Business Analysis
Types of Business Analysis
Credit
Analysis
Equity
Analysis
Business
Environment and strategy Analysis
Financial
Analysis
Prospective
Valuation
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
Roadmap to Financial Analysis
Company Analysis
Financial performance
Revenues
Profitability
Asset Utilisation
Cash flows
Working capital Management
Stock performance
RATIO ANALYSIS
A. Short term solvency
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Current ratio
Liquid ratio
Absolute liquid ratio
Cash ratio
Cash burn ratio
B. Long term solvency
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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 service coverage
Cashflow 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
Terms
 Capital employed =
Equity shareholders funds + Preference share
capital + Long term borrowed funds
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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 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
Comparative Standards / Benchmarking
 Industry leader
 Industry average
 WACC
 Cost of borrowings
Influencing factors
 Sales
 Cost economies
 Optimum 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
average
 NAV of industry leader / laggard
 Institutional norms
 Growth / Decline over the previous years
Influencing factors
 ROI
& EPS
 Dividend 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 / Benchmarking
Institutional norms
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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
Efficiency ratios
1.Fixed assets turnover ratio =
assets
Net sales
Net block of fixed
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 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
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
average
 Industry leader
 Trend over a period of time
Influencing factors
 Production efficiencies
 Investment in relevant technologies
 Price 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 / 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
 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 / Benchmarking
 Industry average
 Leaders & laggards in industry
 Trend over a period of time
Influencing factors
 Dividend policy
 Size of the company
 Market conditions
 NAV
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