Business Analysis of Water Utilities

IIT Kharagpur 26 Feb – 6 March 2016

Business Analysis

ò  Financial Analysis

ò  Stakeholder Analysis

2

Financial Analysis

ò  Balance Sheet

ò  Profit & Loss Statement

ò  Financial Ratios

ò  Cash Flow Statement

3

Balance Sheet

ò  Asset

ò  Physical assets – Producing assets

ò  Capital works in Progress

ò  Inventories

ò  Cash and Bank Balance

ò  Receivables

ò  Investments

ò  Liability

ò  Equity

ò  Debt

ò  Retained Profit

ò  Payables

4

Profit & Loss Statement

ò  Revenues

ò  Costs

ò  Raw Material Cost

ò  Manpower Cost

ò  Conversion Cost

ò  Depreciation (non cash item)

ò  Financial cost (interest and other payments)

ò  Statutory taxes

5

BS and P&L dynamics Demystifying through quick run through

6

Day 0

ò  Company raises $ 50 in debt and $ 50 in equity and keeps it in bank

ò  It has zero cost of operations for the day, (assumption)

ò  Liabilities:

ò  Equity 50

ò  Debt 50

ò  Retained Earnings 00

ò  Assets

ò  Producing Assets: 00

ò  Capital Work in Progress 00

ò  Inventory 00

ò  Cash 100

7

Day 1

ò  Revenues 00

ò  Costs

ò  Raw Material Cost 00

ò  Manpower cost 02

ò  Conversion cost 00

ò  Total Costs 02

ò  Earnings -02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02

ò  Assets

ò  Productive assets: 00

ò  Capital Work in Progress: 50

ò  Inventory:

ò  Raw Material 40

ò  Finished Goods

ò  Cash : 08

Company buys Physical assets for $ 50 and pays $40 for raw materials. $ 2 is paid for salaries on daily basis. Cash with the company is $8. There are no revenues as assets are not productive yet

8

Day 2

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 30

ò  Finished Goods

ò  Cash : 02+16

Company spends $ 2 to make capital work in progress as productive assets (in installation etc.) It also spends $ 2 as conversion cost. Its daily employee cost is $ 2.

9

Day 3

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02+02

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 20

ò  Finished Goods

ò  Receivable 16

ò  Cash : 14

Day 3 is exactly like Day 2 BUT for one difference. The finished goods are sold but the buyer says it will pay cash 3 days later….thus it becomes “receivable” on company BS

10

Day 4

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02+02+02

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 10

ò  Finished Goods

ò  Receivable 16+16

ò  Cash : 10

Day 4 is exactly like Day 3 11

Day 5

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02+02+02 +02

ò  Payable 40

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 00+40

ò  Finished Goods

ò  Receivable 16+16+16

ò  Cash : 06

Day 4 is like Day 4 except Raw Material of $40 bought (which is minimum lot size you can buy) but this time you don’t have enough cash to pay for RM. You buy it on credit from the supplier which is payable after 2 days .

12

Day 6

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02+02+02 +02+02

ò  Payable 40

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 00+30

ò  Finished Goods

ò  Receivable 16+16+16+16

ò  Cash : 02+16

Day 6 is like Day 5 except Receivable of $16 turn into cash at end of its 3 day period. 13

Day 7

ò  Revenues 16

ò  Costs

ò  Raw Material Cost 10

ò  Manpower cost 02

ò  Conversion cost 02

ò  Total Costs 14

ò  Earnings 02

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained earnings : -02+02+02+02 +02+02+02=10

ò  Payable 00

ò  Working Capital Loan 20

ò  Assets

ò  Productive assets: 52

ò  Capital Work in Progress: 00

ò  Inventory:

ò  Raw Material 00+20

ò  Finished Goods

ò  Receivable 16+16+16+16=48

ò  Cash : 02+16-4+16-20=10

Day 6 is like Day but payable of 40 is due on Day 7. It pays the $ 40 payable through $ 20 from its cash balance and takes Working capital loan of $ 20

14

Balance Sheet ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained Earnings 00

