Post on 04-Apr-2018
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Analysis of Profit and Loss Account & Balance Sheet fromEquity Research Point of View
Presentation by
CA V Kandaswamy
Partner
J. Singh & Associates
Chartered Accountants
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Profit & Loss Account
Key Issues
Sales Other Income
Operating Margin (%)
PAT before Exceptional Items
EPS and PE ratios
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Profit & Loss Account
Sales
Variance Analysis
Volume
Price
Mix
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Profit & Loss Account
Other Income
Find sustainable other income
Identify non recurring items
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Profit & Loss Account
Operating Margins (%)
Due to increase in sales
Due to reduction in costs
Rise in prices
Enrichment of Product Mix
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Profit & Loss Account
PAT before Exceptional Items
Forex Impact
Exceptional Items
Tax Incidence
Growth
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Profit & Loss Account
EPS and PE ratios
EPS should be based on normalised income
Profits grow but EPS fall
EPS grow despite fall in profits
Sustainable growth in EPS can help PE to grow
Winning Combination is a growth in EPS and PEratio
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E P SE P S G rowth (% )
P E P E G rowth (% ) Market Price12.0 4.0 48.00
14.4 20% 5.0 25% 72.00
18.7 30% 6.0 20% 112.32
26.2 40% 7.0 17% 183.4639.3 50% 8.0 14% 314.50
327.6 200.0 655.20
Growth % for the period
Multiplier E ffec t
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E P S E P S G rowth (% P EP E Growth (% )
Market P rice12.0 4.0 48.00
14.4 20% 4.8 20% 69.12
18.7 30% 6.2 30% 116.81
26.2 40% 8.7 40% 228.9539.3 50% 13.1 50% 515.14
327.6 327.6 1073.22
Growth % for the period
Multiplier E ffec t
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Balance Sheet
Debt Equity Ratio
Book Value
Stock Turnover ratio
Debtors Turnover ratio
Trends in stocks and debtors
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Balance Sheet
Debt Equity Ratio: Equity
Share holders funds
Equity Share CapitalPreference Share Capital
Reserves and Surplus
Capital Reserves
Revenue ReservesRevaluation Reserves
Negative Reserves
Networth excluding revaluation reserves
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Balance Sheet
Debt Equity Ratio: Debt
Long Term Debt
Rupee loans
Foreign Currency loans
Quasi equity
Short Term Debt
Cash credit/over draft
Long term debt Repayment due in 12 months
Others
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Balance Sheet
Book Value
No. of equity shares outstanding Average, Weighted Average, or year end equity?
Networth excluding revaluation reserves
Exclude preference capital if it is included in Networth
Potential dilution of equity
ESOPS
Convertible portion of quasi equity/debt
Convertible Warrants
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Balance Sheet
Turnover Ratios
Stock Turnover Ratio
Debtors Turnover Ratio
Trends in Stocks and Debtors
**They can be land mine that can topple equityappreciation, if not understood/analysed properly
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Ratios
Liquidity Ratios Leverage Ratios
Coverage Ratios
Activity Ratios
Profitability Ratios
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Liquidity Ratios are based on only balance Sheet
items
Current Ratio = Current Assets / Current Liabilities
Quick / Acid Test Ratio = (Current Assets - Inventories)/CurrentLiabilities
Cash Ratio = (Cash + Marketable Securities) / CurrentLiabilities
Interval Measure = 365* (Current Assets - Inventories) /(COGS+ SGA excluding depn)
Net Working Capital Ratio = Net Working Capital / Net Assets
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Leverage Ratios are based on only balance sheet items
Debt Ratio = Total Debt /(Total Debt + Net worth)
Debt Equity Ratio = Total Debt / Net worth
Capital Employed to Net Worth Ratio = Capital Employed / Net Worth
Capital Employed to Net Worth = 1 + Debt Equity Ratio
Capital Employed = Net Assets = Net Worth + Total Debts
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Coverage ratios involve items in Profit and loss account as
well as Balance Sheet
Debt Service Coverage Ratio = (Net profit + interest + leaserent + non cash expenses) / Instalments due + Lease Rentals
**Instalments due include principal and interest due for the period
Interest Coverage = Earnings before interest tax, depreciationand amortisation / Interest
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Activity Ratios involve items in profit and loss as
well as Balance Sheet
Inventory Turnover Ratio = Cost of goods sold / Average Inventory (or) Sales / Inventory
Days of Inventory holdings = 365 * inventory / sales
Debtors turnover ratio = Credit sales / average
debtors (or) Sales / Debtors
Average collection period = 365* Debtors / Sales
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Assets Turnover ratio involve items in profit and loss as well
as Balance Sheet
Net Assets Turnover Ratio = Sales / Net Assets
Total Assets Turnover Ratio = Sales / Total Assets
Fixed Assets Turnover ratio = Sales / Net Fixed Assets
Current Assets Turnover Ratio = Sales / Current Assets
Working Capital Turnover Ratio = Sales / Net Current Assets
***Sales will be the Numerator in all turnover ratios
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Profitability ratio generally involve only Profit and Loss
account items
Gross Profit Margin = (Sales - Cost of Goods Sold ) / Sales
Net Profit Margin = Profit after Tax / Sales
Operating expenses ratio = Operating expenses / Sales
Operating expenses = cost of goods sold + SGA
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Return ratios involve both Profit and Loss account and
Balance Sheet items
Return on Investment = Earnings before interest and tax / Total
Assets
Return on Investment = Earnings before interest and tax / Total
Assets
Return on capital employed = Earnings before interest and tax /
Net Assets or Capital employed
Return on Equity = Profit after tax / Net worth
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Ratios of interest to investors and capital markets
Earnings per share = (Profit after tax - preference dividend) / No. of Equity Shares o/s
Price - Earnings Ratio = Market Value Per Share / Earnings Per Share (or) Market Capitalisation /Net profit after preference dividend
Dividend Per Share = Dividend to equity holders / No. of equity shares outstanding
Dividend Pay out ratio = Equity dividend / Profit after tax
Dividend Yield = Dividend Per share / Market Value per share
Net worth = Equity Capital + Total Reserves and Surplus
Exclude revaluation reserves in reserves and surplus
Also reduce miscellaneous expenses not written off, if any
Debit balance of Profit and loss account if negative reserve
Book Value = Net Worth / No. of Equity Shares
Market value to Book Value = Market Value per share / Book Value per share
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Return On Capital Employed
Operating Margin % = 100*((PBIDT - Other Income)/ Net Sales)
Profit Margin = EBIT / Net Sales
Asset Turnover = Net Sales / Net Assets
Return on Net Assets (or) Return on Capital Employed = ProfitMargin * Asset Turnover
Return on Net Assets= EBIT / Net Assets
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Return On Net Worth
Leverage can accrue from income side as well as balance sheet side
Income side leverage = PAT / EBIT
Balance Sheet side leverage = Net assets / Net Worth
Financial leverage (or) Return on Capital Employed = Income sideleverage * Balance Sheet side leverage = (PAT / EBIT) * (Net Assets /Net Worth)
Return on Net Worth = ROCE * Financial Leverage
= (EBIT / Net Assets) * (PAT / EBIT) * (Net Assets / Networth)
= PAT / Net Worth
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P&L, Balance sheet and Ratios in real time
analytics
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Conclusion
There is no fool proof method to find multi baggers
Understand the business, and USP of the company
Value accretion can be sustainable only if growth ispredictable
Even one or two quarters of sub optimalperformance can erode value
Other things being constant, market will rewardconsistent performers
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Thank You