SEBI Commerce & Accountancy Syllabus PDF

SEBI GRADE A SYLLABUS Commerce & Accountancy a) Accounting as a financial information system; b) Accounting Standards with specific reference to Accounting for Depreciation, Inventories, Revenue Recognition, Fixed Assets, Foreign Exchange Transactions, Investments. c) Cash Flow Stat...

SEBI GRADE A SYLLABUS Commerce & Accountancy a) Accounting as a financial information system; b) Accounting Standards with specific reference to Accounting for Depreciation, Inventories, Revenue Recognition, Fixed Assets, Foreign Exchange Transactions, Investments. c) Cash Flow Statement, Fund flow statement, Financial statement analysis; Ratio analysis; d) Accounting for Share Capital Transactions including Bonus Shares, Right Shares. e) Employees Stock Option and Buy-Back of Securities. f) Preparation and Presentation of Company Final Accounts. Accounting Standards for Fixed Assets Fixed Assets Accounting Standards for Depreciation Accounting Standards for Depreciation Concept of Depreciation and its methods AS 10 – Property, Plant and Equipment (Measurement & Models) Fixed Assets AS 10 – Some Standards for Depreciation Accounting Standards for Foreign Exchange Transactions (AS 11) Foreign Currency Foreign Operations Transactions Issues At which exchange rate Handle Changes in to be recorded exchange rates Accounting Standards for Foreign Exchange Transactions A business entity may have to deal with the issue of the changes in the exchange rates. In other words, a business entity may have certain undertakings that involve foreign exchange. These undertakings could either be business transactions in foreign currencies or operations outside the country of its domicile. Now, business transactions in foreign currencies or foreign operation must be included in the financial statements of the business entity. The fundamental issues with accounting for such foreign currency transactions or foreign operations are: the exchange rate at which these should be recorded and the manner in which the differences on account of changes in the exchange rates must be identified. Accounting Standards for Foreign Exchange Transactions Foreign Currency Transactions Foreign Operations PARA 46 Forward Exchange Contracts  Foreign Currency Transactions A transaction in foreign currency is nothing but a transaction that is either expressed or requires settlement in a foreign currency. Accordingly, foreign currency transactions include transactions like: buying or selling of goods or services where prices are expressed in a foreign currency borrowing or lending funds where the amounts receivable or payable are expressed in a foreign currency the ones where the business entity is one of the parties to an unperformed foreign exchange contract purchasing or disposing off assets, incurring or settling liabilities that are expressed in a foreign currency  Foreign Currency Transactions Initial Recognition $1 = Rs.70 Rs.70.5 Rs.69.8 Rs.70.2 Rs.69.5 Rs.70 Financial Statements = Reporting Currency Exchange Rate = Date of the transaction Single Rate = Average rate of week or Month  Foreign Currency Transactions Initial Recognition On initial recognition, a foreign currency transaction must be recorded in the reporting currency. Reporting currency is the currency that is used by the business entity to report its business transactions in the financial statements. Accordingly, the foreign currency transactions are recorded by applying the foreign exchange rate between the reporting currency and foreign currency to the foreign currency amount. This exchange rate is the prevailing rate at the date of transaction. Also, a single rate, which is a close approximation of the actual exchange rate, may be used to record all the foreign currency transactions. Such a rate could be the average rate of a week or month. However, in cases where there is frequent fluctuations in the exchange rate, using a single average rate for that period may not be valid.  Foreign Currency Transactions Date – 01/01/2022 $1 = Rs.70 Balance Sheet Date – 31/03/2022 $1 = Rs.75 Exchange Difference = Rs.5  Foreign Currency Transactions Monetary and Non Monetary assets & liabilities Assets & Liabilities Monetary Non Monetary  Foreign Currency Transactions Monetary Investment in Preference Shares Preference Shares Foreign Currency Transactions Non Monetary Investment in Equity Shares Equity Shares  Foreign Currency Transactions Reporting at Subsequent Balance Sheet Date $1 = Rs.70 Monetary Rs.70,00,000 USD 1,00,000 $1 = Rs.75 Rs.75,00,000 Exchange rate of Balance Sheet Date (31st March) Difference = Rs.5 Rs.5,00,000 Exchange Difference = P&L Statement Exception = Para 46  Foreign Currency Transactions Reporting at Subsequent Balance Sheet Date $1=70 Non Monetary $1=70 $10,000 2019 Historical Cost Revalue Market Price $1,00,000 $1=75 $15,000 Historical Rate Rate on date of Revaluation 31st March Rs. 70,00,000 Rs. 11,25,000 Exchange 10 lakh Rs.75,000 5*15,000 Difference Profit & Loss Statement 31st March= Rs.80  Foreign Currency Transactions Reporting at Subsequent Balance Sheet Date Following points must be kept in mind while reporting the foreign currency transactions on the balance sheet date: the foreign currency monetary items must be recorded at the closing rate on the balance sheet date. Foreign currency monetary items include cash, receivables, payables, etc. non monetary items that are carried at historical cost expressed in foreign currency must be reported at an exchange rate that prevails at the date of such a transaction. Non – monetary items include fixed assets, inventories, investments in equity shares etc. foreign currency non – monetary items that are carried at the fair value must be reported by using an exchange rate that prevailed at the time of determining such items i.e at the date of revaluation. Accordingly, all the exchange differences must be accounted as either expenses or income in the period in which they arise.  