Business Analysis. Types of Business Analysis Credit Analysis Equity Analysis Business Environment and strategy Analysis Financial Analysis Prospective Analysis Valuation. Business Analysis
Types of Business Analysis
Business Environment and strategy 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 patternRoadmap to Financial Analysis
Working capital Management
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
Equity shareholders funds + Preference share capital + Long term borrowed funds
= Equity share capital + Reserves & surplus – Miscellaneous Expenditure not written off + Deferred tax
Turnover = Sales
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 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
1. Debt equity ratio = Long termDebt
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
Liquidity ratios 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.
Efficiency ratios 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
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 = ratiosNet Sales
This ratio indicates the number of times the debtors are converted into cash.
4. Average debt collection period =
Avg. Debtors * 360 days
5.Inventory Turnover ratio = ratiosCOGS
This ratio shows the number of times a company’s inventory is turned into sales.
6. Avg. Inventory holding period =
Avg inventories * 360
Profitability ratios ratios
1.GP ratio = GP*100
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 )
Valuation ratios ratios
1. P/E ratio = Market price of equity share
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 ) =
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.