Business Analysis

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Business Analysis

• Types of Business Analysis
• Credit Analysis
• Equity Analysis
• Business Environment and strategy Analysis
• Financial Analysis
• Prospective Analysis
• Valuation

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Roadmap to Financial Analysis

• Business Analysis
• Business Environment Analysis Companys
  economic industry circumstances, SWOT Analysis
  , industry analysis
• Business strategy Analysis Companys business
  decisions leading to a competitive advantage, its
  product mix, cost structure
• Company profile and significant events
• Company shareholding pattern

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• Company Analysis
• Financial performance
• Revenues
• Profitability
• Asset Utilisation
• Cash flows
• Working capital Management
• Stock performance

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RATIO ANALYSIS
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• A. Short term solvency
• Current ratio
• Liquid ratio
• Absolute liquid ratio
• Cash ratio
• Cash burn ratio

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• B. Long term solvency
• Long term debt to equity
• Total debt to equity
• Total debt to total capital ratio
• Fixed assets to equity capital ratio
• Net tangible assets to long debt
• Financial leverage
• Interest coverage
• Cash interest coverage
• Debt service coverage
• Cashflow adequacy

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• 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

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• Terms
• Capital 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

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• ROI ratios
• 1. ROI NP before tax and interest
• Total capital employed
• This 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 companys
  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.

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• 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

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• Comparative Standards / Benchmarking
• Industry leader
• Industry average
• WACC
• Cost of borrowings
• Influencing factors
• Sales
• Cost economies
• Optimum capital structure

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• 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

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• Comparative Standards / Benchmarking
• Industry average
• NAV of industry leader / laggard
• Institutional norms
• Growth / Decline over the previous years
• Influencing factors
• ROI EPS
• Dividend policy

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• 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.

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• Comparative Standards / Benchmarking
• Institutional norms
• Effective asset utilisation
• Cost economies
• Proportion of non cash charges in expense
  structure
• Influencing factors
• Proper asset liability management
• Credit period availed and credit period allowed
• Inventory management / Supply chain management/
  level of obsolescence

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• 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 company
• It is an indication about the optimum capital
  structure and production efficiencies of the
  company.

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• 3. Debtors Turnover ratio Net Sales
• Avg. Debtors
• This ratio indicates the number of times the
  debtors are converted into cash.
• 4. Average debt collection period
• Avg. Debtors 360 days
• Sales

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• 5.Inventory Turnover ratio COGS
• Avg. inventories
• This ratio shows the number of times a companys
  inventory is turned into sales.
• 6. Avg. Inventory holding period
• Avg inventories 360
• COGS

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• Comparative Standards / Benchmarking
• Industry average
• Industry leader
• Trend over a period of time
• Influencing factors
• Production efficiencies
• Investment in relevant technologies
• Price and quality of products

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• Profitability ratios
• 1.GP ratio GP100
• 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 )

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• Comparative Standards / Benchmarking
• Trend over a period of time
• Industry average
• Industry leader / laggard
• WACC
• Influencing factors
• Qualitative and quantitative growth in sales
• Age of fixed assets ( depn )
• Cost of borrowing
• Efficient tax planning

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• 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
  companys management in building up reserves and
  its prudent financial practices.

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• Comparative Standards / Benchmarking
• Industry average
• Leaders laggards in industry
• Trend over a period of time
• Influencing factors
• Dividend policy
• Size of the company
• Market conditions
• NAV

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• Analysts should take the following precautions
• Analysis of trends over a long period of time
• Interpretation of observation against industry
  bench mark
• Analysis of core ratios only
• Inter firm comparison for variations in
  accounting policies
• In case of conglomerates comparative performance
  of different lines of business

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