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Balance sheet analysis a few points -- for interview -- B.Com, M.Com, MBA candidates

Approach to Processing & Appraising of Credit Proposal.


Interpretation of Financial Statements in Assessment of Credit Needs of borrowers:-

Why Financial Analysis ?

Analysis of the financial data is done for ascertaining the past, existing and projected financial status of the borrower. This is also to compare the SOLVENCY, LIQUIDITY and PROFITABILITY of the borrower’s past, present and future activities.

Review of borrower’s past performance is a base for appraisal, which involves assessment of credit needs and safety aspect of bank credit.

Review should be based on latest financial position and performance. Even at the year end, we may obtain tentative data, Balance Sheet and Profit & Loss Account.

Review of financial position/performance means analysis of past data, which can be classified into–

(a) Profit & Loss Account Analysis.
(b) Balance Sheet Analysis.
(c) Ratio Analysis.
(d) Funds Flow Analysis.

In practice, we may deal with the following types of financial statements – (Balance Sheet and Profit & Loss Account.)

a) Audited Financial Statement – is one which is duly certified by a  Chartered Accountant after due verification of books of account in accordance with accepted accounting principles and policies, various relevant statutes etc.

b)Unaudited/ Provisional Financial Statement is one which is prepared and certified by the borrower after the completion of the accounting year.

c)Tentative/ Estimated Financial Statement – Before the close of the year, financial statement can be prepared on the basis of performance of the past months and estimates made for the rest of the year. This is tentative/estimated financial statement.

d)Projected Financial Statement – This is made for future period after taking into account the past performance, rate of growth, market condition, demand/supply of the products, capacity available and all other factors affecting the business.

Contributed by Shri Uday Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager, Raopura Br


Some Points Relating to Audited Financial Statement -

1) For Corporate bodies i.e. public limited and private limited companies, accounts are audited in accordance with the companies Act 1956 and the Balance Sheet / Profit & Loss A/c. are drawn as per Schedule VI to the Act.

1) For others, Income Tax Act provides for audit of accounts by Chartered Accountants in respect of assessees carrying on business with turnover of Rs.40 lakhs and in respect of professional with gross income receipts of Rs.10 lakhs. Balance Sheet and Profit & Loss account are certified besides tax audit forms no. 3 CA to 3 CD.

1) As far as banks are concerned, RBI directives state that in case of non corporate borrowers, banks should obtain audited financial statement duly certified by CA’s in the prescribed formats, from the borrowers (existing as well as new) enjoying/approaching for working capital facilities of Rs.10 lakhs & above. This was implemented from the accounting year commencing from 31-3-1984( Formats given vide our circular No.374/132/1985 dt.09.08.1985)

Analysis of Financial Statements.

I) Profit & Loss Account Analysis From Operational Data -

(a) Profit & Loss A/c. is a very important part of financial statements as it reveals the result of the performance of the borrowers during the accounting year. It matches revenues (sales/income and other misc. receipts) earned and costs incurred in the process of earning the revenue.

Firstly - net sales (Gross Sales – Excise Duty), and other operating revenues, are compared with the cost of goods sold and gross profit / loss is arrived at.

Secondly - from gross profit other operating expenses (administrative, selling, general expenses and interest) are deducted to calculate operating profit / loss.

Thirdly - where nonoperating income/expenses are added to/ deducted from the operating profit and profit before tax is obtained. When Tax is deducted, the resultant figure is net profit. (profit after tax.)

(b) Profit & Loss Appropriation Account -This shows how the profit earned is utilized. In case of corporate bodies, this account is required to be done to show how much profit is transferred to reserves and paid by way of dividend. The Balance amount is transferred to Profit & Loss A/c. shown in the Balance Sheet.

c) Profit & Loss A/c. analysis would cover the following :-
(i) Trend in Sales turnover is an indicator of the size of business operations. A comparison with past years would be meaningful in judging the progress.
(ii) Trend in components of cost of production viz. cost of Raw Materials, stores and spares consumed, power, direct layout, other manufacturing expenses etc. as well as total cost of production.
(iii) Analysis of fixed costs viz. Selling and Administrative expenses, interest.
(iv) Examination of operating results, indicated by profit before tax and after tax.
(v) How much profit has been retained in the business after dividend /withdrawals.

