Ratios — How to Solve Anything

Every ratio problem you have, worked in full. That is all 12 lecture-deck problems, all 5 practice-sheet problems and both 2025-26 exam questions with their theory parts. Each one builds the numbers first, then divides, then interprets, because the interpretation carries marks too. The last topic checks every answer in your handwritten notes and lists what to fix.

Topic 1 of 4 · Lecture deck · slides 15–50 · 12 problems

The Lecture Deck Problems — Q1 to Q12

Each problem in the deck tests one or two ratios straight after the slide that teaches them. The deck's own answers are all confirmed here. Two of them have small slips, which are flagged.

How to know which family a question is testing

Liquidity

short-termmeet current obligationsliquidity positioncash, securities, payables

Leverage

applied for a loanlong-term solvencyinterest expenseinstalments

Profitability

return onmarginGP / NP ratiocapital employed

Valuation

per sharestock is trading atdividendsportfolio managerinvestor

Activity

how many timesin daysopening and closing inventory / receivablescredit sales / purchases

Liquidity — Q1 and Q2slides 15–16 · your notes pp. 25–26

Before you open: is there a bank overdraft in either question?

D-Q1Current + QuickDeck · slide 15

Q. A business holds: Cash $15m, Marketable securities $20m, Inventory $25m, Short-term debt $15m, Accounts payable $15m. What is its CR? What is its QR?

Solution

WhyWhat to write

Sort each item. The first three are assets due within a year. The last two are liabilities due within a year.

CA $= 15 + 20 + 25 = 60$ · CL $= 15 + 15 = 30$

Current ratio.

$60 \div 30 = $2 : 1

Quick assets: take out the inventory. "Short-term debt" is not an overdraft, so QL = CL (Case A).

QA $= 60 - 25 = 35$ · QL $= 30$

Quick ratio.

$35 \div 30 = $1.17 : 1

CommentBoth ratios meet their standards (2 : 1 and 1 : 1), so the firm is comfortably liquid.

D-Q2Quick ratio · two years · commentDeck · slide 16

Q. Zen Ltd. Year 1 / Year 2: Cash 39,000 / 50,000 · Marketable securities – / 1,000 · Accounts receivable 15,000 / 14,000 · Inventory of clothing 1,20,000 / 1,00,000 · Prepaid insurance 1,000 / 0 · Total CA 1,75,000 / 1,65,000 · Accounts payable 4,000 / 5,000 · Taxes payable 6,000 / 0 · Short-term bank loan 45,000 / 25,000 · Total CL 55,000 / 30,000. Calculate the quick ratio for each year and comment on liquidity.

Solution

Two things to notice: there is prepaid insurance, which comes out of QA. And the bank item is a short-term bank loan, not an overdraft, so it stays in QL.

WhyWhat to write

Year 1 QA: take out inventory and prepaid.

$1{,}75{,}000 - (1{,}20{,}000 + 1{,}000) = 54{,}000$

Year 1 QR. QL = CL, because there is no overdraft.

$54{,}000 \div 55{,}000 = $0.98 : 1

Year 2 QA. Prepaid is zero this year.

$1{,}65{,}000 - 1{,}00{,}000 = 65{,}000$

Year 2 QR.

$65{,}000 \div 30{,}000 = $2.17 : 1

Comment (this carries the marks)Year 1: the quick ratio is just below the 1 : 1 standard. The firm could only pay its short-term debts by selling clothing stock, which is 69% of its current assets. Year 2: liquidity has improved sharply. The bank loan has almost halved, stock is down ₹20,000 and cash is up ₹11,000.

Why the quick ratio was needed here: the current ratio was 3.18 in Year 1 and 5.5 in Year 2. On that alone, Year 1 looks perfectly safe. Only the quick ratio shows how much of that depended on stock. Year 2's 2.17 is, if anything, too liquid: cash is sitting idle.

Deck slip: the slide prints "[1650000 – 100000]", which has an extra zero. It should be 1,65,000 − 1,00,000. Your notes wrote "165000 − 10000" p. 26, which drops a zero the other way. The answer 2.17 : 1 is correct in both.

Leverage — Q3 and Q4slides 22–23 · your notes pp. 27–28

Q3 has a fictitious asset. Q4 has a distractor.

D-Q3D/E + Proprietary · fictitious assetDeck · slide 22

Q. ABC Company has applied for a loan. Liabilities: Share Capital 10,00,000 · Reserves & Surplus 2,00,000 · 12% Borrowings 40,000 · Trade Payable 4,00,000. Assets: Tangible Assets 10,00,000 · Long-term Investments 5,00,000 · Stock 70,000 · Trade Receivable 30,000 · Preliminary Expenses 40,000. Total 16,40,000. Compute the debt-equity ratio and the proprietary ratio.

Solution

WhyWhat to write

SH Funds: capital + reserves − preliminary expenses (a fictitious asset).

$10{,}00{,}000 + 2{,}00{,}000 - 40{,}000 = $₹11,60,000

Long-term debt is only the 12% Borrowings. Trade payables are a current liability.

LTD $= ₹40{,}000$

Debt-equity.

