Business AnalysisBusiness AnalysisTypes of Business Analysis

Credit Analysis

Equity Analysis

Business Environment and strategy Analysis

Financial Analysis

Prospective Analysis

Valuation

Roadmap to Financial AnalysisRoadmap to Financial Analysis

Business Analysis

Business Environment Analysis – Company’s economic & industry circumstances, SWOT Analysis , industry analysis

Business strategy Analysis – Company’s business decisions leading to a competitive advantage, its product mix, cost structure

Company profile and significant events

Company shareholding pattern

Company Analysis

Financial performanceRevenuesProfitabilityAsset UtilisationCash flowsWorking capital Management

Stock performance

RATIO ANALYSISRATIO ANALYSIS

A. Short term solvency

Current ratioLiquid ratioAbsolute liquid ratioCash ratioCash burn ratio

B. Long term solvency

Long term debt to equityTotal debt to equityTotal debt to total capital ratioFixed assets to equity capital ratioNet tangible assets to long debtFinancial leverageInterest coverageCash interest coverageDebt service coverageCashflow adequacy

C. Profitability

I.Overall profitability – Net Profit / Total invts

IIComponents of profitability – Net profit / Sales / total investments

III. Gross margin / Operating ratio / Net margin / Working capital T.o / Fixed Assets T.o

Iv. Expenses / T.o , CA / CL /T.o

TermsCapital employed =

Equity shareholders funds + Preference share capital + Long term borrowed funds

Net worth = Equity shareholders funds +/-

Deferred tax= Equity share capital + Reserves & surplus – Miscellaneous Expenditure not written off + Deferred tax

Turnover = Sales

ROI ratios 1. ROI = NP before tax and interest

Total capital employedThis ratio indicates the return earned by the company on its total investment. This is very important to shareholders and other stake holders as it is the ultimate measure of the company’s overall performance. This ratio when compared with industry average gives an indication about the financial performance of the company.

2. RONW = PAT – Preference dividend * 100

Net worth ( ESHs Fund )

This ratio indicates the return earned by equity shareholders. High ratio means high dividend , better growth prospects and high valuation in capital market.

3. EPS = PAT – Preference dividend Number of equity shares

This ratio gives the return earned on each share. It is an important measure of profitability for the investors. This ratio is the basis for valuation of companies in the event of mergers etc, strategic investments by owners. Higher ratio shows company in a positive light. Higher ratio indicates higher returns

Comparative Standards / Benchmarking Industry leader Industry averageWACCCost of borrowings

Influencing factorsSalesCost economiesOptimum capital structure

Structural ratios / Gearing ratios / Long term solvency ratios

1. Debt equity ratio = Long term Debt Total net worth ( ESHs Funds + PC )

This ratio helps in assessing whether the company is relying on own funds or borrowed funds. Higher the debt more fixed liabilities by way of interest. FI s generally look for a D/E of 1.5 :1 while financing projects. This ratio also indicates whether the company has a optimum capital structure to improve the returns available to equity shareholders.

2. Debt service coverage ratio = NPBIT Interest + Loan repayment

This ratio indicates the profits available to service the debts. This ratio is very important for lenders. Higher the ratio higher is the ability of the company to finance the debt and less risk of default.

3. Interest coverage ratio = NPBIT Interest

Comparative Standards / Benchmarking

Industry averageNAV of industry leader / laggard Institutional normsGrowth / Decline over the previous years

Influencing factors

ROI & EPSDividend policy

Liquidity ratios 1. Current ratio = Current Assets, loans & Advances

Current liabilities & Provisions

2. Quick ratio = Current Assets, loans & Adv – inventories – prepaid Exp

Current liabilities & Provisions– Bank overdraft

These 2 ratios helps in analyzing the current assets and current liabilities of the company and its ability to discharge its day to day obligations Quick ratio is more realistic. It indicates the extent to which the company has current assets to meet its current liabilities. Higher the ratio higher is the solvency level of the company and less risk of default.

Comparative Standards / BenchmarkingInstitutional norms

Effective asset utilisation Cost economies Proportion of non cash charges in expense

structure

Influencing factorsProper asset liability managementCredit period availed and credit period allowed Inventory management / Supply chain

management/ level of obsolescence

Efficiency ratios 1.Fixed assets turnover ratio = Net sales

Net block of fixed assets

Fixed assets are income generating assets for any company. This ratio indicates the efficiency with which the fixed assets are used to generate revenue. Higher the ratio better is the utilization of assets for generating sales.

2. Net worth turnover ratio = Net sales

Net worth

This ratio indicates the overall financial and operational efficiency of the companyIt is an indication about the optimum capital structure and production efficiencies of the company.

3. Debtors Turnover ratio = Net SalesAvg. Debtors

This ratio indicates the number of times the debtors are converted into cash.

4. Average debt collection period = Avg. Debtors * 360 days

Sales

5.Inventory Turnover ratio = COGS Avg. inventories

This ratio shows the number of times a company’s inventory is turned into sales.

6. Avg. Inventory holding period = Avg inventories * 360

COGS

Comparative Standards / Benchmarking

Industry average Industry leader Trend over a period of time

Influencing factorsProduction efficiencies Investment in relevant technologiesPrice and quality of products

Profitability ratios 1.GP ratio = GP*100 Sales

2. Net profit ratio = PAT * 100 Sales

These ratios study the profitability in relation to sales. It helps to assess the business performance starting from Gross Profit. Multi level profitability ratios helps to understand the levels at which there is pressure on margin ( profit )

Comparative Standards / BenchmarkingTrend over a period of time Industry average Industry leader / laggardWACC

Influencing factors

Qualitative and quantitative growth in salesAge of fixed assets ( depn )Cost of borrowing Efficient tax planning

Valuation ratios 1. P/E ratio = Market price of equity share

EPS

This ratio is the most popular ratio for valuation of a company by the investors. This ratio indicates market confidence in the company and its future prospects.

2. Book value per share ( Net Asset Value ) = Net worth

No. of equity shares

This ratio measure the net worth per equity share. This ratio indicates the efficiency of the company’s management in building up reserves and its prudent financial practices.

Comparative Standards / Benchmarking Industry averageLeaders & laggards in industryTrend over a period of time

Influencing factorsDividend policySize of the companyMarket conditionsNAV

Analysts should take the following precautions

Analysis of trends over a long period of time Interpretation of observation against industry

bench markAnalysis of core ratios only Inter firm comparison for variations in

accounting policies In case of conglomerates comparative

performance of different lines of business