Accounting Standards for Foreign Exchange Transactions Foreign Operations Financial Statement Financial Statement in Rupees in Rupees/Dollars 31st March Assets & Liabilities Which Rate? Accounting Standards for Foreign Exchange Transactions Foreign Operations Integral Foreign Non Integral Foreign Operations Operations Dependent Branch Reporting in Rupees  Foreign Currency Transactions Reporting at Subsequent Balance Sheet Date $1 = Rs.70 Monetary Rs.70,00,000 USD 1,00,000 $1 = Rs.75 Rs.75,00,000 Exchange rate of Balance Sheet Date (31st March) Difference = Rs.5 Rs.5,00,000 Exchange Difference = P&L Statement Exception = Para 46  Foreign Currency Transactions Reporting at Subsequent Balance Sheet Date $1=70 Non Monetary $1=70 $10,000 2019 Historical Cost Revalue Market Price $1,000,000 $1=75 $15,000 Historical Rate Rate on date of Revaluation 31st March $1,000,000 Rs. 11,25,000 Exchange 1 Cr Rs.75,000 Difference Profit & Loss Statement 31st March= Rs.80 Accounting Standards for Foreign Exchange Transactions Foreign Operations Integral Foreign Non Integral Foreign Operations Operations Dependent Independent Branch Reporting in Dollars Reporting in Rupees Exchange rate of 31st March  Accounting Standards for Foreign Exchange Transactions Foreign Operations There are various methods to translate the financial statements of the foreign operation into reporting currency. These methods depend upon the manner in which a foreign operation is financed and operates in respect of the reporting entity. For this purpose, the foreign operations can be classified into ‘Integral Foreign Operations’ and ‘Non – Integral Foreign Operations.’ Integral foreign operations, as the name suggests, are the ones that carry out their business activities as if such operations were an extension of the operations of the reporting entity. Therefore, changes in the exchange rate of the reporting currency and currency of the country of foreign operation directly impact the ‘cash flow from operations’ of the reporting entity. On the other hand, non – integral foreign operations incur expenses, earn income, accumulate cash and other monetary items, avail borrowing all considerably in the local currency. They may enter into foreign currency transactions, including the currency of the reporting entity. Furthermore, when there are changes in the exchange rate between the reporting and the local currency, there is small or no change in the present and future cash flow from operation of either the reporting entity or non – integral foreign operation.  Accounting Standards for Foreign Exchange Transactions PARA 46 $1 = Rs.70 Monetary Rs.70,00,000 USD 1,00,000 $1 = Rs.75 Rs.75,00,000 Exchange rate of Balance Sheet Date (31st March) Difference = Rs.5 Rs.5,00,000 Exchange Difference = P&L Statement Exception = Para 46 Accounting Standards for Foreign Exchange Transactions PARA 46 Exchange Difference = P&L Statement Expenses was increasing Companies incurred Losses Accounting Standards for Foreign Exchange Transactions PARA 46 1 Long Term Foreign Currency Monetary Item Eg. $1,00,000 bank loan for 5 years 2 For acquisition of Depreciable Asset Eg. Used for buying machine of $1,00,000 3 Exchange Difference can be capitalized to Cost of Asset  Accounting Standards for Foreign Exchange Transactions PARA 46 Date – 30 Nov 2014 $1 = 50 Eg. $1,00,000 bank Eg. Used for buying loan for 5 years machine of $1,00,000 Cost = Rs. 50,00,000 Date – 31st March 2015 $1 = 52 Exchange Difference = Rs. 2 Difference amount = Rs.2,00,000 Earlier, P&L statement = Rs.2,00,000 loss Cost = Rs. 52,00,000  Accounting Standards for Foreign Exchange Transactions PARA 46 The broad principle is that the exchange differences should be taken to the profit or loss statement, notwithstanding the exchange difference which arises on the revenue account or the capital account. However, the Union Government of India, vide its notification issued on March 31st, 2009, inserted the above-mentioned paragraphs in the AS 11 The Effects of Changes in Foreign Exchange Rates The exchange differences which arises on the account of a depreciable asset isn’t required to be charged to the profit or loss statement and might be added or reduced from the cost of such asset. This addition should be depreciated together with the asset over the useful life of such depreciable asset. The underlining conditions are that such asset should be a depreciable capital asset and they’ve to be represented in the Balance sheet in the Foreign currency terms and it should be designated as “Long-term Foreign currency monetary item”. Accounting Standards for Foreign Exchange Transactions PARA 46 1 Long Term Foreign Currency Monetary Item Eg. $1,00,000 bank loan for 5 years 2 For