$40{,}000 \div 11{,}60{,}000 = $0.034 : 1

Total assets = FA + Investments + CA. Leave out the preliminary expenses.

$10{,}00{,}000 + 5{,}00{,}000 + (70{,}000 + 30{,}000) = ₹16{,}00{,}000$

Proprietary ratio.

$\dfrac{11{,}60{,}000}{16{,}00{,}000} \times 100 = $72.5%

Comment to the lenderLong-term solvency is very strong. There is almost no long-term debt (3.4 paise per rupee of equity), and owners finance 72.5% of the assets. On the long-term tests, the loan looks safe.

What a sharp analyst adds: current assets are only ₹1,00,000 against trade payables of ₹4,00,000, a current ratio of 0.25 : 1. The company is solvent in the long term but has a short-term liquidity problem. That is probably why it needs the loan.

D-Q4ICR + DSCR · tax is a distractorDeck · slide 23

Q. Company A: revenues 1,00,00,000; COGS 5,00,000; salaries 1,20,000; marketing 5,00,000; utilities 2,00,000; depreciation 1,00,000; interest 30,00,000. The loan is repaid in 10 yearly instalments of 25,00,000. Tax rate 30%. Determine the interest coverage ratio and DSCR.

Solution

WhyWhat to write

Walk down the ladder to EBITDA: revenue minus COGS and cash operating expenses.

$1{,}00{,}00{,}000 - (5{,}00{,}000 + 1{,}20{,}000 + 5{,}00{,}000 + 2{,}00{,}000) = $86,80,000

One more rung: take off depreciation to get EBIT.

$86{,}80{,}000 - 1{,}00{,}000 = $85,80,000

ICR uses EBIT.

$85{,}80{,}000 \div 30{,}00{,}000 = $2.86 times

DSCR uses EBITDA over interest + one year's instalment. There are no lease rentals, so take 0.

$\dfrac{86{,}80{,}000}{30{,}00{,}000 + 25{,}00{,}000} = $1.58 times

CommentOperating profit covers interest 2.86 times. The DSCR of 1.58 is inside the 1.5–2.0 band that institutions call satisfactory, but at the bottom of it, so there is little cushion if revenue falls.

The 30% tax rate is not used. Both ratios are measured before tax, because interest and principal are paid out of pre-tax operating cash. Your notes get 1.57 p. 28. The exact figure is 1.578, which rounds to 1.58.

Profitability — Q5slides 32–33 · your notes p. 31

Total assets are not given. Find them from the other side of the balance sheet.

D-Q5ROE, ROA, GP, NPDeck · slide 32

Q. AZEE Ltd (₹ crores): Equity share capital @ ₹100: 50,000 · Retained earnings 12,000 · Current liability 8,000 · Total sales 50,000 · Gross profit 16,000 · NPAT 2,450. Compute ROE, ROA, GP ratio, NP ratio.

Solution

WhyWhat to write

SH Funds = capital + retained earnings. There are no fictitious assets.

$50{,}000 + 12{,}000 = 62{,}000$

ROE.

$2{,}450 \div 62{,}000 \times 100 = $3.95%

Total assets are not listed, so use the identity: assets = everything on the liabilities side.

TA $= 50{,}000 + 12{,}000 + 8{,}000 = 70{,}000$

ROA. Only one balance sheet is given, so use the closing figure.

$2{,}450 \div 70{,}000 \times 100 = $3.5%

GP ratio.

$16{,}000 \div 50{,}000 \times 100 = $32%

NP ratio.

$2{,}450 \div 50{,}000 \times 100 = $4.9%

CommentA healthy GP of 32% shrinks to an NP of just 4.9%, so operating costs, interest and tax take 27 paise of every rupee of sales. Returns are poor: 3.95% on equity is below what a bank deposit pays. The problem is costs below gross profit, not pricing.

Distractor: "@ ₹100" (the face value) is only needed if EPS is asked. The same data can come back as an EPS question: $50{,}000 \div 100 = 500$ shares.

Valuation — Q6, Q7, Q8slides 38–41 · your notes p. 33

Q6 is a judgement question. Q8 runs a ratio backwards.

D-Q6Payout ratio · choose oneDeck · slide 38

Q. You manage a High Dividend Yield Fund. Net income: A 1,00,00,000 · B 2,50,00,000 · C 4,00,00,000. Dividends: A 35,00,000 · B 50,00,000 · C 1,00,00,000. Your intern says C is best because its net income is highest. Calculate the dividend payout ratio for each, and say which rewards shareholders most relative to its income.

Solution

Company	Dividend ÷ Net income	Payout
A	35,00,000 ÷ 1,00,00,000	35%
B	50,00,000 ÷ 2,50,00,000	20%
C	1,00,00,000 ÷ 4,00,00,000	25%

AnswerCompany A pays out the largest share of what it earns (35 paise per rupee of profit), so it rewards shareholders most. The intern is confusing size with generosity. C earns the most but keeps 75% of it. For a fund built to pay regular dividends, A fits best.

D-Q7Dividend yieldDeck · slide 40

Q. ABC trades at $20 and XYZ at $40. Both pay $1 per share per year. Compare their dividend yields.

Solution

Yield = DPS ÷ MPS.