II) Balance Sheet Analysis – This involves -

(a) Classification of assets into Current and Non Current / fixed and Liabilities into Current, term (noncurrent) and net worth. Current Assets are those which would be converted into cash during normal operating cycle of business, which is 12 months as per RBI guidelines. Similarly liabilities maturing during the next 12 months should be treated as current liabilities.

(b) It is to be noted that Bank borrowings on A/c of Bills purchased/discounted on the Balance sheet date, which normally do not find a place in the Balance Sheet, should be added to the figure of Bank borrowings on liabilities side and to the receivable (debtors) on assets side. While examining current assets/liabilities, current ratio is considered to be very important ratio. We shall study the same in detail under Ratio Analysis.

(c) Analysis of Capital Structure
It is subjective judgment regarding adequacy of capital which varies from concern to concern, based on the nature of business/industry.

However it is good to make judgment on the long-term debt/equity ratio and total debt/equity ratio.
d) Analysis of Composition of Assets /Current Assets -

Here the study is made to know how much funds are utilised in a particular kind of asset like inventory, receivable etc. Since the value of assets in the Balance Sheet are either historical or as estimated by the borrower, they do not necessarily represent the realisable value or replacement value. They may also include some items having no real value to the business.

It is, therefore, necessary to analyze individual items of assets to find out –

(i) Whether fixed asset include nonproductive assets or intangible assets.
(ii) Whether they are made in associate provisions.
(iii) Whether investment is made in associate concerns, and these are in the interest of the business. If amount is large, further enquiry should be made.
(iv) Whether inventory includes non-borrowing items/obsolete stock.
(v) Whether there are any doubtful debts and adequate provision is made therefor, whether there are debts outstanding over 6 months preferably 90 days ? If so, detailed enquiry should be made to assess their realisability. They should be classified as non current assets.
(vi) Whether receivable are due from associate companies and genuine trade dues, otherwise they should be classified as non current assets.
(vii) Whether loans and advances are made to the directors and employees. If so, we should ascertain the probable time of employment.
(viii) Whether there are accumulated loss, whether deferred revenue expenditure/preliminary expenses are written off. These are intangible assets and should be deducted from Capital and Reserves & Surplus to arrive at Tangible Net Worth.

e)  Assessment of composition of Liabilities -

Detailed discussion should be made to find out –
(i) Whether there are overdue installments in term loans granted by other banks.
(ii) Any deposits accepted are overdue.
(iii) Whether there are any borrowings from directors/partners and their family members, associate concern, friends and relatives. If so, what are the terms ?
(iv) Whether there are pressing creditors and any disputes.
(v) Whether there are any overdue statutory liabilities.
(vi) Whether provisions made for depreciation, doubtful debts, bonus, dividend are adequate.
(vii) Magnitude of contingent liabilities and the possibility of their crystallization.

 III) Ratio Analysis

Ratio is the numerical relationship between two numbers. In the context of financial statements Ratio represents relationship between any two items of Balance Sheet and Profit & Loss Account.
Ratios can be expressed by (I) Ratio like 2:1 (ii) ratios like two items or (iii) percentage.

There are some limitations, which should be borne in mind, while using the ratios during the operations of financial statements.

They are :-
(i) Ratios by themselves are based on single set of figures will not reveal anything. They became more useful and informative only when they are compared with the ratios based on past years figures or standard ratios.
(ii) Ratios are meaningless, if detached from the details for which they were derived.
(iii) Since ratios are drawn on the basis of accounting records they suffer from inherent weaknesses of the accounting systems/policies.
(iv) Too many ratios are likely to confuse instead of revealing meaningful conclusions.
(v) Any particular ratio is not a sure indication of good or bad management. On the contrary, they merely convey certain observations pointing to its probability, if matter is needing further investigation.
 
Ratios as of a particular date are compared with
a) those of the previous year which is called trend analysis.
b) those of the some other units in the same industry or with ratios revealing average performance of the Industry.

Ratios are analyzed by shareholders, short-term creditors and long term creditors. However, discussion is confined to bankers point of view which consists of both short term and long term creditors view and on the circumstances.

A)  Analysis for liquidity/short term solvency of the borrowers

a)         LIQUIDITY RATIO :-

(i)    Current Ratio : It is calculated as :

Current Assets                        
Current Liability. (including bank borrowing)
           
It throws light on the liquidity management of the borrower. Current Ratio of above 1 indicates that there is reasonable cushion of current assets over current liabilities. It shows that there is some amount of long term funds that have been deployed in the current assets thereby in working capital.

