Question

The following particulars are extracted from the Balance Sheet of Goodwill Enterprises Ltd. as at 31st March, 2018 :

$\begin{array}{cc}\text{Particulars}& \text{Rs.}\\ \text{Equity Share Capital}& \text{3,00,000}\\ \text{10 \% Preference Share Capital}& \text{1,20,000}\\ \text{Capital Reserve}& \text{60,000}\\ \text{Profit \& Loss Balance}& \text{1,20,000}\\ \text{12 \% Debentures}& \text{50,000}\\ \text{10 \% Mortgage Loan}& \text{1,50,000}\\ \text{Current Liabilities}& \text{2,80,000}\\ \text{Non Current Assets}& \text{4,80,000}\\ \text{Current Assets}& \text{6,00,000}\end{array}$

Showing the full working, calculate the following ratios :

(i) Debt-Equity Ratio

(ii) Proprietary Ratio

(iii) Interest Coverage Ratio

Net Profit after interest and tax amounted to Rs. 63,000

Rate of Income Tax was 50%

Answer 1

(i) Debt-Equity Ratio = $\frac{Debt}{Equity}or\frac{Long-termDebts}{Shareholde{r}^{\prime }sFunds}$

Long Term Debts
= Debentures + Mortgage Loan
= Rs. 50,000 + Rs. 1,50,000
= Rs. 2,00,000

Shareholder's Funds
= Equity Share Capital + Pref. Share Capital + Capital Reserve + P & L Balance
= Rs. 3,00,000 + Rs. 1,20,000 + Rs.60,000 + Rs. 1,20,000
= Rs. 6,00,000

Debt Equity Ratio = $\frac{Rs.2,00,000}{Rs.6,00,000}$ = 0.33 : 1

(ii) Proprietary Ratio = $\frac{\text{Shareholder's Funds}}{\text{Total Assets}}$

Total Assets
= Non Current Assets + Current Assets
= Rs. 4,80,000 + Rs. 6,00,000
= Rs. 10,80,000

Proprietary Ratio $=\frac{Rs.6,00,000}{Rs.10,80,000}$ = 0.5556 or 55.56 %

(iii) Interest Coverage Ratio
$=\frac{\text{Net Profit before Interest and Tax}}{\text{Fixed Interest Charges}}$

Fixed Interest Charges
= 12% Interest on Debentures of Rs. 50,000 + 10% Interest on Mortgage Loan of Rs. 1,50,000
= Rs. 6,000 + Rs. 15,000
= Rs. 21,000

Net Profit before Interest and Tax is Calculated as follows :

Net Profit after Interest and Tax = Rs. 63,000

Net Profit before Tax $=Rs.63,000\times \frac{100}{50}=Rs.1,26,000$

Net Profit before Interest and Tax
= Rs. 1,26,000 + Fixed Interest Charges
= Rs. 1,26,000 + Rs.21,000
= Rs. 1,47,000

Interest Coverage Ratio = $\frac{\text{Rs. 1,47,000}}{\text{Rs. 21,000}}=7\text{times}$