ABC: $1 \div 20 = $5% · XYZ: $1 \div 40 = $2.5%

CommentBoth pay the same dividend, but an investor in ABC gets twice the income per dollar invested. Yield depends on the price you pay, not only on the dividend.

Your notes wrote "40%" under XYZ p. 33. That should be $40, the price. The yields (5%, 2.5%) are right.

D-Q8Forecast price from P/E · share count changesDeck · slide 41

Q. Net income $20,00,000; 5,00,000 shares at $40. Next year: net income $32,50,000 and 1,50,000 new shares (6,50,000 in total). If P/E stays the same, what will the price be next year?

Solution

WhyWhat to write

Current EPS.

$20{,}00{,}000 \div 5{,}00{,}000 = \$4$

Current P/E.

$40 \div 4 = 10$ times

Next year's EPS uses the new share count.

$32{,}50{,}000 \div 6{,}50{,}000 = \$5$

Rearrange P/E = MPS ÷ EPS to MPS = P/E × EPS.

$10 \times 5 = $$50

The trap: dividing next year's income by the old 5,00,000 shares gives EPS $6.50 and a price of $65. New shares dilute earnings, and the question tells you about them for exactly that reason.

Activity — Q9 to Q12slides 47–50 · your notes p. 34

Each gives opening and closing balances, so average them. Net off returns first.

D-Q9Inventory turnover + holding periodDeck · slide 47

Q. Sales $75,000; Gross profit $35,000; Opening inventory $9,000; Closing inventory $7,000. Compute inventory turnover and the average holding period (stock velocity).

Solution

COGS is not given. Find it from Sales and GP.

$75{,}000 - 35{,}000 = 40{,}000$

Average inventory.

$(9{,}000 + 7{,}000) \div 2 = 8{,}000$

Turnover.

$40{,}000 \div 8{,}000 = $5 times

Holding period.

$365 \div 5 = $73 days

Do not divide Sales (75,000) by inventory. That gives 9.4 times, which is wrong, because stock is valued at cost and has to be compared with cost.

D-Q10Receivables turnover + daysDeck · slide 48

Q. Gross credit sales $1,00,000; returns $10,000; receivables opening $10,000 and closing $15,000. How many times does the company collect its average receivables? Express it in days too.

Solution

Net credit sales.

$1{,}00{,}000 - 10{,}000 = 90{,}000$

Average receivables.

$(10{,}000 + 15{,}000) \div 2 = 12{,}500$

Turnover.

$90{,}000 \div 12{,}500 = $7.2 times

Collection period.

$365 \div 7.2 = 50.7 \approx $51 days

The slide prints "10,0000", which is a typo for 10,000.

D-Q11Creditors turnoverDeck · slide 49

Q. Credit purchases $1,23,555; returns $10,000; payables opening $12,555 and closing $25,121. How many times did the company pay its creditors?

Solution

Net credit purchases.

$1{,}23{,}555 - 10{,}000 = 1{,}13{,}555$

Average payables.

$(12{,}555 + 25{,}121) \div 2 = 18{,}838$

Turnover. The payment period is added because examiners often ask for both.

$1{,}13{,}555 \div 18{,}838 = $6.03 times
APP $= 365 \div 6.03 \approx $61 days

Deck slip: the slide gives 6.02. The exact figure is 6.028, which rounds to 6.03. The slide truncated it.

D-Q12Fixed assets turnoverDeck · slide 50

Q. Gross fixed assets $50,00,000; accumulated depreciation $20,00,000; sales $90,00,000. Compute FA turnover.

Solution

Use net fixed assets.

$50{,}00{,}000 - 20{,}00{,}000 = 30{,}00{,}000$

Turnover.

$90{,}00{,}000 \div 30{,}00{,}000 = $3 times

CommentEvery rupee of fixed assets (net of depreciation) generates ₹3 of sales. Using the gross figure (1.8 times) would understate how hard the assets are working.

Topic 2 of 4 · Faculty practice sheet · 5 problems · sheet pp. 1–3

The Practice Sheet — Full Statements, Many Ratios

This is where the deck's one-ratio drills become exam-sized questions. You get a full P&L and balance sheet and eight ratios to find. The skill being tested is pulling the right numbers out of a full statement, so every solution starts with working notes.

Sheet Q1 — Siddharth LtdT-form P&L · 8 ratios · overdraft present · your notes pp. 37–38

Build all six working notes before touching a single ratio.

S-Q1Bank OD · pref. dividend · interest ≠ operatingPractice sheet · p. 1

Q. From the P&L A/c and Balance Sheet of Siddharth Ltd for the year ended 31 March 2019 (open the sheet for the full statements), calculate: Acid-test ratio, Operating ratio, Dividend payout ratio, Interest coverage ratio, Creditors turnover ratio, EPS, Stock turnover ratio, P/E ratio. Market value of an equity share is ₹12. Dividend paid per equity share is ₹2.

Solution

Working notes (build these first)

BlockBuild

W1 COGS, from the top half (the Trading A/c).

