Final Ppt With Changes

7/30/2019 Final Ppt With Changes

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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



Profit & Loss Account

Key Issues

Sales Other Income

Operating Margin (%)

PAT before Exceptional Items

EPS and PE ratios




Sales

Variance Analysis

Volume

Price

Mix




Other Income

Find sustainable other income

Identify non recurring items




Operating Margins (%)

Due to increase in sales

Due to reduction in costs

Rise in prices

Enrichment of Product Mix




PAT before Exceptional Items

Forex Impact

Exceptional Items

Tax Incidence

Growth




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



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



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



Balance Sheet

Debt Equity Ratio

Book Value

Stock Turnover ratio

Debtors Turnover ratio

Trends in stocks and debtors



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



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



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



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



Ratios

Liquidity Ratios Leverage Ratios

Coverage Ratios

Activity Ratios

Profitability Ratios



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



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



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



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



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



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



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



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



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



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



P&L, Balance sheet and Ratios in real time

analytics

http://localhost/var/www/apps/conversion/releases/20121120192253/tmp/scratch_5/financials.xls






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



Thank You

Final Ppt With Changes

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