acquisition of Non Depreciable Asset Eg. Used for buying land or Stock of goods of $1,00,000 3 Exchange Difference amortize over loan & transfer to P&L Statement  Accounting Standards for Foreign Exchange Transactions Date – 30 Nov 2014 $1 = 50 Eg. Used for buying land or Eg. $1,00,000 bank Stock of goods of $1,00,000 loan for 5 years Cost = Rs. 50,00,000 Date – 31st March 2015 $1 = 52 Exchange Difference = $2 Difference amount = Rs.2,00,000 Transfer to Foreign Currency Monetary Item Translation Difference Amount Amortize over 5 years = Rs.2,00,000/5 = Rs.40,000 Transfer Rs.40,000 to Profit & Loss Statement Accounting Standards for Foreign Exchange Transactions For “Long Term Foreign currency monetary item, which is not used to acquire depreciable asset, for example loan taken to acquire land or goods or loan advanced by company to others, exchange difference should be credited to ‘Foreign Currency Monetary Item Translation Difference Account. This amount should be amortize over the term loan and transfer to Profit and Loss statement. Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts 1 Exchange Foreign Currency $1,00,000 2 On a specified Future Date After 6 months 3 At a Predetermined Rate $1 = 53 Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose For Speculation Purpose Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose 6 months = $1,00,000 $1 = 50 6 months = $1,00,000 No Uncertainty No Risk $1 = 53 Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose $1,00,000 Spot Rate $1 = 50 Rs.3 Premium Rs.3,00,000 $1,00,000 Forward Rate $1 = 53 Rs.7 Exchange Rate difference $1,00,000 Rs.7,00,000 Exchange Rate $1 = 60  Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose 6 months $1 = 50 Spot Rate Amortize over life of contract Rs.3 Premium Transfer To P&L Statement Rs.3,00,000 3,00,000/6 = 50,000/ month $1 = 53 Forward Rate Rs.7 Exchange Rate difference Rs.7,00,000 Recognize in P&L Statement $1 = 60 Exchange Rate Profit of Rs.7,00,000  Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose For Speculation Purpose Premium Amortize over life of contract Transfer To P&L Statement Exchange Rate difference Recognize in P&L Statement Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Speculation Purpose 6 months = $1,00,000 $1 = 50 6 months = $1,00,000 No Uncertainty No Risk $1 = 53 Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose $1,00,000 Forward Rate $1 = 53 Rs.7 Exchange Rate difference $1,00,000 Rs.7,00,000 Exchange Rate $1 = 60  Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose $1 = 53 Forward Rate Rs.7 Exchange Rate difference Rs.7,00,000 Recognize in P&L Statement $1 = 60 Exchange Rate Profit of Rs.7,00,000  Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose For Speculation Purpose Premium Amortize over life of contract Transfer To P&L Statement Forward Rate Exchange Rate difference Exchange Rate difference Recognize in P&L Statement Recognize in P&L Statement Exchange Rate  Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Hedging Purpose Forward Exchange Contracts is an agreement to exchange different currencies at a specified future date at a predetermined rate. For Managing or minimizing the foreign exchange fluctuations risks and for trading or speculation purposes are two main reasons for entering into this agreement. As said above forward contracts are entered for hedging purposes and for trading or speculation purposes. When it is for hedging purpose, premium or discount arising at the inception of the contract should be amortised as an expense or income over the life of the contract and exchange difference on such contract should be recognised in profit and loss. Any profit or loss arising on cancellation or renewal of such forward contract should be recognised as income or expense. Accounting Standards for Foreign Exchange Transactions Forward Exchange Contracts For Speculation Purpose When it is made for trading or speculation purpose, premium or discount on such contracts need not be recognised as it is held for trading or speculation purpose and it should be valued at the balance sheet rate. Gain or loss as on the balance sheet date should be recognised in profit and loss for the period. The above said gain or loss is the difference between forward rate available on the reporting date for the remaining maturity of the contract and forward rate fixed at the inception. Accounting Standards for Investments (AS 13)  Accounting Standards for Investments (AS 13) Dividend Interest Rental Capital Appreciation Investments are by an enterprise for- (a) Earning Income (Dividend, interest & rentals) (b) Capital Appreciation Eg. Shares, Bonds, Debentures, fixed deposits, building, land etc.  Accounting Standards for Investments AS 13 does not Include AS 13 Accounting for Investments doesn’t deal with the following: The base for recognizing dividends, interest, and rentals which are earned on the investments that are covered by AS 9 Investments in retirement benefit plans and life insurance enterprises which is covered by AS 15 The following which is formed under the Central or the State Government Act or declared under Companies Act, 2013 - 1.Mutual Funds 2.Venture Capital Funds and related Asset Management Companies  Accounting Standards for Investments Fair Value Vs Market Value The investments for which there exists an active market, the fair value of such investments shall be taken as the market value. This is because the market value provides the closest estimate for fair value of such investments. The market value is nothing but the amount that is received from the sale of an investment in the open market. Such an amount is also adjusted for expenses incurred before the disposal of such an investment. But, where an active market for investments does not exist, other means are adopted to determine the fair value of such investments. The fair value refers to the amount for which an asset is exchanged between a buyer and seller in an arm’s length transaction.  