Business analysis ppt

1. Business Analysis
Types of Business Analysis
Credit Analysis
Equity Analysis
Business Environment and strategy Analysis
Financial Analysis
Prospective Analysis
Valuation

2. 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

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

4. RATIO ANALYSIS

5. A. Short term solvency
Current ratio
Liquid ratio
Absolute liquid ratio
Cash ratio
Cash burn ratio

6. 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

7. 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

8. 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

9. 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
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

10. 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

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

12. 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

13. Comparative Standards / Benchmarking
Industry average
NAV of industry leader / laggard
Institutional norms
Growth / Decline over the previous years
Influencing factors
ROI & EPS

14. 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.

15. 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

16. 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.

17. 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

18. 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

19. 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

20. 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 )

21. 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

22. 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.

23. 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

24. 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