Current Ratio of below 1 indicates that liquidity of the borrower is not sound and the current assets are not adequate to pay off the current liabilities.

It also indicates that short terms funds have been used for long term uses/to meet funds lost.

This Ratio should be analyzed in association with the net working capital /liquid surplus because current ratio is susceptible to manipulation e.g. if equal amount is added to both numerator and denominator the ratio would decrease and vice versa.

Net working capital /liquid surplus would indicate how much retained profit has been deployed in working capital.

Normally increase in the liquid surplus will increase the Ratio.
Standard current ratio will range between 1.10:1 to 1.33:1

If the ratio is disproportionately high, it indicates –
i)       Under utilisation of resources
ii)    Inventory is poor, not marketable
iii)  Poor debt recovery.
iv)  Poor marketing – No demand for products
v)    High liquidity at the cost of profitability.

If the ratio is disproportionately low, indicates –

i)       Working capital shortage.
ii)    Declining sales-cash flow problem.
iii)  Declining profitability.
iv)  Short-term sources funded in long term use.
v)    Diversion / siphoning of fund.
vi)  Erosion of capital.
vii)Frequent approach for exceeding/ TOD, return of cheques & bills.
viii) Defaulter in repayment.

B) Debt – Equity Ratio (Solvency Ratio):-

The total debt/equity ratio reveals the stake of the borrower in business i.e. his investment in the activity. Ideal ratio is 3:1. Against the own stake in the business, to what extent the unit has raised the outside liabilities.

As per our credit policy, for Large & Medium industries, it is 3.5 : 1 but for SSI it is relaxed to 4:1, For traders, Service Industry, Infrastructure it is 5:1 & Ship breaking it is 6:1. If 100% or more collateral security it is relaxed in between 4.5:1 to  7:1 i.e. for SSI 5:1, For traders, Service Industry, Infrastructure it is 6:1 & Ship breaking it is 7:1.For Trade finance acceptable DER is 6:1.

Debt Equity Ratio (DER)                                =  Total Outside Liability
                                                                            Tangible Net Worth

C)Profitability Ratio is calculated as - Profit  X 100
                                                                Sales          

D)Debt Service coverage Ratio (DSCR)

                        Net Profit  + Deprecation + Interest
DSCR =          Installment + Interest

Data are to be collected from the projected figures for all the years of proposed repayment of the term loan. Minimum should be 1.5 

Fund flow & Cash flow

We have observed that the figures in two balance sheets of different dates of the same business organisation are different. What is the reason for this change ? We know that the balance sheet of a particular day is the snap shot of the asset & liability position of the organisation on the particular day. In any on going business activity, there is a continuous flow of fund from various sources to various uses i.e. flow from liabilities to deployment in assets and recycled / liquidated back to sources/resources. In this course of cycle if the fund generates surplus over the cost, it creates profit. If the profit retained in the business cycle, it increases capital (net worth). If some fresh fund (new sources) like share issue or Bank finance have injected in the cycle it will create new  assets either for long term or for short term use which in course of turnover will generate more surplus. How much fresh fund is to be injected depends upon the fund utilisation capacity. Similarly the surplus generation also depend how quick the fund is recycled and increase of profit depends upon the maximisation of surplus over minimization of cost. Fund may be cash or noncash. Sources (liabilities) and uses (assets) have been classified as long term (term) and short term (current). Long-term sources could be deployed for both long and short term uses i.e. in fixed assets and current assets. But short term sources i.e. current liabilities are to be deployed only for short term uses i.e. in creation of current assets, which can be liquidated easily for recirculation. Deployment of short term sources in long term uses will create cash flow or liquidity problem for the organisation.

Cash is the most liquid part of the fund meant for fast recycling i.e. from short term sources ( Current liability like sale proceeds ) to short term uses (Current assets like inventory) and back to sources through sell. We call this flow of cash as Cash Flow. 

Application of Fund Flow in Appraisal Process -

If we see our banks proposal memorandum form, there we shall find four columns- two columns for two previous years, one for present year-estimated and one for next year’s projection. Here we have to fill in the data of operation (sales & profit), assets and liabilities, their various ratios. There after we have to compare the operational data, ratios and year to year flow of fund from sources to uses to justify the projected figures. From the projected data justified as above, we shall proceed to arrive at the justified Maximum Permissible Bank Finance (MPBF) through the Methodologies as discussed here after.