ò  Payables 00

ò  Working Capital Loans 00

ò  Assets

ò  Producing Assets 50

ò  Capital Work in Progress 00

ò  Inventory

ò  Raw Material 00

ò  Finished Goods 00

ò  Receivable 00

ò  Cash 100

ò  Total 100

ò  Liabilities

ò  Equity: 50

ò  Debt : 50

ò  Retained Earnings 10

ò  Payables 00

ò  Working Capital Loans 20

ò  Assets

ò  Producing Assets 52

ò  Capital Work in Progress 00

ò  Inventory

ò  Raw Material 20

ò  Finished Goods 00

ò  Receivable 48

ò  Cash 10

ò  Total 130

Day 0 Day 7 15

Typical P&L Statement 2015

Revenues 100

Expenses

Manpower Cost 20

Material Cost 40

Conversion Cost 10

Sales and Marketing cost 05

Overheads 02

Total Expenses 78

Earnings before Depreciation, Interest and Tax (EBITDA) 22

Depreciation 05

Earnings before Interest and Tax 17

Interest 05

Profit Before Tax 12

Tax 04

Profit after Tax 08

16

Financial Ratios from P&L 2015

Revenues 100

Expenses

Manpower Cost 20

Material Cost 40

Conversion Cost 10

Sales and Marketing cost 05

Overheads 02

Total Expenses 78

Earnings before Depreciation, Interest and Tax (EBITDA) 22

Depreciation 05

Earnings before Interest and Tax (EBIT) 17

Interest 05

Profit Before Tax 12

Tax 04

Profit after Tax 08

EBITDA % = 22/100=22%

EBIT %= 17/100=17%

PAT %= 08/100 17

Financial Ratios

ò  Revenues

ò  EBITDA

ò  EBIT

ò  PBT

ò  PAT

ò  Equity

ò  Retained Earnings

ò  Long Term Debt

ò  Current Liabilities

ò  Payables / Short term debt

ò  Assets (Producing)

ò  Capital Works in Progress

ò  Current Assets

ò  Inventories

ò  Receivables

Asset Turnover Ratio: Revenue / Assets

Networth: Equity+Retained Earnings

Return on Total Assets= EBIT * (1-Tax Rate)/ (Networth + Long Term Debt)

Return on Networth= PAT/ Networth 18

Company 1, Ratios

ò  Revenues: 100

ò  EBITDA : 15

ò  EBIT : 01

ò  PBT : 01

ò  PAT : 01

ò  Equity 15

ò  Debt 00

ò  Total Liabilities 15

ò  Assets (Producing) 05

ò  Inventories 05

ò  Cash 05

ò  Total Assets 15 PAT/ Revenue= 1/100 Revenue / Total Assets = 100/ 15 PAT / Total Assets = (1/ 100)* (100/15)= (1/15) 19

Company 2, Ratios

ò  Revenues: 15

ò  EBITDA : 10

ò  EBIT : 05

ò  PBT : 05

ò  PAT : 05

ò  Equity 75

ò  Debt 00

ò  Total Liabilities 75

ò  Assets (Producing) 50

ò  Inventories 20

ò  Cash 05

ò  Total Assets 75 PAT/ Revenue= 5 /15 Revenue / Total Assets = 15/ 75 PAT / Total Assets = (5/ 15)* (15/45)= (1/15) 20

Which Company is better Company 1 or Company 2?

Company 1

ò  PAT / Revenue = 1 / 100

ò  Revenue / Total Assets = 100/15

ò  PAT / Total Assets =

1/100 * 100/15 = 1/15

Company 2

ò  PAT / Revenue = 5/15

ò  Revenue /Total Assets = 15 / 75

ò  PAT / Total Assets

ò  5/15 * 15/75 = 1/15

Ultimately return on total assets matter !

21

Cash Flows

ò  Operating Cash Flows

ò  Cash flow from operations less tax paid

ò  Investment Cash Flows

ò  Capital expenditure

ò  Change in investments

ò  Financial Cash Flows

ò  Debt or Equity raised / (paid back)

ò  Dividend payout etc.

22

Company A 2012 2013 2014 2015

Revenues 00 10 10 10

PAT 00 02 02 02

Equity 50 50 50 50

Debt 50 50 50 50

Working Cap Loan

00 00 00 00

Retained Earnings 00 02 04 06

Assets 80 80 80 80

Inventories 00 00 00 00

Receivables 00 00 00 00

Cash 20 20-8+10=22 22-8+10=24 24-8+10=26 23

Company B 2012 2013 2014 2015

Revenues 00 10 10 10

PAT 00 02 02 02

Equity 50 50 50 50

Debt 50 50 50 50

Working Cap Loan

00 00 00 04 =(04-08)

Retained Earnings 00 02 04 06

Assets 80 80 80 80

Inventories 00 00 00 00

Receivables 00 10 20 30

Cash 20 20-8=12 12-8=4 00 24

Cash Flows: Company A

2012 2013 2014 2015

Operating cash flows

PAT 00 02 02 02

Less : Change in receivables

00 00 00 00

Cash Flow 00 02 02 02

25

Cash Flows: Company B

2012 2013 2014 2015

Operating cash flows

PAT 00 02 02 02

Less : Change in receivables

00 -10 -10 -10

Cash Flow 00 -08 -08 -08

26

Cash Flow Company A versus Company B

Company A

ò  Cash in Balance sheet increases from $20 in 2012 by $ 6 to $ 26 in 2015

ò  The increase in cash of $6 is equal to increase in retained earnings.

ò  The increase in cash can be used for capital expenditure or dividend payout or debt reduction.

Company B

ò  Cash in Balance Sheet decreases by $24 in 2012 to $2015. This wipes out $ 20 cash on the Balance sheet and adds $ 4 in working capital loans

ò  Decrease in cash balance ($ 20) + increase in working capital loan ($4) + Increase in retained earnings ($6) = Increase in receivables ($30) from 2012 to 2015

ò  Clearly company does not have own resources for capital expenditure or dividend payout.

Both Company A and B have similar P&L statement but different business strengths 27

Annexures Background of my interest in water….

28

Water: A marketing tool

December 2015, Bangalore (India) 29

Active Water Management

December, 2015 – Bangalore (India) 30