Balance Sheet: Income Statement

Balance Sheet
Assets Liabilities Equities

Current Assets Rs. Rs. Current Liabilities Rs. Rs.
Cash and Cash Equivalents 50,000 Accounts Payable 10,000
Short Term Investments - Short/Current LT Debt 20,000
A/C Receivables 40,000 Accrued Liabilities 10,000
Inventory 70,000 Total Current Liabilities 40,000
Mrkt. Securities 60,000
Total Current Assets 220,000 LT Liabilities
Fixed Assets LT loans 30,000
Long Term Investments 80,000 Total Liabilities 30,000
Property, plant and
equipment 550,000
Goodwill - Stockholders' Equity
Intangible Assets - Retained Earnings 210,000
LT Loans 130,000 Share Capital 700,000
Total Stockholder Equity 910,000
Total Fixed Assets 760,000
Total Assets Rs. 980,000 Total Labilities + Equities Rs. 980,000
Income Statement
Sales 200,000
COGS 90,000
Gross Profit 110,000
Operating Expenses:
Admin Exp 30,000
Distribution & mkt Exp. 40,000
Total Op Expenses 70,000
Operating Profit 40,000
Other Exp 4,000
Other INCOME 15,000
EBIT 51,000
Interest Expense 12,000
EBT 39,000
Income Tax Exp.(40% of
EBT) 15,600
Net Income Net Profit 23,400
Par Value 10
No. of Common Shares 70,000
No. of Common Shares = Share Capital/Par Value
Profitability Ratios
Gross Profit Margin:
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 110,000
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭 𝐌𝐚𝐫𝐠𝐢𝐧 = =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 200,000
= 0.55 or 55%
Interpretation:
The higher the gross profit margin the better, so here 55% is gross profit margin and 45% is
COGS, A high gross profit margin means that the company did well in managing its cost of sales.
It also shows that the company has more to cover for operating, financing, and other costs.
Operating profit Margin:

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝,
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐩𝐫𝐨𝐟𝐢𝐭 𝐌𝐚𝐫𝐠𝐢𝐧 = =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
110.000 − 70,000 40000
= =
200,000 200,000
= 0.20
Interpretation:
Here operating margin .20. This means that 80 pesa on every Rupee of sales is used to pay for
variable costs. Only 20pesa remains to cover all non-operating expenses or fixed costs.
Higher Operating margin ratios are favorable
Return on Assets:
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑛𝑒(𝑃𝐴𝐼𝑇) 23,400
𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐀𝐬𝐬𝐞𝐭𝐬 ≔ =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 980,000
= 0.0238 or 2.38%
Interoperation:
This ratio shows that every Rupee that was invested on asset has returned 0.0238 Rupees. That
is very low, Higher ROA is favorable
Return on Equity (ROE) :
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑛𝑒(𝑃𝐴𝐼𝑇) 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑛𝑒(𝑃𝐴𝐼𝑇)
𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐄𝐪𝐮𝐢𝐭 ≔ ′
≔
Total Shareholder s Equity R. . E + Share Capital
Total Shareholder's Equity = Retained Earnings + Share Capital + Common Stock +Preferred
Stock.
23,400 23,400
= 210,000+700,000 = 910,000 = 0.0257142 = 2.57%
Interpretation:
It means that company generates 2.57% on each rupee in equity
Return on Equity (ROE) is an indicator of company's profitability by measuring how much
profit the company generates with the money invested by common stock owners.
LEVERAGE RATIOS
Time Interest Earned or Interest Coverage Ratio :
Profit before interest and tax (PIBT) 51,000

Interest Cover Ratio = = 12,000 = 4.25 𝑇𝑖𝑚𝑒𝑠
Interest Expense
Interpretation:
4.25 times interest earned ratio means that the company's income is 4.25 times greater than its
annual interest expense, and the company can afford the interest expense on new loan. It should
be always more than 2 times
Debt to Equity Ratio:

Total Debt or intrest bearing Liabilities
Debt to equity ratio =
Total Stockholder Equity
𝐿𝑇 𝐿𝑜𝑎𝑛𝑠 + 𝑆𝑇 𝐿𝑜𝑎𝑛𝑠
=
Capital + R. E
= (30,000+20,000)/ (210,000+700,00)
= 0.05 or 5%
Interpretation: This shows 5% of equity will be given to creditors.
Indicates how well creditors are protected in case of the company's insolvency. Higher DE ratio
is unfavorable
Debt to asset Ratio:

Total Debt or intrest bearing Liabilities
Debt to asset ratio =
Total assets
𝐿𝑇 𝐿𝑜𝑎𝑛𝑠 + 𝑆𝑇 𝐿𝑜𝑎𝑛𝑠
=
Total assets
= (30,000+20,000)/ (980,000)
= 0.051 or 5.1%
Interpretation:
Therefore, the figure indicates that 5.1% of the company’s assets are funded via debt.
The debt to asset ratio is commonly used by analysts, investors, and creditors to
determine the overall risk of a company. Companies with a higher ratio are more
leveraged and hence, riskier to invest in and provide loans to. If the ratio steadily
increases, it could indicate a default at some point in the future.
If ratio =1
means that the company owns the same amount of liabilities as its assets. It indicates that
the company is highly leveraged.
If ratio >1
means the company owns more liabilities than it does assets. It indicates that the
company is extremely leveraged and highly risky to invest in or lend to.
If ratio <1
means the company owns more assets than liabilities and can meet its obligations by
selling its assets if needed. The lower the debt to asset ratio, the less risky the company.
Liquidity Ratios
Current Ratio:
Current ratio is a financial ratio that measures whether or not a company has enough
resources to pay its debt over the next business cycle (usually 12 months) by
comparing firm's current assets to its current liabilities.
Current Assets = Cash + Bank + Accounts Receivable + Marketable Securities +

Inventory + Prepaid Expenses
Current Liabilities: accounts payable, accrued liabilities, ST loans, dividends, unpaid
taxes and other debts that are due within one year.
Here
Cash + Accounts Receivable + Marketable Securities + Inventory
Current Ratio =
accounts payable + accrued liabilities + ST loans,
50000 + 40000 + 60000 + 70000

Current Ratio =
10000 + 10000 + 20000
Current Ratio: 5.5:1
This ratio depends upon the ratio of your competitor if others have high current assets to current
liabilities ratio than its not good for your company
Normally you have to keep it greater than one
Quick Ratio or Acid Test :

Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to
use its quick assets (cash and cash equivalents, marketable securities and accounts
receivable) to pay its current liabilities.
Here
50000 + 60000 + 40000
Quick Ratio =
10000 + 10000 + 20000
Quick Ratio = 4:1
Interpretation:
As you can see quick ratio is 4:1. This means that Company can pay off all of her
current liabilities with quick assets and still have some quick assets left over.
The acid test ratio measures the liquidity of a company by showing its ability to pay off
its current liabilities with quick assets. If a firm has enough quick assets to cover its total
current liabilities, the firm will be able to pay off its obligations without having to sell off
any long-term or capital assets.
Additional Ratios
Book Value per Common Share

Total Commom Equity
BVPS =
No of Common Shares issued
910,000
BVPS =
70,000
BVPS: 13
Here Par value of share is Rs.10 and market value or book value of share is Rs.13
Dividend Per Share

Total Dividend
DPS =
1000,000
DPS =
70,000
DPS=14.28
Source for total dividend = Statement of stock market
Earnings Per Share

Net income
EPS =
23400
EPS = = 0,334 𝑅𝑠.
70,000

Balance Sheet: Income Statement

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Balance Sheet: Income Statement

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Balance Sheet

Assets Liabilities Equities

Operating profit Margin:

Profit before interest and tax (PIBT) 51,000

Debt to Equity Ratio:

Debt to asset Ratio:

Current Assets = Cash + Bank + Accounts Receivable + Marketable Securities +

50000 + 40000 + 60000 + 70000

Quick Ratio or Acid Test :

Book Value per Common Share

Dividend Per Share

Earnings Per Share

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