$70{,}000 + 5{,}40{,}000 + 2{,}14{,}000 - 80{,}000 = $7,44,000
Check: 9,00,000 − 7,44,000 = 1,56,000 = the GP shown ✓

W2 Operating expenses: salaries, rent, misc., selling, depreciation. Not interest (financing) or tax.

$26{,}000 + 5{,}000 + 15{,}000 + 10{,}000 + 30{,}000 = $86,000

W3 EBIT. "Net profit c/d 50,000" is after the tax provision, so it is NPAT.

$50{,}000 + 20{,}000 + 5{,}000 = $75,000

W4 Shares & pref. dividend

$1{,}50{,}000 \div 10 = $15,000 shares · $8\% \times 1{,}00{,}000 = $₹8,000

W5 Quick assets: debtors + B/R + cash. The investment is long-term.

$60{,}000 + 50{,}000 + 85{,}000 = $1,95,000

W6 Quick liabilities: all CL except the bank overdraft. The debentures and "bank loan payable after 5 years" are long-term and stay out.

Creditors 60,000 + Prov. tax 20,000 + Prop. pref. div. 8,000 $= $88,000

The eight ratios

#	Ratio	Working	Answer
1	Acid-test	1,95,000 ÷ 88,000	2.22 : 1
2	Operating ratio	(7,44,000 + 86,000) ÷ 9,00,000 × 100	92.22%
3	EPS	(50,000 − 8,000) ÷ 15,000	₹2.80
4	Dividend payout	DPS 2 ÷ EPS 2.80 × 100	71.43%
5	Interest coverage	EBIT 75,000 ÷ 5,000	15 times
6	Creditors turnover	Purchases 5,40,000 ÷ Creditors 60,000 (all purchases assumed credit; only closing creditors given)	9 times
7	Stock turnover	COGS 7,44,000 ÷ avg stock (70,000 + 80,000)/2 = 75,000	9.92 times
8	P/E	MPS 12 ÷ EPS 2.80	4.29 times

CommentLiquidity is strong (2.22 against the 1 : 1 standard) and interest is covered 15 times, so there is little financial risk. The weak point is operations: 92 paise of every sales rupee goes in costs, leaving an operating margin of 7.78%. The company pays out 71% of equity earnings as dividend. The market values it at only 4.3 times earnings, which is modest.

Versus your notes pp. 37–38: six of the eight are right. Operating ratio: you used 91,000 of expenses, which includes the ₹5,000 interest, and got 92.78%. Interest is a financing cost, so leave it out: 92.22%. Check: operating profit = 9,00,000 − 8,30,000 = 70,000 = EBIT 75,000 − interest on investment 5,000 ✓. Rounding: 2.21 → 2.22, 71.42 → 71.43, 4.28 → 4.29. Round the last digit rather than cutting it off. Opening stock (₹70,000) is inside the Trading A/c, not the balance sheet. Your notes found it correctly.

If your faculty prefers CL as the denominator (like the 2025-26 key), the acid-test is $1{,}95{,}000 \div 1{,}08{,}000 = 1.81:1$. Write the QL answer and add one line stating the convention. Why →

Sheet Q2 — M/s Efficient & Expert LtdTwo years · one needs averaging, one can't · your notes pp. 35–36

The 9% Debentures line is a distractor. The 2019 overdraft is not.

S-Q2Advance · OD in year 2 only · distractorPractice sheet · p. 2

Q. 2018 / 2019: Stock 10,000 / 25,000 · Debtors 20,000 / 20,000 · Bills receivable 10,000 / 5,000 · Advance 2,000 / – · Cash in hand 18,000 / 15,000 · Creditors 25,000 / 30,000 · Bills payable 15,000 / 20,000 · Bank overdraft – / 2,000 · 9% Debentures 5,00,000 / 5,00,000 · Sales 3,50,000 / 3,00,000 · Gross profit 70,000 / 50,000. Compute for both years: Current ratio, Liquid ratio, Stock turnover, Number of days' debtors outstanding.

Solution

Block / Ratio	2018	2019
CA	10,000 + 20,000 + 10,000 + 2,000 + 18,000 = 60,000	25,000 + 20,000 + 5,000 + 15,000 = 65,000
CL (debentures excluded)	25,000 + 15,000 = 40,000	30,000 + 20,000 + 2,000 = 52,000
Current ratio	60,000 ÷ 40,000 = 1.5 : 1	65,000 ÷ 52,000 = 1.25 : 1
QA (− stock − advance)	60,000 − 10,000 − 2,000 = 48,000	65,000 − 25,000 = 40,000
QL (− bank OD)	40,000 (no OD)	52,000 − 2,000 = 50,000
Liquid ratio	48,000 ÷ 40,000 = 1.2 : 1	40,000 ÷ 50,000 = 0.8 : 1
COGS = Sales − GP	2,80,000	2,50,000
Stock used	10,000 (closing only; no 2017 figure exists)	(10,000 + 25,000) ÷ 2 = 17,500
Stock turnover	2,80,000 ÷ 10,000 = 28 times	2,50,000 ÷ 17,500 = 14.29 times
Debtors + B/R used	30,000 (closing)	(30,000 + 25,000) ÷ 2 = 27,500
Debtors' days (all sales assumed credit)	30,000 × 365 ÷ 3,50,000 = 31.29 ≈ 31 days	27,500 × 365 ÷ 3,00,000 = 33.46 ≈ 33 days

CommentEverything got worse in 2019. The current ratio fell further below 2 : 1 and the liquid ratio dropped below 1 : 1. Stock 2.5×'d while sales fell 14%, so stock turnover halved. The GP margin fell from 20% to 16.7%, and debtors are taking two days longer to pay. The business is building stock it cannot sell.