Accounting Standards for Investments Investments Current (Short term) Fixed (Long Term) Investments Investments Other than Current Investments Realizable Value Within 1 year  Accounting Standards for Investments Investments Current Investments Long Term Investments As far as investments are concerned, these are classified into long term investments and current investments. (i) Current Investments A current investment refers to an investment that is readily realizable and is held for not more than one year from the date on which such an investment is made. (ii) Long Term Investments Long term investment refers to an investment other than the current investment even though such investments are readily marketable.  Accounting Standards for Investments Acquisition of Investments Cost of Investment Brokerage, Fees, Duties The total cost of an investment consists of 1. Acquisition Costs (Purchase Costs) 2. the charges incurred to acquire such an investment. These may include any brokerage, fees and duties.  Accounting Standards for Investments Acquisition of Investments Par Value Fair Value Investment Acquired by Issue of Shares There are scenarios where an investment is acquired wholly or partly by issuing shares or other securities. The acquisition costs of investments in such a case is the fair value of the securities issued. This fair value of shares issued can be determined by considering the issue price of such securities estimated by the statutory authorities. Furthermore, such a fair value may not be equal to the nominal or par value of securities issued.  Accounting Standards for Investments Acquisition of Investments Fair Value Fair Value Investment Acquired in Exchange of Another Asset Some enterprises may acquire an investment by wholly or partly exchanging another asset. Thus, the acquisition cost of such an investment is the fair value of the asset exchanged. However, it would be appropriate for an enterprise to determine the fair value of the investment acquired if such a value can be determined readily. Accounting Standards for Investments Carrying Amount of Investments Current Investments Cost Value 1 lakh 1 lakh 1 lakh Lower Amount Fair Value 2 lakh 50 K 2 Lakh Report Reverse 50K loss 50K loss  Accounting Standards for Investments Carrying Amount of Investments Current Investments To determine the carrying amount for current investments to be stated in the balance sheet, the lower of cost or fair value of such an investment must be considered. In addition to this, if there is any decline in the fair value or any reversal of such a decline, then they are to be Cost Value included in the P&L of the enterprise. Lower Amount Fair Value  Accounting Standards for Investments Carrying Amount of Investments Long Term Investments Cost Value Cost Value 1 Cr 10 lakh 1 Cr Report loss of 90 lakh Reverse loss of 90 lakh  Accounting Standards for Investments Carrying Amount of Investments Long Term Investments The carrying amount of the long term investment is typically the cost of such an investment. However, if there is a permanent reduction in the value of the long term Cost Value investment, the carrying amount of such an investment is also reduced. Also, such a reduction is charged to P&L statement. However, such a reduction in the carrying amount is reversed when there is an increase in the value of such an investment or the reasons that lead to a reduction in its carrying amount do not exist anymore.  Accounting Standards for Investments Disposal of Investments 1 Cr 2 Cr Report Profit of 1 Cr Report Profit/ Loss for 50 Shares 100 Shares 50 Shares 50 Shares  Accounting Standards for Investments Disposal of Investments When an asset is disposed of, the difference between proceeds received from disposal and the carrying amount of investment is recognized in the P&L statement. Such a difference is also adjusted for any expenses incurred with respect to disposal of such investments. However, there are cases where only a part of an individual investment is disposed of. In such a case, the carrying amount of a portion of such investment is determined on the basis of the average carrying amount of the total investment.  Accounting Standards for Investments Reclassification of Investments Long Term Investments Current Investments Cost Value Lower Value New Value Carrying Value Current Investments Long Term Investments Cost Value Lower Value New Value Fair Value  Accounting Standards for Investments Reclassification of Investments Following are the ways in which investments can be reclassified. The first one relates to the case where long term investments are reclassified as current investments. In such a case, investments are transferred at an amount that is lower of cost and its carrying amount at the date of transfer. The second one relates to the case where current investments are reclassified as long term investments. In such a case, investments are transferred at an amount that is lower of cost and fair value at the date of transfer.  