Now let us discuss what do we mean by term capital, working capital and net working capital (NWC) as we are going to finance the term capital and working capital of the business organisation.

The sources of funds which are required for creation of fixed assets are called as Term Capital or Sunk Capital. This long term fund will come from the owners stake i.e. his net worth /capital or from long term borrowings.

The sources of funds which are used by a business unit for deployment in current assets for smooth running of the production /sales cycle are known as working capital. Here sources are sale proceeds, recovery from book debts and working capital borrowing from banks, deployed in stock of raw material and other inventory.

Working Capital

The components of working capital requirements are -
a.   Raw materials, consumable                     b. Work in process                  c. Finished Goods
d.   Bills Receivable                                         e. Expenses.

Net Working Capital (NWC) is the difference between the total current asset and total current liability i.e. excess of Current Assets over Current Liabilities. We call it liquid surplus or surplus of long term sources over long term uses.

Working Capital Gap (WCG) is the difference between the total current asset and current liability excluding the bank borrowings.

Assessment of working capital limits  As per our Credit Policy -

For SSI units upto Rs. 5.00 crs & other than SSI units upto Rs. 2.00 crs  assessment is done as per turnover method i.e. as per Nayak committee recommendations.

For SSI units above Rs. 5.00 crs & other than SSI units above Rs. 2.00 crs assessment is done as per Modified Maximum Permissible Bank Finance Method which is nothing but Tondon’s IInd method of lending.

Justification for Determining of Credit Limit – 

Apart from the assessment of MPBF as per the methodology, some justification are to be made for determining the credit limit by considering some practical operational aspects. These may be –
i)        Operating cycle,
ii)     Cost of required level of inventory holding,
iii)   Cost of other consumable spares and monthly expenses,
iv)   Borrower’s credit recovery period,
v)     Seasonality,
vi)   Demand & Supply position of market for sale,
vii)  Any other factor.

Please cross check each financial data with the physical operational data as reflected in the books of the borrower and in the books of the Bank from where these have been generated.
Apart from the financial data, some more data as mentioned below are required for sound appraisal of a credit facility.

1)    Borrower’s personal profile,
2)    Guarantor’s personal profile,
3)    Their Associate’s profile,
4)    Profile of the unit,
5)    Market report,
6)    About their other banking arrangements & confidential report from their Bankers.
7)    Viability of the business activity.
8)    This part we shall call to “Know Your Borrower”.

In case of existing units, following points are to be examined:

1)    Value of the account is to be assessed i.e. how much interest and other commission income earned by the Bank from the various operation of the limit.
2)    Assessment of credit utilisation / over utilisation of limit from minimum & maximum outstanding in the account. Under utilisation puts some questions in the mind but outstanding always remains at the top of the limit is alarming.
3)    Liquidity position of the borrower from keeping the outstanding always at the top of the limit or exceeding the limit, bouncing of cheques and bills, all these indicates either liquidity problem or diversion of fund or may be due to poor debts recovery position by bouncing of cheques and bills.
4)    Non observance of credit discipline by not routing sale proceeds through account i.e. credit summation not talleys with that of the sales figure.
5)    Delay in payment of loan installment. ( Delay beyond 90 days means slippage to NPA).
6)    Delay in submission of stock statement and financial data papers for renewal of limit.( Delay beyond 3 months means slippage to NPA).
7)    Adverse comment by the Auditors. Are they rectified?

Our ultimate aim is to keep the account performing.

Contributed by Shri Uday Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager, Raopura Br


Working Capital Assessment

Calculation of Maximum Permissible Bank Finance as per the Recommendations of Nayak Committee.


1) Accepted level of Projected Annual Turnover (PAT)                                                       


2) Working Capital Funds @ 25% Of PAT (Taking 90 days as operating cycle)                 


3) Borrower’s Contribution
           
                        5% of PAT (*)                                    

           
4) Permissible Bank Finance (2 - 3)                                                                                               

(*) In case of assessment under turnover method  -

a) Margin requirements are to be maintained upfront.

b) Where upfront NWC is higher than the minimum margin requirements, the MPBF may be computed by excluding the minimum margin requirement from 25% of the accepted turnover.


Where the Projected Annual Turnover is found to be over optimistic, the same should be pruned to realistic/accepted level.

In case of operating cycle more or less than 3 months, Working Capital Funds is to be increased or decreased accordingly.

Current ratio should be 1.10 : 1.

Calculation of Maximum Permissible Bank Finance as per the Recommendations of Tandon Committee.

