Sales Credit Sales Opening Debtors Closing Debtors Average Debtors Debtors T/O 4 Times 2 Times 1.5 Times Recovery Speed Good Better Should Improve
43
44 Credit Sales = Average Daily Credit Sales Opening Debtors + Closing Debtors = Average Debtors Average Debtors = Average Collection Period Average Daily Credit Sales
45 Sales3,65,000 Open Debtors Cash Sales Credit Sales Credit Sales per Day (/ 365 Days) Closing Debtors Average Debtors Average Collection Period Avg. Drs = =35 Avg. Credit Days Sales per Day
46
47 Calculation I II III Purchases Credit Purchases(60)% Opening Creditors Closing Creditors Average Creditors 150 Creditors Turnover 4 Times 2 Times 1.5 Times Interpretation Rapid Settlement Average Rotation Liberal/Stre ss
48
49 Annual Credit Purchases Days = Credit Purchases per Day Opening Creditors + Closing Creditors = Average Creditors 2 Average Payment Period = Average Creditors Credit Purchases per Day
50 Cash Purchases Purchases3,65,000 Credit Purchases Opening Crs Closing Crs Credit Purchases per Day (/ 365 Days) Average Creditors Average Crs Average = Payment Period Avg. Credit Purchase per Day = =35 Days
51
52 General Profitability Ratio Gross Profit Ratio Operating Ratio Operating Profit Ratio Expenses Ratio Net Profit Ratio
53
54 Calculation: Gross Profit 20 Net Sales 100 x 100 = 20% Gross Sales Sales Return
55 Operating Ratio = Operating Cost Net Sales x 100
56 Sales 100 Sales return 10 Raw material Consumed 60 Manufacturing Expenses 10 Admin Expenses 5 Cost of goods sold Other operating expenses Net Sales 90 Operating cost 75 Operating Ratio = Operating Cost Net Sales x100 = 75/90 x 100 = 83 %
57 Net Sales 100 Operating Cost 80 Operating Profit  20 Operating Profit ratio = Operating Profit 20 Net Sales 100 x 100 = 20/100 x100 20%
58
59 Cost Goods Sold Cost of goods sold x 100 Net sales Expenses Admin Expenses Admin expenses x 100 Net Sales Selling & Distribution Expenses Factory Cost Factory Cost x 100 Net Sales Specific Expenses Specific expenses x100 Net Sales S & D Expenses x 100 Net Sales
60
61 Calculation : Net Profit After Tax 20 x 100 Net Sales 100 Net Profit Ratio = 20/100 x 100 = 20 %
62
63 Return on Investment Ratio Return On Asset Return on Capital Employed Return on Shareholders Equity
64 Sales 100 Less: Operating Expenses 50 Profit before Interest 50 Less: Interest (10) ROA = TOTAL ASSETS PBIT Total Assets = 50/100 = 50% = 35/100 = 35 % Profit before Tax 40 Less: 30% (12) ROA = PAT Total Assets = 28/100 = 28% Profit After Tax = 35 Profit After Tax Before Interest
65
66 BALANCE SHEET LIABILITIES ASSET Share holders funds 100 Bank Loan 100 Sundry Creditors Fixed Assets 150 Current Asset Income Statement Total Capital Employed Sales 200 Less: Operating Expense (150) Operating Profit 50 Less: Interest (10) Profit before Tax 40 ROCE = Operating profit Capital employed = 50/300x 100 = %
67
68 Return on Share holders Funds = Profit After Tax X 100 Share holders Funds
69 Return on Equity Share Holders Funds Earnings Per Share Cash Flow Earnings Per Share Dividend Per Equity Share Dividend Pay Out Ratio Dividend Yield Ratio
70 Comprehensive Illustration Depreciation 100 EP S = Profit after Tax and Pref. Dividend No. Of Equity Shares 100 Profit after Tax 1000 Preference Dividend 100 Profit after Tax and Preference Dividend 900 Equity Dividend Div. Per Share Div. Payout Ratio = 900 / 100 => 9 Per Share = Equity Dividend No. Of Equity Shares = 100 / 100 => 1 Per Share = Dividend Per Share Earnings Per Share = 1 / 9 => 11.11% Cash Flow Earnings Per Share = (PAT & Pref Dividend + Depn/Amtisn + Non Cash Expense) No. Of Equity Shares = ( )/100 = 11 Per Share Div. Yield Per Share = Div. Per Share Market Price per Share = 1/10 => 10% 10/Sh
71
72 Market Value Ratios Earnings Yield Ratio Price Earning Ratio Price to Cash Flow Ratio Market Value to Book Value Ratio
73 Earning Yield Ratio = Earning Per Share (E/P ratio) Market Price Per Share
74 Price Earnings Ratio (or) P/E Ratio = Market Price Per Share Earning Per Share
75 EPS 10 MPS 100 High P/E ratio SOLD Low EPS Low Profit 10 Times of Earnings High Expectation
76 High P/E ratio High Expectations Low profit Compare High Expectations Industry Average Other Shares High Risk Element
77 Cash Flow Earning Per Share = Cash Flow Earnings Market Price Per Share
78
79 Book Value of Share Market Value of Share
80 Equity Share Capital + Reserve & Surplus () Accumulated Loss Books Value No. Of Equity Shares = Books Value Per Share
81 BV = 10 MV = 30 BV to MV ratio = 30/ 10 = 3 Book Value Per Share Balance sheet Past Value Market Value Market Future
82
83 Long Term Sources of Funds Surplus Changes in WC Requirement Increase in WC Long Term Uses of Funds Deficit Changes in WC Decrease in WC
84 Balance Sheet Uses of Funds Decrease in WC Long Term Sources Long term Uses Inflow Outflow Inflow Outflow Short Term Sources Sources of Funds Short Term Uses (Increase in WC)
85 Sources of Funds Uses of Funds LONG TERM USES LONG TERM FUNDS WORKING CAPITAL
86 Sources of Funds Uses of Funds LONG TERM FUNDS LONG TERM USES VE WORKING CAPITAL
87 Fund Flow Analysis Sources of Funds Use of Funds Working Capital aising Long Term Funds TLs Funds From Operations Disposing Long Term Assets Paying Long Term Funds Back Purchase of Long Term Assets Increase in WC Decrease in WC quity Debenture Profit before Depreciatio n and Tax Dividend & Tax
88 Current Year Income Statement Fund Flow Analysis Two Year Balance Sheet Funds Generated Operations Long Term Sources Long Term Uses Changes in WC
89
90 Fund From Operations Long Term Source Profit Before Tax (+) Depreciation/Amortization (+) Losses on the Sales of Assets/Investments () Profit on the Sales of Assets/Investments
91 INCOME STATEMENT BALANCE SHEET Sales Less: Operating Exp Less: Depreciation Less: Tax 100 (50) (20) PBT 30 (10) PAT SOURCES OF FUNDS Liabilitie s Capital Reserves Term loan Current Liabilities PY CY FUND FLOW STATEMENT Assets Fixed Assets Current Assets USES OF FUNDS PY CY Funds From Operations (30+20) 50 Fixed Assets ( ) Capital ( ) Term Loan (6050) Working Capital CY[12050] PY[9040] =70 =50 Tax
92 Financial Soundness Despite Loss Liquidity Strain Indicators Despite Profits Diversion of Short Term Fund for Long Term Purpose Uses of Fund Flow Statement Where Funds Have Come From Funds Generated From Operations Long Term Fund Support for WC Purpose
93
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