Financial Statements Income Statement ABC Ltd. Balance Sheet Financial Ratios Cash Flow Statement  Income Statement An income statement is a financial statement that consists of two things in particular i.e. Revenues and expenses. With the help of which we determine Profit/ loss of a company. If the Revenue is more than expenses then the difference is considered as Profit. Whereas, if Expenses is more than Revenue then the difference is considered as Loss. Income Statement can be called by different names like Profit and Revenue Profits Expenses Loss Statement, Operations Statement, Statement of Revenues and expenses and Statement of earnings.  Two ways of making Income Statement Single Step Format Multi Step Format  Single Step Format ABC Ltd. Total Revenue Total Revenue = 100 Cr Total Expenses Total Expenses = 70 Cr Tax Rate = 30% 100 Cr -70 Cr Total Revenue – Total Expenses Profit Before Tax = 30 Cr = Profit Before Tax (PBT) Tax = 30% * 30 Cr = 9 Cr Profit Before Tax – Income Tax = Net Profit / Net Income 30 Cr - 9 Cr Net Profit = 21 Cr  Multi Step Format Cost of Goods Sold Total Revenue Cost of Goods Sold Raw Material Gross Profit Labor Total Operating Expenses Total Operating Expenses Operating Profit Earning before Interest and Taxes (EBIT) Selling, General and Interest Cost Administrative expenses Profit Before Tax Depreciation Expenses Income Tax Interest Net Profit / Net Income  Multi Step Format Total Revenue 100 Cr ABC Ltd. Raw Material 25 Cr Cost of Goods Sold 40 Cr Labor 15 Cr Gross Profit 60 Cr Selling, General and Total Operating Expenses Administrative expenses 20 Cr 25 Cr Depreciation Expenses 5 Cr Operating Profit 35 Cr Earning before Int & Taxes (EBIT) 35 Cr Interest Cost 5 Cr Profit Before Tax 30 Cr Income Tax 9 Cr Income Tax 30% Net Profit / Net Income 21 Cr Single Step Format Net Profit = 21 Cr  Book Value Net Worth Equity Owner’s equity Assets Liabilities Shareholder’s Equity Economic Value Assets Equity + Liabilities Balanced Assets = Equity + Liabilities Balance Sheet Equation  Two ways of making Balance Sheet 1. Horizontal Balance Sheet 2. Vertical Balance Sheet Left Right Assets Equity Assets + Liabilities Equity + Liabilities  Assets 1. Current Assets < 1 year 2. Non - Current Assets > 1 year Use or cash Long term Assets Fixed Assets Marketable Securities ABC Ltd. Cash and Cash Short Term Land Building Factories Equivalents Investments Inventory Account Receivables Long Term Investments Equipment  Liability 1. Current Liabilities < 1 year 2. Non - Current Liabilities Long Term Liabilities > 1 year Short Term Loans Accounts Payable Long Term Loans Working Current Current Capital Assets Liabilities Difference  Equity Net Profit Dividend Retained Earnings Equity Share Capital Loan Repay Business Expand  Assets Non Current (Fixed) Assets…………………………………..50 Cr ABC Ltd. Land and Buildings……………………………………10 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Cash and Cash Equivalents………………………..7 Cr Total Assets……………………………………………………….80 Cr Equity + Liabilities Non- Current Liabilities………………………………………20 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Accounts Payable……………………………………..20 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Financial Ratios Liquidity Ratios Capital Structure Ratios Coverage Ratios Turnover Ratios Profitability Ratios  Liquidity Ratios Current Ratio CA CL The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or Short term those due within one year. The current ratio is called Obligations current because it incorporates all current assets < 1 year and current liabilities. Ideal ratio is 2:1. Ideal = 2:1 Current Assets Current Ratio Current Liabilities  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Liquidity ratios Current Ratio CA CL The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or Short term those due within one year. The current ratio is called Obligations current because it incorporates all current assets < 1 year and current liabilities. Ideal ratio is 2:1. Ideal = 2:1 Current Assets 30 Cr Current Ratio 1.5 Current Liabilities 20 Cr  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Current Ratio Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Cash and Cash Equivalents………………………..7 Cr Total Assets……………………………………………………….80 Cr Equity + Liabilities Non- Current Liabilities………………………………………20 Cr Quick Ratio Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Current Assets - Inventory Accounts Payable……………………………………..20 Cr Equity………………………………………………………………..40 Cr Current Liabilities Equity capital (19 lakh shares * Rs.100).