Versus your notes pp. 35–36: all eight figures are right. Excluding the advance and deducting the 2019 overdraft are both correct. You rounded the days up (32, 34). The nearest whole numbers are 31 and 33. Either way, write the decimal first.

Sheet Q3 — PVC Ltd, Pune"25% dividend" · units matter · your notes pp. 39–40

25% of what? And what unit is each answer in?

S-Q3Dividend % of face value · unitsPractice sheet · p. 2

Q. PVC Ltd. Liabilities: Equity shares of ₹10 each 5,00,000 · Reserve fund 3,50,000 · P&L A/c 5,50,000 · Long-term loans 17,50,000 · Creditors 2,50,000 · Other current liabilities 1,50,000. Assets: Fixed assets (30,00,000 − dep. 4,50,000) 25,50,000 · Stock 5,00,000 · Debtors 4,00,000 · Cash 1,00,000. Profit ₹4,00,000; 25% dividend declared; market price ₹560; ignore tax. Calculate D/E, Current ratio, Acid-test, EPS, P/E, Dividend payout.

Solution

WhyWhat to write

SH Funds. There are no fictitious assets.

$5{,}00{,}000 + 3{,}50{,}000 + 5{,}50{,}000 = 14{,}00{,}000$

D/E.

$17{,}50{,}000 \div 14{,}00{,}000 = $1.25 : 1

CA and CL.

CA $= 5{,}00{,}000 + 4{,}00{,}000 + 1{,}00{,}000 = 10{,}00{,}000$ · CL $= 2{,}50{,}000 + 1{,}50{,}000 = 4{,}00{,}000$

Current ratio.

$10{,}00{,}000 \div 4{,}00{,}000 = $2.5 : 1

Acid-test. There is no overdraft, so QL = CL.

$(10{,}00{,}000 - 5{,}00{,}000) \div 4{,}00{,}000 = $1.25 : 1

EPS: 50,000 shares, no preference capital, tax ignored.

$4{,}00{,}000 \div 50{,}000 = $₹8

P/E.

$560 \div 8 = $70 times

DPS: 25% of the ₹10 face value.

$25\% \times 10 = ₹2.50$

Payout.

$2.50 \div 8 \times 100 = $31.25%

CommentLiquidity is healthy, with both ratios above standard. The firm is moderately geared (₹1.25 of loans per ₹1 of equity). It keeps about 69% of its profit for growth. A P/E of 70 is very high: the market expects a lot of future growth.

Versus your notes pp. 39–40: the arithmetic is right throughout, but three units or labels are wrong. D/E "1.25%" should be 1.25 : 1. P/E "₹70" should be 70 times. Payout is labelled "Surplus ÷ RE", but it is DPS ÷ EPS, and "0.3125" should be written 31.25%. The current ratio was left unfinished: it is 2.5 : 1. Examiners mark the unit, so these would lose marks.

Sheet Q4 — ROCE and Return on Proprietors' FundsClimb the ladder backwards · your notes p. 41

You are given NPAT and must reach EBIT. The 60% tax rate and "throughout the year" are the keys.

S-Q4NPAT → EBIT · retained profitPractice sheet · p. 3

Q. (₹ lakh) Share capital 200 · General reserve 150 · Investment allowance reserve 50 · 15% long-term loan 300 (throughout the year) · NPAT 56 · Tax rate 60% · Proposed dividend 10. Calculate ROCE and Return on proprietors' funds.

Solution

WhyWhat to write

Undo the tax. NPAT is what is left after taking 60%, so PBT = NPAT ÷ (1 − t).

$56 \div (1 - 0.60) = 140$

Undo the interest. "Throughout the year" means a full year's interest.

$15\% \times 300 = 45$ ⇒ EBIT $= 140 + 45 = $185

Retained profit this year = NPAT − proposed dividend. It adds to the owners' funds.

$56 - 10 = 46$

Proprietors' funds.

$200 + 150 + 50 + 46 = $446

Capital employed = proprietors' funds + long-term loan.

$446 + 300 = $746

ROCE, pre-tax (the deck's first form).

$185 \div 746 \times 100 = $24.80%

ROCE, post-tax: EBIT(1 − t), the deck's second form.

$185 \times 0.40 \div 746 \times 100 = 74 \div 746 = $9.92%

Return on proprietors' funds = NPAT ÷ proprietors' funds.

