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प्रश्न
The following particulars are related to X Ltd.:
| 2019-20 (₹) | 2018-19 (₹) | |
| Revenue from Operations (Sales) | 80,00,000 | 60,00,000 |
| Cost of Revenue from Operations | 62,00,000 | 45,00,000 |
| Administrative Exp. | 2,70,000 | 2,40,000 |
| Selling and Distribution Exp. | 5,80,000 | 5,00,000 |
| Depreciation | 2,40,000 | 2,25,000 |
| Interest on Mortgage Loan | 1,10,000 | 80,000 |
| Tax Provision | 1,80,000 | 1,50,000 |
| BALANCE SHEET | ||||
| as at 31st, March ...... | ||||
| Note No. |
2020 (₹) | 2019 (₹) | ||
| I. | Equity & Liabilities | |||
| Shareholder’s Funds | ||||
| Equity Share Capital | 1 | 11,00,000 | 10,00,000 | |
| Reserves & Surplus | 9,75,000 | 5,50,000 | ||
| Non-Current Liabilities | ||||
| Long-Term Borrowings | 2 | 11,00,000 | 8,00,000 | |
| Current Liabilities | ||||
| Trade Payables | 8,20,000 | 6,50,000 | ||
| Short-term Provision | 3 | 1,80,000 | 1,50,000 | |
| 41,75,000 | 31,50,000 | |||
| II. | Assets | |||
| Non-Current Assets | ||||
| Property, Plant and Equipment and Intangible Assets | 17,75,000 | 16,30,000 | ||
| Current Assets | ||||
| Inventory | 15,50,000 | 8,00,000 | ||
| Trade Receivables | 7,20,000 | 6,00,000 | ||
| Cash and Bank Balance | l,30,000 | 1,20,000 | ||
| 41,75,000 | 31,50,000 | |||
Notes to Accounts:
- Face Value of Company’s Equity Share is 10.
-
2020 (₹) 2019 (₹) Long-term Borrowings 10% Mortgage Loan 11,00,000 8,00,000 -
2020 (₹) 2019 (₹) Short-term Provision: Tax Provision 1,80,000 1,50,000
You are required to comment upon the efficiency and financial position of the company by preparing a project report with the help of ratio analysis.
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उत्तर
Introduction of the Project:
The project’s objective is to observe the performance and financial position of X Ltd. based on P & L particulars and balance sheets for two years.
Figures relating to P & L particulars and Balance Sheets for two years have been supplied and are used for project work.
The project work is planned and executed by calculating the following ratios:
- Liquidity Ratios;
- Solvency Ratios;
- Activity Ratios; and
- Profitability Ratios.
(a) Liquidity Ratios:
`bb"Current Ratio"bb:"Current Assets"/"Current Liabilities"`
`"Year 2019":(15,20,000)/(8,00,000)=1.9:1`
`"Year 2020":(24,00,000)/(10,00,000)=2.4:1`
`bb"Quick Ratio"bb:"Liquid Assets"/"Quick Liabilities"`
`"Year 2019":(7,20,000)/(8,00,000)=0.9:1`
`"Year 2020":(8,50,000)/(10,00,000)=0.85:1`
Comments: Although the current ratio has improved in the year 2020 and is well above the standard of 2:1, the short-term financial position of the company cannot be said to be satisfactory. This is because the current ratio is not followed by an increase in the quick ratio. This indicates that the current ratio has increased due to increased inventory. A large portion of current assets consists of inventory, which is the least liquid of current assets.
(b) Solvency Ratios:
`bb"Debt Equity Ratio"bb:"Long term Debts"/"Shareholders’ Funds"`
`"Year 2019":(8,00,000)/(10,00,000 + 5,50,000)=0.52:1`
`"Year 2020":(24,00,000)/(11,00,000+9,75,000)=0.53:1`
`bb"Debt to Total Assets Ratio"bb:"Long term Debts"/"Total Assets"`
`"Year 2019"=(8,00,000)/(31,50,000)=0.25:1`
`"Year 2020"=(11,00,000)/(41,75,000)=0.26:1`
Comments: Debt equity ratio has marginally increased from 0.52 to 0.53, and debt to total assets ratio has marginally increased from 0.25 times to 0.26 times. The long-term financial position of the company is quite satisfactory.
(c) Activity Ratios:
`bb"Inventory Turnover Ratio"bb="Cost of Revenue from Operations"/"Average Inventory"`
`"Year 2019"=(45,00,000)/(8,00,000)=5.625 "times"`
Year 2020
`"Average Inventory"=(8,00,000+15,50,000)/2=11,75,000 "times"`
`"Inventory Turnover Ratio"=(62,00,000)/(11,75,000)=5.277 "times"`
`bb"Trade Receivables Turnover Ratio"bb="Revenue from Operations"/"Average Trade Receivables"`
`"Year 2019"=(60,00,000)/(6,00,000)=10 "times"`
Year 2020
`"Average Trade Receivables"=(6,00,000+7,20,000)/2=6,60,000`
`"Trade Receivables Turnover Ratio"=(80,00,000)/(6,60,000)=12.12 "times"`
Comments: The decline in inventory turnover ratio despite an increase in turnover indicates that there is a considerable pile-up of obsolete or unsaleable inventory within the company. An increase in inventory level is also evident from the increasing trend of the current ratio and the declining trend of the quick ratio.
An increase in the Trade receivables turnover ratio indicates that the amount from Trade receivables is being collected more quickly.
(d) Profitability Ratios:
`bb"Gross Profit Ratio"bb="Gross Profit"/"Revenue from Operations"xx100`
Gross Profit = Revenue from Operations − Cost of Revenue from Operations
`"Year 2019"=(15,00,000)/(60,00,000)xx100=25%`
`"Year 2020"=(18,00,000)/(80,00,000)xx100=22.5%`
`bb"Operating Ratio"bb="Cost of Revenue from Operations + Operating Exp."/"Revenue from Operations"xx100`
`"Year 2019"=(45,00,000+7,40,000+2,25,000("Depreciation"))/(60,00,000)xx100=91.08%`
`"Year 2020"=(62,00,000+8,50,000+2,40,000("Depreciation"))/(80,00,000)xx100=91.13%`
`bb"Net Profit Ratio"bb="Net Profit"/"Revenue from Operations"xx100`
Net Profit = Revenue from Operations − Cost of Revenue from Operations − Administrative Expenses − Selling Expenses − Depreciation − Interest − Tax Provision
`"For 2019"=(3,05,000)/(60,00,000)xx100=5.08%`
`"For 2020"=(4,20,000)/(80,00,000)xx100=5.25%`
`bb"Earning Per Share (E.P.S.)"bb="Net Profit after Tax"/"No. of Equity Shares"`
`"For 2019"=(3,05,000)/(1,00,000)=3.05 "per share"`
`"For 2020"=(4,20,000)/(1,00,000)=3.82 "per share"`
Comments: Gross Profit Ratio has dropped by 2.5%, which indicates that the price of materials purchased or wages and other direct expenses have gone up much more than the increase in selling price. The operating ratio has gone up, which has resulted in a lower margin of profit on sales.
The net profit ratio has gone up from 5.08% to 5.25%, which is an indication of improvement in the firm’s overall efficiency and profitability.
E.P.S. has also gone up from 3.05 to 3.82 per share which indicates that overall profitability of the firm is improving.
Conclusion: Despite an increase in the volume of sales, the gross profit ratio has gone down. This is a cause of concern, and the management should take immediate remedial measures with respect to cost control and control over inventory. As far as overall profitability and financial position are concerned, they are quite satisfactory.
