business analysis ppt by babasab patil

8/3/2019 Business Analysis Ppt BY babasab patil

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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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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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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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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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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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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

business analysis ppt by babasab patil

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