$56 \div 446 \times 100 = $12.56%

Which ROCE to write?Your deck allows either slide 30. Write the pre-tax 24.80% as the main answer and add the post-tax 9.92% in one line. That covers both conventions. Interpretation: the business earns 24.8% before tax on all long-term funds, well above the 15% it pays on its loan. So the borrowing is profitable for shareholders, which is why their return (12.56%) exceeds the post-tax ROCE (9.92%).

Versus your notes p. 41: the method is right and you used the post-tax form. 9.91 → 9.92 and 12.55 → 12.56 are rounding only. The denominator is written as "200L + (150 + 50) + 46 + 300", which is correct. Label it as capital employed.

Sheet Q5 — Jiny Ltd vs Industry NormsNot attempted in your notes · strengths & weaknesses

"Total Capital Employed" in this question is mislabelled. Don't use it as capital employed.

S-Q5Compare with industry · commentPractice sheet · p. 3

Q. Jiny Ltd, FY 2022-23, total sales ₹55,00,000. Sources: Equity 22,00,000 · Reserves & Surplus 2,00,000 · 10% Debenture 4,60,000 · Sundry creditors 3,30,000 · Bills payable 4,40,000 · Other CL 2,20,000 · total 38,50,000. Application: Fixed assets 12,10,000 · Cash 4,40,000 · Debtors 5,50,000 · Stock 16,50,000. Industry norms: Current ratio 3.5 : 1 · Long-term debt to equity 0.15 : 1 · Receivables turnover 15 times. Compare and comment on strengths and weaknesses.

Solution

Ratio	Jiny Ltd	Industry	Verdict
Current ratio	CA 26,40,000 ÷ CL 9,90,000 = 2.67 : 1	3.5 : 1	Weaker
LT Debt ÷ Equity	4,60,000 ÷ 24,00,000 = 0.19 : 1	0.15 : 1	Slightly more geared
Receivables turnover	55,00,000 ÷ 5,50,000 = 10 times (36.5 days)	15 times (24.3 days)	Weaker
Extra: Quick ratio	(26,40,000 − 16,50,000) ÷ 9,90,000 = 1.00 : 1	—	Exactly at standard

StrengthsSolvency is sound. Debt is only 19% of equity, close to the industry's 15%, so interest is not a burden. The current ratio of 2.67 is above the general 2 : 1 benchmark.

WeaknessesWorking capital is poorly managed. (1) Liquidity is below the industry norm, and stock is 62.5% of current assets, so the quick ratio is only 1 : 1. (2) Customers take about 37 days to pay against an industry 24, which points to a loose credit policy. Recommendation: reduce stock levels and tighten collections. Both would free up cash and raise the current ratio.

Trap in the question: the line "Total Capital Employed 38,50,000" is actually the balance-sheet total, and it includes ₹9,90,000 of current liabilities. True capital employed = 38,50,000 − 9,90,000 = ₹28,60,000. It is not needed for these three ratios, but it would be for ROCE. Sales are assumed to be all on credit, and only closing debtors are given.

Topic 3 of 4 · Your 2025-26 papers · Q4 (10 marks) + Q7b (5 marks) in both

The Actual Exam Questions

The rest of both papers (journal, trial balance, final accounts, common size, cash flow) is solved on Solved Papers.

Both 2025-26 papers (Final, 24 Nov 2025 and Re-Exam, 31 Jan 2026) had a 10-mark compute-and-analyse ratio question and a 5-mark ratio theory question. Their official answer keys (in the questionpaper folder) show three things. 1 mark per ratio computed plus 0.5 per explanation. Closing balances are used when each year stands alone. And the answers stay with the basic formulas from your deck.

Final Exam 2025-26 · Q4 — Zenith Ltd, two years[10 marks] · CO4 · Analyse

Four ratios × two years = 8 marks. Four comments = 2 marks.

FE-Q4GP · CR · FAT · Collection periodFinal Exam, 24 Nov 2025

Q. Zenith Ltd. 2022-23 / 2023-24: Sales 4,20,000 / 5,20,000 · COGS 3,20,000 / 3,70,000 · GP 1,00,000 / 1,50,000 · Operating expenses 68,000 / 72,000 · Net profit 32,000 / 78,000. Balance sheet: Share capital 1,00,000 / 1,00,000 · Reserves 60,000 / 70,000 · Trade payables 30,000 / 20,000 · Short-term borrowings 30,000 / 50,000 · Fixed assets (net) 50,000 / 60,000 · Receivables 70,000 / 65,000 · Stock 80,000 / 85,000 · Cash at bank 20,000 / 30,000. Calculate GP ratio, Current ratio, FA turnover, Receivables collection period for both years, and analyse.

Solution (matches the official key)

Ratio	2022-23	2023-24	What it says
GP ratio = GP ÷ Sales × 100	1,00,000 ÷ 4,20,000 = 23.81%	1,50,000 ÷ 5,20,000 = 28.85%	Margin up 5 points: better pricing or cheaper buying
Current ratio = CA ÷ CL	1,70,000 ÷ 60,000 = 2.83 : 1	1,80,000 ÷ 70,000 = 2.57 : 1	Slight decline, still above 2 : 1
FA turnover = Sales ÷ FA	4,20,000 ÷ 50,000 = 8.4 times	5,20,000 ÷ 60,000 = 8.67 times	Assets used slightly more productively
Collection period = Receivables ÷ (Sales ÷ 365)	70,000 ÷ 1,150.68 = 61 days	65,000 ÷ 1,424.66 = 46 days	Faster collection, tighter credit control

Overall analysis2023-24 is better on three of the four measures: higher margin, faster collection and better use of assets. The one weakening, liquidity, is mild and comes from short-term borrowings rising from 30,000 to 50,000. Extra insight worth a line: net profit more than doubled (NP margin 7.6% → 15%) because operating expenses rose only 6% while sales rose 24%.