First Method of Lending.

(1) Working Capital Gap (WCG) =Total Current Assets (CA) less Other Current Liabilities(OCL).
( OCL means Current Liabilities (CL) excluding Bank Borrowings).

(2) Working Capital Funds required is                                    = WCG (as per 1)

(3) Borrower’s Contribution
           
            a)         25% of WCG                                     

            b)         Net Working Capital (CA- CL)                       _______         
                       
            c)         Higher of 3(a) & 3(b)                                                                                      


(4) Permissible Bank Finance (2-3)                                                                                    

Minimum Current Ratio - 1.17 : 1.
Second Method of Lending. ( Modified Method )

(1) Working Capital Gap (WCG) =Total Current Assets (CA) less Other Current Liabilities(OCL).
( OCL means Current Liabilities (CL) excluding Bank Borrowings).

(2) Working Capital Funds required is                                    = WCG (as per 1)

(3) Borrower’s Contribution
           
            a)         25% of Current Asset                                    

            b)         Net Working Capital (CA- CL)                       _______         
                       
            c)         Higher of 3(a) & 3(b)                                                                                      


(4) Permissible Bank Finance (2-3)                                                                        
Minimum Current Ratio - 1.33 : 1.

For SSI units upto Rs. 5.00 crs & other than SSI units upto Rs. 2.00 crs  assessment is done as per turnover method i.e. as per Nayak committee recommendations.

For SSI units above Rs. 5.00 crs & other than SSI units above Rs. 2.00 crs assessment is done as per Modified Maximum Permissible Bank Finance Method which is nothing but Tandon’s IInd  method of lending.

Contributed by Shri Uday Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager, Raopura Br


IMPORTANT FINANCIAL RATIOS WITH PRACTICAL SOLUTION

Before we discuss important ratios we must know the very basic terms of Balance Sheet. They are-

1. Gross Working Capital                                            = Current Assets
2. Net Working Capital                                                = Current Assets - Current Liabilities ( CA-CL)
3. Other Current Liability(OCL)                              = Current Liabilities - Bank Borrowing or overdraft
4. Quick Assets                                                           = Current Assets - Inventories
5. Working Capital Gap                                              = Current Assets - Other Current Liabilities
                                                                                        (CA - OCL).
6. Net Worth                                                                = Paid up Capital + Free Reserves + Surplus
7. Tangible Net Worth                                     = Net worth - Intangible Assets

For interpretation of balance sheet the following ratios are to be compared.
A) Liquidity Ratios, B) Solvency Ratio, C) Leverage Ratios, D) Profitability Ratios & E) Activity Ratios ( i.e. Operational efficiency Ratios).

Basically Liquidity Ratios & Solvency Ratios (Leverage Ratios) are the ratios which indicate financial strength of unit. Liquidity Ratios express instant financial strength of unit whereas Solvency Ratio express financial strength in long run.  

(A) Liquidity Ratios
1. Current Ratio                                                          =   Current Assets
                                                                                        Current Liabilities

Bench Mark is  minimum 1.33:1. But as per our Credit Policy Desirable CR under Turn over Method is 1.10:1 & under Modified MPBF-for credit limits upto Rs. 10.00 crs is 1.17 : 1  & Above Rs. 10.00 crs is 1.25:1. It means for working out MPBF, minimum margin is to be taken @15% or 20% of total current assets.
       
2. Acid test Ratio or Quick Ratio                                =   Quick Assets
                                                                                      Quick Liabilities,     Accepted 1:1
(B) Solvency Ratio                                              =   Tangible  Assets
                                                                                 Total Outside Liabilities, should be more than 1.          
(C) Leverage Ratios                                                                                                 
1. Debt Equity Ratio (DER)                                =  Total Outside Liability
                                                                                 Tangible Net Worth

Bench Mark is  maximum 3:1. As per our credit policy, for Large & Medium industries, it is 3.5 : 1 but for SSI it is relaxed to 4:1, For traders, Service Industry, Infrastructure it is 5:1 & Ship breaking it is 6:1. If 100% or more collateral security it is relaxed in between 4.5:1 to  7:1 i.e. for SSI 5:1, For traders, Service Industry, Infrastructure it is 6:1 & Ship breaking it is 7:1.For Trade finance acceptable DER is 6:1.

2. Debt Service Coverage Ratio (DSCR)
= Net Profit + Depreciation + Interest on Term Loan
            Installment +  Interest on Term Loan.

