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Business analysis ppt
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Business AnalysisTypes of Business Analysis
Credit Analysis
Equity Analysis
Business Environment and strategy Analysis
Financial Analysis
Prospective Analysis
Valuation
Roadmap 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 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 / BenchmarkingIndustry leaderIndustry 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 / laggardInstitutional 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 allowedInventory 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 company
It 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 averageIndustry leader Trend over a period of time
Influencing factorsProduction efficienciesInvestment 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 timeIndustry 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 / BenchmarkingIndustry 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 timeInterpretation of observation against industry bench markAnalysis of core ratios onlyInter firm comparison for variations in accounting policiesIn case of conglomerates comparative performance of different lines of business