…...19 Cr Retained Earnings…………………………………….15 Cr A/c Receivables + Mark. Sec. + Cash Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Current Liabilities Working Capital (CA-CL)……………………………………..10 Cr  Liquidity ratios Quick Ratio The quick ratio is an indicator of a company’s short- term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. Acid Test Since it indicates the company’s ability to instantly use its near-cash assets (assets that can be converted quickly to Ideal = 1:1 cash) to pay down its current liabilities, it is also called the acid test ratio. Ideal ratio is 1:1. Current Assets - Inventory Quick Ratio Current Liabilities  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Liquidity ratios Quick Ratio The quick ratio is an indicator of a company’s short- term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. Acid Test Since it indicates the company’s ability to instantly use its near-cash assets (assets that can be converted quickly to Ideal = 1:1 cash) to pay down its current liabilities, it is also called the acid test ratio. Ideal ratio is 1:1. Current Assets - Inventory 30 Cr – 8 Cr Quick Ratio 1.1 : 1 Current Liabilities 20 Cr  Liquidity ratios Cash Ratio The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash and cash equivalents to its current liabilities. The metric calculates Cash and its equivalents a company's ability to repay its short-term debt with cash Marketable Securities or near-cash resources like marketable securities. The cash ratio is almost like an indicator of a firm’s value Worst Case Scenario under the worst-case scenario—say, where the company is about to go out of business. Cash and Cash Eq. + Mark. Sec. Cash Ratio Current Liabilities  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Liquidity ratios Cash Ratio The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash and cash equivalents to its current liabilities. The metric calculates Cash and its equivalents a company's ability to repay its short-term debt with cash Marketable Securities or near-cash resources like marketable securities. The cash ratio is almost like an indicator of a firm’s value Worst Case Scenario under the worst-case scenario—say, where the company is about to go out of business. Cash and Cash Eq. + Mark. Sec. 17 Cr Cash Ratio 8.5 : 10 Current Liabilities 20 Cr  Capital Structure Ratios Shareholder Equity ratio The shareholder equity ratio indicates how much of a company's assets have been generated by issuing equity shares rather than by taking on debt. The Assets Generated shareholder equity ratio is calculated by dividing total shareholders' equity by the total assets of the company. Shareholder Total Shareholder Equity Equity Ratio Total Assets  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Capital Structure Ratios Shareholder Equity ratio The shareholder equity ratio indicates how much of a company's assets have been generated by issuing equity shares rather than by taking on debt. The Assets Generated shareholder equity ratio is calculated by dividing total shareholders' equity by the total assets of the company. Shareholder Total Shareholder Equity 19 Cr 0.238 Equity Ratio Total Assets 80 Cr  Capital Structure Ratios Debt Ratio ( Total debt to assets ratio) The term debt ratio refers to a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt (liabilities) to Assets Funded by Debt total assets. A ratio greater than 1 shows that a considerable portion of a company's debt is funded by Total Liabilities assets, which means the company has more liabilities than assets. A ratio below 1 means that a greater portion of a company's assets is funded by equity Total Liabilities Debt Ratio Total Assets  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Capital Structure Ratios Debt Ratio ( Total debt to assets ratio) The term debt ratio refers to a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt (liabilities) to Assets Funded by Debt total assets. A ratio greater than 1 shows that a considerable portion of a company's debt is funded by Total Liabilities assets, which means the company has more liabilities than assets. A ratio below 1 means that a greater portion of a company's assets is funded by equity Total Liabilities 40 Cr Debt Ratio 0.5 Total Assets 80 Cr  Capital Structure Ratios Debt to equity ratio The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by Financial Leverage dividing a company’s total liabilities by its shareholder equity. It is a measure of the degree Debt Vs Equity to which a company is financing its operations through debt versus wholly owned funds. Debt to Total Liabilities Equity Ratio Shareholder Equity  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Capital Structure Ratios Debt to equity ratio The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by Financial Leverage dividing a company’s total liabilities by its shareholder equity. It is a measure of the degree Debt Vs Equity to which a company is financing its operations through debt versus wholly owned funds. Debt to Total Liabilities 40 Cr Equity Ratio 2.10 Shareholder Equity 19 Cr  Coverage Ratios Interest Coverage ratio The interest coverage ratio is used to determine how easily a company can pay interest on its outstanding debt. Can company pay The interest coverage ratio is calculated by dividing a interest company's earnings before interest and taxes (EBIT) by its interest expense during a given period. The interest EBIT and not Net Profit coverage ratio is sometimes called the times interest Times Interest Earned earned (TIE) ratio. Interest EBIT Coverage Ratio Interest Expense  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Coverage Ratios Interest Coverage ratio The interest coverage ratio is used to determine how easily a company can pay interest on its outstanding debt. Can company pay The interest coverage ratio is