Bench Mark is  minimum 1.5. As per our credit policy minimum average DSCR between 1.50 to 2.00 is acceptable. Higher the better. Higher the DSCR the lower the repayment schedule & lower the DSCR higher the repayment schedule.
3. Interest Service Coverage Ratio (ISCR)              =   Profit Before Depreciation & Interest
                                                                                                            Interest
As per our credit policy Accepted ISCR should be between 1.50 and 1.75. Higher the better.

(D) Profitability Ratios

1. Gross Profit Ratio                                       =  Gross Profit  x 100
                                                                             Net Sales
2. Operating Profit Ratio                                 = Operating Profit  x 100
                                                                             Net sales
3. Net  Profit Ratio                                          =  Net Profit  x 100
                         Net Sales
4. Return on Assets                                        = Profit Before Interest & Tax  x 100
                         Total Tangible Assets

5. Return on Equity                                         = Net Profit  x 100
                        Net Worth.


(E) Activity Ratios (Operational Efficiency Ratios).

1. Debtors Turnover Ratio                              =  Debtors  x 12  (in months)  OR
                                                                   
      Sales
               =  Debtors  x 365  (in days)                                                                          Sales
2. Creditors Turnover Ratio                            =  Creditors  x 12  (in months)            OR
                                                                   
     Purchases
                                                                        =  Creditors  x 365  (in days)                                                                                                            Purchases
3. Current Assets Turnover Ratio                   = Gross Sales
                                                                          Stock + Debtors
   
As per our credit policy bench Mark is  minimum 1.75:1, More the better.

Break Even Point.  For a business unit Break Even Point means a certain business level where unit registers no loss and no profit.

Break Even Point (in Rupees)                        = Fixed Cost (F)  x Sales        OR
                                                                          Contribution

Break Even Point (in Units)                            = Fixed Cost (F)                      OR
                                                                          Contribution

Break Even Point                                            = Fixed Cost (F)
                                                                            P/V Ratio

Profit Volume Ratio ( P/V Ratio)                    =  Contribution  X 100
                                                                               Sales

Contribution                                                     = Selling Price - Variable Cost *

Profit (P)                                                         = Contribution - Fixed Cost
                                                           
* Variable cost means cost which varies according to the size of production.
Formula for Registering Desired Level of Profit is-

A Level of Business to Register
Desired Level of Profit =                     Fixed Cost + Desired Profit  x Sales
                                                                                   Contribution

Contributed by Shri Sharad Kumar Rewatkar, Chief Manager, Raopura Branch



Following is a Balance Sheet of M/s Girdharilal & Co. for the Year March, 2008.

Liabilities
Amt. in Lacs
Assets
Amt. in Lacs
Capital
430
Land & Building
100
Reserves
60
Plant & Machinery
200
Term Loan
30
Bank Fixed Deposit
20
Provision for Taxation
10
Govt. Securities
50
Sundry Creditors
200
Stock
300
Unsecured loan
50
Sundry Debtors.
250
Cash Credit
200
Prepaid Expenses
20
Deposit from Dealer
50
Advance Payment to Supplier
10
Advance Payment from Customer
70
Cash on Hand
10


Cash on Bank
10


Patent
50


Goodwill
40


Tender Deposit
20


Old Stock
20
Total
1,100
Total
1,100

Last Year’s Sale          -Rs. 1,200 lacs                       Last Year’s Purchase  - Rs. 1,100 lacs         
This Year’s Sale           - Rs. 1,500 lacs                      This Year’s Purchase  - Rs. 1,350 lacs         
Projected Sale            -Rs. 2,000 lacs                       Projected Purchase     - Rs. 1,760 lacs         
Gross Profit                 - Rs. 150 lacs                          Operating Profit          - Rs. 100 lacs
Profit After Tax            - Rs. 75 lacs

Net Worth = Capital + Reserves = Rs. 430 + Rs. 60 = Rs. 490 lacs
Intangible Assets = Patent & Goodwill = Rs. 50+ 40 = Rs. 90 lacs

Tangible Net Worth = Total Worth - Intangible Assets = Rs. 490 - 90 = Rs. 400 lacs
Term Liability = Term Loan   = Rs. 30 lacs

Current Liability = Provision for Taxation + Sundry Creditors + Cash Credit + Unsecured Loan* + Deposit from Dealer * + Advance Payment from Customer * = Rs. 10 + 200 + 50 + 50 + 200 + 70 = Rs. 580 lacs.( Deposit taken from Dealer or Advance Payment taken from Customer are Current Liability)