Why closing balances: each year's balance sheet is given on its own, with no opening figures for 2022-23. So the key uses closing receivables and closing FA for both years, to keep the two years consistent. Averaging only 2023-24 would mix two methods in one comparison.

Re-Exam 2025-26 · Q4 — Alpha Traders vs Beta Manufacturing[10 marks] · inter-firm comparison

"Total Debt-Equity": read the word "Total". Beta has prepaid expenses and goodwill.

RE-Q4Quick · NP · TOTAL D/E · FATRe-Exam, 31 Jan 2026

Q. Alpha: Share capital 2,50,000 · R&S 30,000 · 10% Debentures 80,000 · Term loan 60,000 · Creditors 90,000 · Outstanding exps 20,000 ‖ FA (net) 2,00,000 · LT investments 50,000 · Inventory 1,00,000 · Receivables 1,40,000 · B/R 20,000 · Cash 20,000. Credit sales 10,00,000; NP 1,50,000. Beta: Share capital 3,00,000 · R&S 40,000 · LT borrowings 1,00,000 · Bills payable 70,000 · Creditors 1,10,000 · Provision for tax 30,000 ‖ FA (net) 2,00,000 · Goodwill 1,60,000 · Inventory 1,20,000 · Receivables 1,00,000 · Prepaid 10,000 · Cash 60,000. Credit sales 14,00,000; NP 2,00,000. Compute Quick ratio, NP margin, Total Debt-Equity, FA turnover for both, with a comparative comment.

Solution (matches the official key)

Ratio	Alpha	Beta
CA / CL	2,80,000 / 1,10,000	2,90,000 / 2,10,000
Quick ratio (no OD, so QL = CL)	(2,80,000 − 1,00,000) ÷ 1,10,000 = 1.64 : 1	(2,90,000 − 1,20,000 − 10,000) ÷ 2,10,000 = 0.76 : 1
NP margin	1,50,000 ÷ 10,00,000 = 15.00%	2,00,000 ÷ 14,00,000 = 14.29%
Total debt (all outside liabilities)	80,000 + 60,000 + 90,000 + 20,000 = 2,50,000	1,00,000 + 70,000 + 1,10,000 + 30,000 = 3,10,000
Total Debt ÷ Equity	2,50,000 ÷ 2,80,000 = 0.89 : 1	3,10,000 ÷ 3,40,000 = 0.91 : 1
FA turnover (FA net)	10,00,000 ÷ 2,00,000 = 5 times	14,00,000 ÷ 2,00,000 = 7 times

Comparative commentAlpha is the safer business. It is comfortably liquid even without selling stock, while Beta (0.76) could not pay its short-term debts without selling inventory. Beta is the more efficient one. It squeezes 7 rupees of sales from each rupee of fixed assets against Alpha's 5. Profitability (15% vs 14.3%) and gearing (0.89 vs 0.91) are almost identical.

Three details the key relies on: (1) "Total Debt-Equity" means every outside liability goes on top, current ones included. Plain D/E would be 1,40,000 ÷ 2,80,000 = 0.50 (Alpha) and 1,00,000 ÷ 3,40,000 = 0.29 (Beta). (2) Beta's prepaid ₹10,000 comes out of quick assets. (3) Beta's goodwill is a real intangible, not a fictitious asset, so equity is not reduced for it. The key's FA turnover uses only "Fixed Assets (Net)". If you include goodwill, say so.

Theory — Q7b from both papers[5 marks each] · model answers

Structure: definition → formula → what high/low means → who uses it.

FE-Q7b5 marks · 2.5 eachFinal Exam 2025-26

Q. Explain the significance of Liquidity Ratios and Profitability Ratios in assessing the financial performance of a business.

Model answer

Liquidity ratios measure a firm's ability to meet its short-term obligations as they fall due, using its current assets. The two main ones are the Current ratio (CA ÷ CL, standard 2 : 1) and the Quick ratio (Quick assets ÷ Quick liabilities, standard 1 : 1). They matter to suppliers, bankers and short-term creditors. A low ratio warns that the firm may default. A very high one suggests idle funds and poor working-capital management. So liquidity ratios show the firm's short-term financial health and solvency.

Profitability ratios measure how effectively a firm generates profit, from its sales (GP margin, NP margin, operating ratio) and from its investment (ROA, ROCE, ROE). They reflect management efficiency, cost control and pricing power. Owners use them to judge the return on their funds, and management uses them to find where costs are rising. Together: liquidity shows whether the firm can survive the short run, and profitability shows whether it is worth running in the long run. A firm needs both.

