Question

From the following information, calculate:

1. Return on Investment Ratio.
2. Net Assets Turnover Ratio.

Particulars	₹
Net Profit after Interest and Tax	2,40,000
Tax	1,60,000
Net Fixed Assets: Property, Plant and Equipment and Intangible Assets	10,00,000
Non-current Investments (Non-trade)	1,00,000
Equity Share Capital (Face Value ₹ 10 per share)	5,00,000
15% Preference Share Capital	1,00,000
Reserves and Surplus (including surplus of the year under consideration)	2,00,000
10% Debentures	4,00,000
Revenue from Operations	24,00,000

Answer 1

Preliminary Calculations:

1. Net Profit before Interest and Tax (EBIT):

\[\text{Net Profit before Tax} = \text{Net Profit after Tax} + \text{Tax}\]

$$\text{Net Profit before Tax} = ₹ 2,40,000 + ₹ 1,60,000 = ₹ 4,00,000$$

$$\text{Interest on 10\% Debentures} = ₹ 4,00,000 \times \frac{10}{100} = ₹ 40,000$$

$$\text{EBIT} = \text{Net Profit before Tax} + \text{Interest Expense}$$

$$\text{EBIT} = ₹ 4,00,000 + ₹ 40,00,000$$

$${\text{EBIT} = ₹ 4,40,000}$$

2. Shareholders’ Funds:

$$\text{Shareholders' Funds} = \text{Equity Share Capital} + \text{Preference Share Capital} + \text{Reserves \& Surplus}$$

$$\text{Shareholders' Funds} = ₹ 5,00,000 + ₹ 1,00,000 + ₹ 2,00,000$$

$${\text{Shareholders' Funds} = ₹ 8,00,000}$$

3. Capital Employed (Net Assets):

$$\text{Capital Employed} = \text{Shareholders' Funds} + \text{Long-term Debt} - \text{Non-trade Investments}$$

$$\text{Capital Employed} = ₹ 8,00,000 + ₹ 4,00,000 - ₹ 1,00,000$$

$${\text{Capital Employed} = ₹ 11,00,000}$$

Ratio Calculations:

(i) Return on Investment (ROI):

$$\text{Return on Investment} = \left( \frac{\text{Net Profit before Interest and Tax (EBIT)}}{\text{Capital Employed}} \right) \times 100$$

$$\text{Return on Investment} = \left( \frac{4,40,000}{11,00,000} \right) \times 100 = 40\%$$

$${\text{Return on Investment (ROI)} = 40\%}$$

(ii) Net Assets Turnover Ratio:

$$\text{Net Assets Turnover Ratio} = \frac{\text{Revenue from Operations}}{\text{Capital Employed (Net Assets)}}$$

$$\text{Net Assets Turnover Ratio} = \frac{24,00,000}{11,00,000} \approx 2.1818$$

$${\text{Net Assets Turnover Ratio} = 2.18\text{ Times}} \ $$