(B)Return on Proprietor’s Fund N.P.(after tax) x100 Proprietors’ Funds Company Standard 1.Return of Rs xx On each Rs. 100 of Owners’ funds. 2.Rs. xx is Available for Appropriations. 1.Large amount for Appropriations. 2.Scope to attract fresh Funds from owners. 1.Small amount for Appropriations. 2. Less Scope to attract fresh Funds from owners. (C )Return on Equity Capital N.P.(after tax&pref.Div) x100 Equity Cap.+ Reserves Company Standard 1.Return of Rs. xx On each Rs. 100 Equity shareholders’ Funds. 2.Rs. xx is Available for Appropriations. 1.Large amount for Appropriations. 2.High increase in net Worth. 3.scope to attract fresh funds from equity shareholders. 4.high price for each Equity share on stock Exchange or in a merger. 1.Small amount for Appropriations. 2.Low increase in net Worth. 3. Less scope to attract fresh funds from equity shareholders 4.Low price for Equity share on stock Exchange or in a merger. 6.Capital Structure (A)Capital Gearing Pref. Cap. + Debenture +Loan Equity Cap. + Reserves Company Standard For every Rs. XX From funds with Fixed returns, Rs. 1 is from equity Shareholders. Higher returns for equity shareholders if rate of fixed returns is less than ROI. Low returns / Loss to equity shareholders if rate of fixed returns is more than ROI. (B)Debt - Equity Debt Equity 2:1 Rs. x obtained from debt, for Each Rs. 1 from Shareholders. 1.Low safety margin for Lenders. 2.More interest payments. 3.Less scope for more loans. 4.Trading on equity. 1.High safety margin for Lenders. 2.Less interest payments. 3. scope for more loans. 4.No trading on equity
RATIOS-COMPUTATION AND COMMENTS Objective of Analysis Ratio to be Computed Formula Standard Ratio Points for comments Actual Ratio Higher than Standard Lower than Standard 8.Coverage (A)Dividend payout Equity Dividend x 100 Profit for Equity Shareholders Company Standard 1.Rs.xx is paid as Dividend out of Each Rs. 100 Available for Distribution. 2.Balance (100- xx) can be transferred to reserves. 1.very high dividends make short term equity shareholders very happy. 2.Scope to issue fresh equity shares at high price. 3.High price on stock exchange or in merger for equity shares. 4.Less reserves may mean low growth in future and no bonus issue. 1.Very low dividends make short term equity shareholders very unhappy. 2. Less Scope to issue fresh equity shares. 3.Low price on stock exchange or in merger for equity shares. 4.If transfers to reserves are more, it may mean high growth or bonus issue in future. (B)Interest Coverage PBIT Interest Company Standard Earnings are xx times the interest. 1.Strong capacity to pay interest as and when due. 2.large balance profits left for tax, dividends. 3.Good scope to get more loans at low rate of interest. 4.But less benefits of trading on equity, if assets are financed less by debt and more by equity. 1.Weak capacity to pay interest as and when due.
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- Balance Sheet, Generally Accepted Accounting Principles, Capital Employed