RE-Q7b5 marks · 2.5 eachRe-Exam 2025-26

Q. Write a short note on (1) Stock Turnover Ratio (2) Debt to Equity Ratio.

Model answer

1. Stock (Inventory) Turnover Ratio = COGS ÷ Average Inventory, expressed in times. Average inventory = (opening + closing) ÷ 2. It measures how quickly inventory is sold, and so how efficiently it is managed. A high ratio shows fast-moving stock and efficient inventory control. A low ratio shows overstocking or slow-moving or obsolete goods. 365 ÷ STR gives the stock velocity (average holding period) in days. COGS is used rather than sales because stock is valued at cost.

2. Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Equity, expressed as x : 1. Shareholders' equity = Equity + Preference capital + Reserves & Surplus − Fictitious assets. It shows the proportion of borrowed to owned funds used to finance the business, and so its long-term solvency. A lower ratio means financial stability and a wide margin of safety for lenders. A higher ratio means greater financial risk and a heavier fixed interest burden, though it can raise the return to shareholders (trading on equity) when the firm earns more than the interest rate.

Topic 4 of 4 · Your handwritten notes · notebook pp. 25–41

Your Notes, Checked Line by Line

Only the ratio pages of your notebook were read (pp. 25–41). The rest were left out, as you asked. Verdict: the method is right almost everywhere. There is one real error (interest in the operating ratio), three unit/label errors that would cost marks, some truncation instead of rounding, and four blanks, all of which are now filled in.

Page	What's there	Status	Fix
25	Ways of expressing; current & acid-test formulas; deck Q1; Q2 year 1	✓ Correct	—
26	Q2 year 2; D/E, SH Funds, Proprietary, ICR, DSCR formulas	✓ Answer correct	Typo "165000 − 10000" → 1,65,000 − 1,00,000
27	"Equity, SH fund, net worth, owner fund all same"; deck Q3 D/E 0.034, Proprietary 72.5%	✓ Correct	—
28	Deck Q4: EBITDA build, ICR 2.86, DSCR	~ Rounding	DSCR 1.57 → 1.58
29	Profitability margins; expense ratios	✎ Label / blanks	"Impact margin" = EAT (NPAT) margin. Admin and S&D ratios were blank → filled here
30	ROA, ROCE (both forms), ROE	✎ Label	"Net Profit Tax" → Net Profit After Tax
31	Deck Q5 (AZEE): ROE 3.95%, ROA 3.5%, GP 32%, NP 4.9%, plus the sources = application identity	✓ Correct	—
32	Valuation formulas: EPS, P/E, DPS, Payout, Yield	✓ Correct	—
33	Deck Q7 yields; Q8 P/E forecast $50	✓ Answers correct	"40%" under XYZ → $40
34	Activity formulas	✎ Label / blank	FA turnover denominator "fixed ratio" → net fixed assets. Total asset turnover was blank → filled here
35	Sheet Q2: CR 1.5 / 1.25; LR 1.2 / 0.8	✓ Correct	—
36	Sheet Q2: STO 28 / 14.29; debtor days 31.28 / 33.46	✓ Correct	Nearest whole days are 31 / 33 (you rounded up to 32 / 34)
37	Sheet Q1: acid-test, operating ratio, payout, EPS	✗ One error	Operating ratio 92.78% → 92.22% (remove ₹5,000 interest). Acid 2.21 → 2.22, payout 71.42 → 71.43
38	Sheet Q1: ICR 15, creditors 9, STO 9.92, P/E	~ Rounding	P/E 4.28 → 4.29 times; STO needs its unit, "times"
39	Sheet Q3: D/E, CR, acid, EPS, P/E	✗ Units	D/E "1.25%" → 1.25 : 1; P/E "₹70" → 70 times; CR unfinished → 2.5 : 1
40	Sheet Q3: payout	✗ Label	"Surplus ÷ RE" → DPS ÷ EPS; 0.3125 → 31.25%
41	Sheet Q4: ROCE (post-tax) 9.91%, ROPF 12.55%	~ Rounding	→ 9.92% and 12.56%; also give pre-tax ROCE 24.80%
—	Sheet Q5 (Jiny Ltd)	Not attempted	Solved above

⚠ The three habits to fix before the exam

Write the unit every time. Liquidity and D/E are x : 1. Turnover, coverage and P/E are times. Margins and returns are %. EPS and DPS are ₹. Periods are days. Three of your answers had the wrong unit.
Round, don't truncate. 2.216 → 2.22, not 2.21. 1.578 → 1.58. It happened six times in your notes.
Interest is never an operating expense. It sits below EBIT on the ladder. That single rule separates the operating ratio, operating profit, ICR and ROCE from the "after-interest" figures.

Sources

Deck Financial Analysis using Ratios, problems Q1–Q12 slides 15–50

Faculty Financial Ratios practice sheet Q1–Q5 pp. 1–3

Past papers FAA Final Exam (24 Nov 2025) and Re-Exam (31 Jan 2026) Q4 and Q7b, with their official answer keys, in the repository's questionpaper/ folder

Your notes Handwritten ratio pages notebook pp. 25–41