Question

Calculate Return on Investment Ratio and Investment Ratio and Inventory Turnover Ratio from the figures given below :

$\begin{array}{cc}& \text{Rs.}\\ \text{Opening Inventory}& 30,000\\ \text{Closing Inventory}& 40,000\\ \text{Carriage Inwards}& 10,000\\ \text{Purchases}& 1,00,000\\ \text{Current Assets}& 50,000\\ \text{Current Liabilities}& 20,000\\ \text{Non Current Assets}& 80,000\\ \text{Indirect Expenses}& 15,000\\ \text{Revenue from Operations}& 2,00,000\end{array}$

Answer 1

(I) Return on Investment = $=\frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}}\times 100$

Net Profit before Interest = Gross Profit - Indirect Expenses

Gross Profit = Revenue from Operations - Cost of Revenue from Operations

Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inwards - Closing Inventory

= Rs. 30,000 + Rs. 1,00,000 + Rs. 10,000 - Rs. 40,000 = Rs. 1,00,000

Gross Profit = Rs. 2,00,000 - Rs. 1,00,000 = Rs. 1,00,000

Net Profit before Interest = Gross Profit - Indirect Expenses

= Rs. 1,00,000 - Rs. 15,000 = Rs. 85,000

Capital Employed = Non-current Assets + Current Assets - Current Liabilities

= 80,000 + 50,000 - 20,000

= Rs. 1,10,000

Return on Investment = $\frac{85,000}{1,10,000}\times 100=77.27$

(II) Inventory Turnover Ratio $=\frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$

Average Inventory = $\frac{Rs.30,000+Rs.40,000}{2}=Rs.35,000$

Inventory Turnover Ratio = $\frac{1,00,000}{35,000}=2.86$ times