* Unsecured loan is a loan taken from close relatives. So if loan taken from director or close relatives and no period is mentioned then it is a current liability.  If period is mentioned for more than 12 months or it is not required to be repaid till the currency of Bank loan. Then it is considered as term liability.
Total Outside Liability =Term Liability + Current Liability OR Liability other than Total worth
                                     = Rs. 30 + Rs. 580 = Rs. 610 lacs.
Term / Fixed assets = Land & Building  + Plant & Machinery = Rs. 100 + Rs. 200 = Rs. 300 lacs

Current Assets = Bank Fixed Deposit $ + Govt. Securities $ + Stock + Sundry Debtors + Pre paid Expenses + Advance Payment to Supplier + Cash on Hand + Cash in Bank
          = Rs. 20 + 50 + 300 + 250 + 20 + 10 + 10 + 10  =  Rs. 670 lacs.

($ Bank Fixed Deposit & investment in Govt. Securities are treated as Current Asset).
Non Current Assets = Tender Deposit + Old/ outdated stock = Rs. 20 + 20 = Rs. 40 lacs.

1. Gross Working Capital = Current Assets = Rs. 670 lacs
2. Net Working Capital = Current Assets - Current Liabilities = Rs. 670 - Rs. 580 = Rs. 90 lacs
3. Other Current Liability(OCL) = Current Liabilities - Bank Borrowing or overdraft
                                                  = 580 - 200 = Rs. 380 lacs
4. Working Capital Gap          = Current Assets - Other Current Liabilities
                                                = Rs. 670 - 380 = Rs. 290 lacs.

5. Quick Assets                       = Current Assets - Inventories = Rs. 670 - 300 = Rs. 370 lacs.

(A) Liquidity Ratios

1. Current Ratio                                  =   Current Assets                   =          670      =          1.16
                                                                 Current Liabilities               580                 

2. Acid test Ratio or Quick Ratio       =   Quick Assets                      =          370      =          0.97    
                                                               Quick Liabilities                                380                 
(B) Solvency Ratio    =   Tangible  Assets                                      =           1010    =          1.66
                                                             Total Outside Liabilities                      610

(C) Leverage Ratios                                                                                                 

1. Debt Equity Ratio (DER)               =  Total Outside Liability            =          610     =          1.53
                                                               Tangible Net Worth                          400     
(D) Profitability Ratios

1. Gross Profit Ratio                           = Gross Profit x 100               = 150 X 100    =          10%
                                                                 Net Sales                                  1500

2. Operating Profit Ratio                     = Operating Profit x 100         = 100 X 100    =          6.67%
                                                                  Net sales                                 1500

3. Net  Profit Ratio                              =  Profit After Tax x 100         = 75 X 100      =          5%
                Net Sales                   1500
(E) Activity Ratios

1. Debtors Turnover Ratio                  =  Debtors  x 12  (in months)  =      250X 12  =  2 Months                                                                              Sales                                             1500                
                                                                                                                                                OR
   =  Debtors  x 365  (in days)    = 250 X 365   = 61 Days                            Sales                                       1500        

2. Creditors Turnover Ratio                =  Creditors  x 12  (in months)            =  200 X 12   = 1.78 Months                                                 Purchases                                             1350        

                                                                                                                                                OR                 
                                                            =  Creditors  x 365  (in days)   =  200 X 365  = 54 Days                                                                               Purchases                                    1350

3. Current Assets Turnover Ratio       = Gross Sales                         =  1500                        =  2.73
                                                              Stock + Debtors                       300+ 250     



Following is a Balance Sheet of M/s Shyamsunder & Co. for the Year March, 2008.

