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Accounting Ratios 3.15

Working Notes:
1. Calculation of Net Profit before Interest and Tax:
Let the Net Profit before Tax = ` 100
Tax = 40%
So, Net Profit after Tax = ` 100 – ` 40 = ` 60.
If Net Profit after Tax is ` 60, then Net Profit before Tax = ` 100.
` 100
If Net Profit after Tax is ` 1, then Net Profit before Tax = .
` 60
` 100
If Net Profit after Tax is ` 1,21,500, then Net Profit before Tax = × ` 1,21,500
` 60
= ` 2,02,500. `
Net Profit before Tax 2,02,500
Add: Interest on Debentures (` 4,00,000 × 12/100) 48,000
 10  2,50,500
Less: Interest on Non-trade Investment ` 35,000   3,500

Net Profit before Interest and Tax  100  2,47,000
2. Calculation of Capital Employed:
A. Liabilities Side Approach
Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and Surplus
+ Long-term Borrowings – Non-trade Investment
= ` 5,00,000 + ` 50,000 + ` 1,25,000 + ` 4,00,000 – ` 25,000 = ` 10,50,000.
B. Assets Side Approach
Capital Employed = Net Fixed Assets + Trade Investment + Working Capital*
= ` 9,50,000 + ` 50,000 + ` 50,000 = ` 10,50,000.
*Working Capital = Current Assets – Current Liabilities
= ` 2,20,000 – ` 1,70,000 = ` 50,000.
Illustration 10.
Vijay owns a business and gives the following information:

Particulars 31st March, 31st March,
2023 (`) 2024 (`)
Net Sales 9,00,000 18,00,000
Gross Profit 2,25,000 3,60,000
Current Assets 3,00,000 4,50,000
Current Liabilities 1,50,000 2,50,000
He is of the opinion that his manager Rajeev is very efficient as there is an increase in
profit from ` 2,25,000 to ` 3,60,000 by his efforts.
Again his current assets have increased from ` 3,00,000 to ` 4,50,000 whereas current
liabilities have increased only by ` 1,00,000 and thus his short-term financial position is
also becoming strong.
Do you agree with him? State yes/no. Give reasons for your answer.
Solution:
Undoubtedly, there is an increase in gross profit from ` 2,25,000 to ` 3,60,000, i.e.,
` 1,35,000. But this is not the test of efficiency of the manager. There is an increase in
Net Sales also.