calculated by dividing a interest company's earnings before interest and taxes (EBIT) by its interest expense during a given period. The interest EBIT and not Net Profit coverage ratio is sometimes called the times interest Times Interest Earned earned (TIE) ratio. Interest EBIT 35 Cr Coverage 7 Ratio Interest Expense 5 Cr Total Revenue 100 Cr Bank Cost of Goods Sold 40 Cr Gross Profit 60 Cr EMI Total Operating Expenses 25 Cr Operating Profit 35 Cr Earning before Int & Taxes (EBIT) 35 Cr Interest Principal 10 Cr Interest Cost 5 Cr Profit Before Tax 30 Cr Interest Coverage ratio Income Tax 9 Cr Net Profit / Net Income 21 Cr 15 Cr Debt Service Coverage Ratio  Coverage Ratios Debt Service Coverage Ratio The debt-service coverage ratio (DSCR) is a measurement of a firm's available cash flow to pay current debt obligations. Interest + Principal Debt Service Coverage ratio DSCR = Earnings available for Debt Service / (Interest + Installments). It measures the ability to Earn enough to pay meet the commitment of various debt services like interest , debt installment etc. Ideal ratio is 2. The DSCR shows investors whether a company has enough income to pay its debts. Debt Service EBIT 35 Cr Coverage 2.33 Ratio Debt Service 15 Cr  Turnover Ratios Total Assets Turnover Ratio The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The Use of Total assets asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to How much revenue? generate revenue. It is a measure of total asset utilization. It helps to answer – what sales are been generated by each rupees worth of assets invested in the business. Total asset Sales Turnover Ratio Total Assets  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Turnover Ratios Total Assets Turnover Ratio The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The Use of Total assets asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to How much revenue? generate revenue. It is a measure of total asset utilization. It helps to answer – what sales are been generated by each rupees worth of assets invested in the business. Total asset Sales 100 Cr Turnover 1.25 Ratio Total Assets 80 Cr  Turnover Ratios Fixed Assets Turnover Ratio The fixed asset turnover ratio (FAT) is, in general, used by Use of Fixed assets analysts to measure operating performance. This efficiency ratio compares net sales to fixed assets and measures a How much revenue? company's ability to generate net sales from its fixed-asset investments, namely property, plant, and Non current Assets equipment (PP&E). Fixed asset Sales Turnover Ratio Fixed Assets  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Turnover Ratios Fixed Assets Turnover Ratio The fixed asset turnover ratio (FAT) is, in general, used by Use of Fixed assets analysts to measure operating performance. This efficiency ratio compares net sales to fixed assets and measures a How much revenue? company's ability to generate net sales from its fixed-asset investments, namely property, plant, and Non current Assets equipment (PP&E). Fixed asset Sales 100 Cr Turnover 2 Ratio Fixed Assets 50 Cr  Turnover Ratios Capital Turnover Ratio Equity Turnover Ratio Capital (Equity) turnover compares the annual sales of a business to the total amount of its stockholders' equity. The intent is to measure the proportion of Use of Equity revenue that a company can generate with a given How much revenue? amount of equity. It is also a general measure of the level of equity investment needed in a specific industry in order to generate sales. Capital Sales Turnover Ratio Stockholder’s Equity  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Turnover Ratios Capital Turnover Ratio Equity Turnover Ratio Capital (Equity) turnover compares the annual sales of a business to the total amount of its stockholders' equity. The intent is to measure the proportion of Use of Equity revenue that a company can generate with a given How much revenue? amount of equity. It is also a general measure of the level of equity investment needed in a specific industry in order to generate sales. Capital Sales 100 Cr Turnover 5.26 Ratio Stockholder’s Equity 19 Cr  Profitability Ratios Gross Profit Ratio Gross profit margin is a metric analysts use to assess a company's financial health by Sales after COGS calculating the amount of money left over from product sales after subtracting the cost How much Gross profit of goods sold (COGS). This ratio tells us how per sales much sales or revenue is required for gaining particular Gross Profit. Gross Profit Gross Profit Ratio Sales  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Profitability Ratios Gross Profit Ratio Gross profit margin is a metric analysts use to assess a company's financial health by Sales after COGS calculating the amount of money left over from product sales after subtracting the cost How much Gross profit of goods sold (COGS). This ratio tells us how per sales much sales or revenue is required for gaining particular Gross Profit. Gross Profit Gross Profit 60 Cr 0.6 Ratio 100 Cr Sales  Profitability Ratios Operating Profit Ratio The operating margin measures how much profit a company makes on a dollar of sales after How much operating paying for variable costs of production, such as profit per sales wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating income by its net sales. Operating