Liabilities
Amt. in Lacs
Assets
Amt. in Lacs
Capital
300
Plant & Machinery
170
General Reserves
140
Furniture & Fixture
30
Surplus in P & L
20
Stock

Term Loan from IDBI
130
Raw Material
340
Car loan from Dena Bank
15
Work In Progress
160
Term Deposits
45
Finished Goods
100
Debentures
60
Receivable
320
Cash Credit from Dena Bank
210
Cash on Hand
40
OD from Dena Bank
150
Cash with Bank
10
Creditors - Trade
170
Investment in shares
50
Creditors - Others
30
Preliminary Expenses
50




Total
1,270
Total
1,270

1) Credit Purchase is Rs. 1,700 lacs.
2) Annual Sales is Rs. 3,200 lacs.
3) 5% of the debtors is not recoverable.   i.e.              - Rs. 16 lacs
4) Gross Profit - Rs. 200.00 lacs. Operating Profit - Rs. 125 lacs,   Net Profit i.e. Profit After tax - Rs. 90 lacs.
-272
Total/Net Worth = Capital + General Reserves + Surplus in P & L Term Loan= Rs. 300 + Rs. 140 + Rs. 20 = Rs. 460 lacs

Intangible Assets = Preliminary Expenses = Rs. 50 lacs

Tangible Net Worth = Total Worth - Intangible Assets = Rs. 460 - 50 = Rs. 410 lacs

Term Liability = TL from IDBI + Car Loan + Term Deposit + Debentures = 130 + 15 + 45 + 60 = Rs. 250 lacs

Current Liability = Cash Credit from Dena Bank + OD from Dena Bank + Creditors (Trade) + Creditors (Others) = Rs. 210 + 150 + 170 + 30 = Rs. 560 lacs.

Total Outside Liability =Term Liability + Current Liability OR Liability other than Total worth
                                        = Rs. 250 + Rs. 560 = Rs. 810 lacs

Term / Fixed Assets = Plant & Machinery + Furniture & Fixture = Rs. 170 + Rs. 30 = Rs. 200 lacs

Current Assets = Stock (RM + WIP + FG) + Receivable + Cash on Hand + Cash in Bank
               = Rs. 600 (340 + 160 + 100) + 304 (320-16) + 40 + 10  =  Rs. 954 lacs

Non Current Assets = Bad Doubtful Debt + Investment in Shares = Rs. 16 + 50 = Rs. 66 lacs.

Total Assets =  FA + CA + NCA + IN. A = 200 + 954 + 66 + 50 = Rs. 1270 lacs

1. Gross Working Capital        = Current Assets = Rs. 954 lacs

2. Net Working Capital = Current Assets - Current Liabilities = Rs. 954 - Rs. 560 = Rs 394 lacs.
3. Other Current Liability(OCL) = Current Liabilities - Bank Borrowing & overdraft

                                                  = 560 - 210 - 150 = Rs. 200 lacs

4. Working Capital Gap          = Current Assets - Other Current Liabilities = Rs. 954 - 200
                                                = Rs. 754 lacs.

5. Quick Assets                       = Current Assets - Inventories = Rs. 954 - 600 = Rs. 354 lacs.

(A) Liquidity Ratios

1. Current Ratio                                  =   Current Assets                   =          954      =          1.70
                                                                 Current Liabilities               560                 

2. Acid test Ratio or Quick Ratio      =   Quick Assets                       =          354      =          1.77    
                                                              Quick Liabilities                                 200                 

(B) Solvency Ratio=   Tangible  Assets                                           =           1220    =          1.51
                                                             Total Outside Liabilities                      810

(C) Leverage Ratios                                                                                                 

1. Debt Equity Ratio (DER)            =  Total Outside Liability            =            810     =          1.98
                                                           Tangible Net Worth                               410    

(D) Profitability Ratios

1. Operating Profit Ratio                     = Operating Profit x 100         = 125 X 100    = 3.91%
                                                                        Net sales                           3200

2. Net Profit Ratio                               =  Profit After Tax x 100         = 90 X 100      = 2.81%
                Net Sales                3200
(E) Activity Ratios

1. Debtors Turnover Ratio                  =  Debtors  x 12  (in months)  =      304X 12  =  1.14 Months                                                                          Sales                                         3200       
   
                                                                                                            OR                 

   =  Debtors  x 365  (in days)    = 304 X 365   = 35 Days                            Sales                                      3200         

2. Creditors Turnover Ratio                =  Creditors  x 12  (in months)            =  170 X 12   = 1.20 Months                                                 Purchases                                             1700                    
                                                                                                            OR
           
                                                            =  Creditors  x 365  (in days)   =  170 X 365  = 36 Days                                                                                Purchases                                   1700

3. Current Assets Turnover Ratio       = Gross Sales                         =  3200            =  3.54
                                                              Stock + Debtors                        600 + 304   


Balance sheet analysis a few points -- for interview -- B.Com, M.Com, MBA candidates Reviewed by sambasivan srinivasan on 5:04:00 PM Rating: 5

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