From the following information calculate any two of the following ratios:
(i) Net Profit Ratio
(ii) Debt Equity Ratio
(iii) Quick Ratio.
Information:
Paid up Capital ₹20,00,000
Capital Reserve ₹2,00,000
9% Debentures ₹8,00,000
Revenue from Operations ₹14,00,000
Gross Profit ₹8,00,000
Indirect Expenses ₹2,00,000
Current Assets ₹4,00,000
Current Liabilities ₹3,00,000
Opening Inventory ₹50,000
Closing Inventory 20% more than opening Inventory.
Answer (2)
To calculate the requested financial ratios, let's understand what each ratio represents and how to calculate it using the provided information.
(i) Net Profit Ratio :
Definition : The net profit ratio measures the percentage of revenue that remains as net profit after all operating expenses, interest, and taxes have been deducted from the total revenue. It is a measure of profitability.
Formula : Net Profit Ratio = ( Revenue from Operations Net Profit ) × 100
Calculation Steps :
Gross Profit is given as ₹8,00,000.
Indirect Expenses are ₹2,00,000.
Net Profit = Gross Profit - Indirect Expenses = ₹8,00,000 - ₹2,00,000 = ₹6,00,000.
Revenue from Operations is ₹14,00,000.
Net Profit Ratio = ( 14 , 00 , 000 6 , 00 , 000 ) × 100 = 42.86%
(ii) Debt Equity Ratio :
Definition : The debt-equity ratio is a measure of a company's financial leverage, calculated by dividing its total liabilities by stockholders' equity. It indicates the proportion of debt used to finance the assets relative to equity.
Formula : Debt Equity Ratio = Shareholder’s Equity Total Debt
Calculation Steps :
Total Debt includes 9% Debentures , which are ₹8,00,000.
Shareholder's Equity = Paid-up Capital + Capital Reserve = ₹20,00,000 + ₹2,00,000 = ₹22,00,000.
Debt Equity Ratio = 22 , 00 , 000 8 , 00 , 000 = 0.36
These calculations provide insight into how profitable and financially leveraged the company is based on the given figures.
The Net Profit Ratio is calculated as 42.86%, showing the percentage of revenue kept as profit. The Debt Equity Ratio is 0.36, indicating how much debt is financed relative to equity. Both these ratios provide insights into the company's financial health and profitability.
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