Operating Profit Profit Ratio Sales  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Profitability Ratios Operating Profit Ratio The operating margin measures how much profit a company makes on a dollar of sales after How much operating paying for variable costs of production, such as profit per sales wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating income by its net sales. Operating Operating Profit 35 Cr 0.35 Profit Ratio 100 Cr Sales  Profitability Ratios Net Profit Ratio The net profit margin, or simply net margin, measures how much net income or How much net profit per profit is generated as a percentage of revenue. sales It is the ratio of net profits to revenues for a company or business segment. Net Profit Net Profit Ratio Sales  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Profitability Ratios Net Profit Ratio The net profit margin, or simply net How much net profit per margin, measures how much net income or sales profit is generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or business segment. Net Profit Net Profit 21 Cr 0.21 Ratio 100 Cr Sales  Profitability Ratios Return on Assets and Investments Return on Assets Ratio (ROA) The term return on assets (ROA) refers to a How much net profit financial ratio that indicates how profitable a from assets company is in relation to its total assets. Return on Net Profit Assets (ROA) Total Assets  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Profitability Ratios Return on Assets and Investments Return on Assets Ratio (ROA) The term return on assets (ROA) refers to a How much net profit financial ratio that indicates how profitable a from assets company is in relation to its total assets. Return on Net Profit 21 Cr 0.2625 Assets (ROA) 80 Cr Total Assets  Profitability Ratios Return on Assets and Investments Return on Capital Employed (Pre-tax) Return on Capital Employed (ROCE) is a financial ratio that measures a company's How much return for money profitability and the efficiency with which its invested in company capital is employed Equity Loans Return on Capital EBIT Employed (ROCE) Capital Employed (Pre-tax)  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………………………10 Cr Total Operating Expenses 25 Cr Cash and Cash Equivalents………………………..7 Cr Operating Profit Total Assets……………………………………………………….80 Cr 35 Cr Equity + Liabilities Earning before Int & Taxes (EBIT) 35 Cr Non- Current Liabilities………………………………………20 Cr Interest Cost 5 Cr Long Term Loans………………………………………20 Cr Current Liabilities……………………………………………….20 Cr Profit Before Tax 30 Cr Accounts Payable……………………………………..20 Cr Income Tax 9 Cr Equity………………………………………………………………..40 Cr Equity capital (19 lakh shares * Rs.100).…...19 Cr Net Profit / Net Income 21 Cr Retained Earnings…………………………………….15 Cr Dividend…………………………………………………..6 Cr Total Equity and Liabilities………………………………...80 Cr Working Capital (CA-CL)……………………………………..10 Cr  Profitability Ratios Return on Assets and Investments Return on Capital Employed (Pre-tax) Return on Capital Employed (ROCE) is a financial ratio that measures a company's How much return for money profitability and the efficiency with which its invested in company capital is employed Equity Loans Return on Capital EBIT 35 Cr 0.89 Employed (ROCE) Capital Employed 39 Cr (Pre-tax)  Profitability Ratios Return on Assets and Investments Return on Capital Employed (Post-tax) t = tax rate (30%) EBIT (1-t) 35 Cr * 0.7 Return on Capital 0.63 Employed (ROCE) Capital Employed 39 Cr (Post-tax)  Don’t confuse Turnover Ratios Profitability Ratios Capital Return on Capital EBIT Sales Turnover Employed (ROCE) Capital Employed Ratio Stockholder’s Equity (Pre-tax) Capital Capital Employed Equity Equity Loans  Profitability Ratios Return on Assets and Investments Return on Equity  ABC Ltd. Net Profit 21 Cr 1 2 0 Cr Preference General Shareholders 21 Cr Shareholders Fixed Dividend Return on Equity  Profitability Ratios Return on Assets and Investments Return on Equity Return on equity (ROE) is a measure of financial performance calculated by dividing net income by How much return for money shareholders' equity. Because shareholders' invested by shareholders equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. Net Profit – Preference Dividend (21 -0) Cr Return on Equity 1.10 Stockholder’s Equity 19 Cr  Profitability Ratios Shareholder’s point of view Earnings per share  ABC Ltd. Net Profit 21 Cr 1 2 Preference General (equity) Shareholders Shareholders Earnings Profit Available for 0 Cr 21 Cr equity shareholders 15 Cr 6 Cr Retained Earnings Dividend  Profitability Ratios Shareholder’s point of view Earnings per share Earnings per share (EPS) is a company's net profit divided by the number of common shares it has How much earning for outstanding. EPS indicates how much money a per share company makes for each share of its stock and is a widely used metric for estimating corporate value. Earnings Net Profit – Preference Dividend Earnings per share No of equity shares outstanding  Assets Non Current (Fixed) Assets…………………………………..50 Cr Land and Buildings……………………………………10 Cr Total Revenue 100 Cr Machinery…………………………………………………5 Cr Investments……………………………………………..35 Cr Cost of Goods Sold 40 Cr Current Assets……………………………………………………30 Cr Inventory………………………………………………….8 Cr Gross Profit 60 Cr Accounts Receivables……………………………….5 Cr Marketable Securities………………?