7/29/2019 Ratio Solution 131

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1

Gross Profit RatioGross Profit / Sales x 100

Previous Year(Rs. 64,000 / Rs. 3,00,000) x 100

= 21.3 %

Current Year

(Rs. 76,000 / Rs. 3,74,000) x 100

= 20.3 %

7/29/2019 Ratio Solution 131

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2

Interpretation

The GP ratio has declined by 1% --- due to

Decrease in unit selling price

Increase in indirect expenses other thanpurchases and value of stock.

Combination of i and ii.

7/29/2019 Ratio Solution 131

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3

Operating Expenses to Sales

Ratio(OES)

Previous Year

(Rs. 49,000 / Rs. 3,00,000) x 100

= 16.3 %

Current Year

(Rs. 57,000 / Rs. 3,74,000) x 100= 15.2 %

7/29/2019 Ratio Solution 131

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4

Interpretation

OES has fallen even though there is an

increase in sales.

Administration expenses have remained

constant resulting in decline in adm. Exp

ratio from 4.3% to 3.7% .

These cost savings were offset by

increase in transportation espenses from

2% to 2.7%.

7/29/2019 Ratio Solution 131

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5

Operating Profit Ratio

(EBIT / Sales) x 100

Previous Year

(Rs. 15,000 / Rs. 3,00,000) x 100= 5 %

Current Year(Rs. 19,000 / Rs. 3,74,000) x 100

= 5.1 %

7/29/2019 Ratio Solution 131

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6

Interpretation

The increase in OP ratio by 0.1% is the

result of

Decrease in OP Exp. Ratio by 1.1 %

(Increase in profit)

Decrease in GP ratio by 1%.

Virtually no gain to the company fromincreased sales.

7/29/2019 Ratio Solution 131

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7

Capital Turnover Ratio

Sales / Capital Employed

Previous Year

Rs. 3,00,000 / Rs. 1,00,000

= 3 times

Current Year

Rs. 3,74,000 / 1,47,000

= 2.5 times

7/29/2019 Ratio Solution 131

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8

Interpretation

The reduction in the Capital T/o ratio

signifies that the company is unable to

employ the additional funds as profitably

as existing funds.

The expected increase in sales does not

seem to have materliased.

7/29/2019 Ratio Solution 131

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9

Stock Turnover Ratio

COGS / Average Stock

Previous Year

Rs. 2,36,000 / Rs. 50,000

= 4.7 times

Current Year

Rs. 2,98,000 / Rs. 77,000

= 3.9 times

7/29/2019 Ratio Solution 131

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10

Interpretation

The increase in sales was less thanproportionate increase in stock.

7/29/2019 Ratio Solution 131

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11

Net Profit to Capital Employed

Ratio

(Net Profit + Interest / Capital Employed)

X 100

Previous Year

(Rs. 15,000 + nil / 1,00,000) x 100

= 15%

Current Year

(Rs. 17,000 + 2,000 / 1,47,000) x 100

= 12.9 %

7/29/2019 Ratio Solution 131

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12

Interpretation

The company seems to have failed tomaintain the earning rate on the funds

employed.

7/29/2019 Ratio Solution 131

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13

Debtors Collection Period

(Debtors / Average Credit Sales Per Day)

Previous Year

(Rs. 50,000 / Rs. 739.7) = 68 days

Current Year

(Rs. 82,000 / Rs. 937) = 88 days

7/29/2019 Ratio Solution 131

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14

Interpretation

The increase in Debtors Collection Periodimplies relaxation in credit terms to

promote sales, in particular to penetrate

new market/ customers.

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15

To Sum Up

The expansion of the business does notseem to have yielded the anticipated

benefits.