Question

From the following particulars, calculate :
a) Current Ratio,
b) Debt to Capital Employed Ratio,
c) Trade Receivables Turnover Ratio,
d) Trade Payables Turnover Ratio,
e) Operating Ratio and
f) Net Profit Ratio.

Hint:

For Turnover ratios, the answer is always expressed in "Times". For Profitability ratios (like Operating and Net Profit ratios), the answer is always expressed as a "Percentage (%)". Pure liquidity ratios are usually expressed as proportions (e.g., 2:1).

Answer 1

Step 1: Understanding the Concept:
Ratio analysis involves grouping various financial metrics to test the liquidity, solvency, activity (turnover), and profitability of a business.

Step 2: Detailed Explanation:
Let us calculate each ratio step-by-step based on the provided data.
a) Current Ratio
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]
- Current Assets = Inventory + Trade Receivables = 75,000 + 75,000 = ₹ 1,50,000.
- Current Liabilities = Trade Payables = ₹ 1,25,000.
\[ \text{Current Ratio} = \frac{1,50,000}{1,25,000} = 1.2 : 1 \]
b) Debt to Capital Employed Ratio
\[ \text{Ratio} = \frac{\text{Long-Term Debt}}{\text{Capital Employed}} \]
- Long-Term Debt = Debentures = ₹ 1,00,000.
- Capital Employed = Shareholders' Funds + Long-Term Debt = Share Capital + Debentures = 2,00,000 + 1,00,000 = ₹ 3,00,000.
\[ \text{Ratio} = \frac{1,00,000}{3,00,000} = 0.33 : 1 \text{ (or 33.33%)} \]
c) Trade Receivables Turnover Ratio
\[ \text{TRTR} = \frac{\text{Net Credit Revenue from Operations}}{\text{Average Trade Receivables}} \]
- Net Credit Revenue = ₹ 3,00,000.
- Since opening/closing balances are not given, take the given Trade Receivables as the average = ₹ 75,000.
\[ \text{TRTR} = \frac{3,00,000}{75,000} = 4 times \]
d) Trade Payables Turnover Ratio
\[ \text{TPTR} = \frac{\text{Net Credit Purchases}}{\text{Average Trade Payables}} \]
- Net Credit Purchases = ₹ 2,50,000.
- Average Trade Payables = ₹ 1,25,000.
\[ \text{TPTR} = \frac{2,50,000}{1,25,000} = 2 times \]
e) Operating Ratio
\[ \text{Operating Ratio} = \frac{(\text{Cost of Goods Sold} + \text{Operating Expenses})}{\text{Revenue from Operations}} \times 100 \]
- Cost of Goods Sold (COGS) = Revenue - Gross Profit = 5,00,000 - 1,00,000 = ₹ 4,00,000.
- Operating Expenses = ₹ 50,000.
- Total Operating Cost = 4,00,000 + 50,000 = ₹ 4,50,000.
\[ \text{Operating Ratio} = \left(\frac{4,50,000}{5,00,000}\right) \times 100 = 90% \]
f) Net Profit Ratio
\[ \text{Net Profit Ratio} = \left(\frac{\text{Net Profit}}{\text{Revenue from Operations}}\right) \times 100 \]
\[ \text{Net Profit Ratio} = \left(\frac{50,000}{5,00,000}\right) \times 100 = 10% \]

Step 3: Final Answer:
a) Current Ratio = 1.2 : 1
b) Debt to Capital Employed Ratio = 0.33 : 1
c) Trade Receivables Turnover Ratio = 4 times
d) Trade Payables Turnover Ratio = 2 times
e) Operating Ratio = 90%
f) Net Profit Ratio = 10%