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Business AnalysisTypes 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 Companyseconomic & industry circumstances, SWOTAnalysis , industry analysis
Business strategy Analysis Companysbusiness decisions leading to a competitiveadvantage, 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
Stockperformance
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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 ser i e o era e
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C. Profitability
I.Overall profitability Net Profit / Total invts
IIComponents ofprofitability 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 +/- Deferredtax
= Equity share capital + Reserves & surplus
Miscellaneous Expenditure not written off+ Deferredtax
Turnover= Sales
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ROI ratios1. ROI = NP before tax and interest
Total capital employedThis ratio indicates the return earned by the
company on its total investment. This is veryimportant to shareholders and otherstake holders as it
is the ultimate measure ofthe companys overallperformance. This ratiowhen compared with industryaverage gives an indication about the financialperformance ofthe company.
2. RONW = PAT Preference dividend * 100Net worth ( ESHs Fund )
This ratio indicates the return earned by equityshareholders. High ratio means high dividend , better
growth prospects and high valuation in capital market.
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3. EPS = PAT Preference dividend
Numberofequity shares
This ratio gives the return earned on each share.It is an important measure ofprofitability fortheinvestors. This ratio is the basis forvaluation ofcompanies in the event ofmergers etc, strategicinvestments by owners. Higherratio shows companyin a positive light. Higherratio indicates higherreturns
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Comparative Standards / Benchmarking
Industry leaderIndustry average
WACC
Cost ofborrowings
Influencing factors
SalesCost 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 whetherthe company is relying on own funds orborrowed funds. Higherthe debt more fixed liabilities by way ofinterest. FI sgenerally lookfora D/E of1.5 :1while financing projects. This ratio also indicateswhetherthe 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 veryimportant forlenders. Higherthe ratio higheris the ability ofthe company tofinancethe debt and less riskofdefault.
3. Interest coverage ratio = NPBIT
Interest
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Comparative Standards / Benchmarking
Industry average
NAV ofindustry leader/ laggard
Institutional norms
Growth / Decline overthe previous years
Influencing factors
ROI & EPS
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Liquidity ratios
1. Current ratio = Current Assets, loans & AdvancesCurrent 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 currentliabilities ofthe company and its ability to discharge its day to day
obligations Quickratio is more realistic. It indicates the extent towhichthe company has current assets to meet its current liabilities. Highertheratio higheris the solvency level ofthe company and less riskofdefault.
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Comparative Standards / Benchmarking
Institutional norms
Effective asset utilisation
Cost economies
Proportion ofnon cash charges in expensestructure
Influencing factors
Properasset liability management
Credit period availed and credit period allowed
Inventory management / Supply chain management/
level ofobsolescence
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Efficiency ratios
1.Fixed assets turnover ratio = Net sales
Net block of fixed assets
Fixed assets are income generating assets forany company. Thisratio indicates the efficiency with which the fixed assets are used togenerate revenue. Higherthe ratio betteris the utilization ofassets for
generating sales.
2. Net worth turnover ratio = Net sales
Net worth
This ratio indicates the overall financial and operationalefficiency ofthe company
It is an indication about the optimum capital structure andproduction efficiencies ofthe company.
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3. Debtors Turnoverratio = Net Sales
Avg. Debtors
This ratio indicates the numberoftimes the
debtors are converted into cash.
4. Average debt collection period =
Avg. Debtors * 360 days
Sales
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5.Inventory Turnoverratio = COGS
Avg. inventories
This ratio shows the numberoftimes 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 overa period oftime
Influencing factors
Production efficiencies
Investment in relevant technologies
Price and quality ofproducts
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Profitability ratios
1.GP ratio = GP*100Sales
2. Net profit ratio = PAT * 100Sales
These ratios study the profitability in relation tosales. It helps to assess the business performance
starting from Gross Profit. Multi level profitability
ratios helps to understand the levels at which there is
ressure on mar in ( rofit
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Comparative Standards / Benchmarking
Trend overa period oftimeIndustry average
Industry leader/ laggard
WACC
Influencing factors
Qualitative and quantitative growth in sales
Age offixed assets ( depn )
Cost ofborrowin
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Valuation ratios
1. P/E ratio = Market price of equity share
EPS
This ratio is the most popularratioforvaluation ofa companyby 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 perequity share. This ratioindicates the efficiency ofthe companys management in building upreserves and its prudent financial practices.
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Comparative Standards / Benchmarking
Industry average
Leaders & laggards in industry
Trend overa period oftime
Influencing factors
Dividend policy
Size ofthe company
Market conditions
NAV
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Analysts should take the following precautions
Analysis oftrends overa long period oftime
Interpretation ofobservation against industry bench
mark
Analysis ofcore ratios only
Interfirm comparison forvariations in accounting
policies
In case ofconglomerates comparative performance
ofdifferent lines ofbusiness