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Study material on Company Analysis

© Cygnus Business Consulting & Research Pvt Ltd. 2009 1


Study material on Company Analysis

Internship Study material

COMPANY ANALYSIS

© Cygnus Business Consulting & Research Pvt Ltd. 2009 2


Study material on Company Analysis

About Us

We are a world class business consulting and research organisation focusing on analysis and research of
Economies, Industries and Companies. Solutions and services offered by the company span the entire value
chain of information, analysis and research. Cygnus Business Consulting & Research is a knowledge services
organisation that offers business solutions to a number of leading corporates, banks, industries and trade
associations, consulates, consultants and educational institutes both in India and abroad.

We have built competencies in consulting and business research. A comprehensive suite of business
intelligence products serve as a foundation for customised research and consulting projects. We cover a range
of manufacturing and services industries.

Cygnus in Latin means “Swan” a heavenly bird known for its purity and swiftness. True to our name, we at
Cygnus lay a lot of stress on purity, authenticity and speed.

We have our knowledge centre in Hyderabad, India. We have a talented and motivated team of over 70
professionally qualified and experienced employees who are strongly committed to upholding the highest
standards of research integrity and cutting edge analysis. We leverage the industry domain experience of the
team along with the deep knowledge and skills in finance and business research across various sectors and
sub-sectors, to produce an insightful analysis and research.

At Cygnus, we understand that quality, time and cost are of fundamental importance when delivering
business information. With over two decades of experience in the field of analysis and research, we come
with a rich heritage of domain expertise, world-class service delivery, state-of-the-art technology, quality
processes and highly skilled manpower.

Cygnus acts as a knowledge partner to associations like CII, FICCI, PHARMEXCIL and many such
affiliations. Cygnus has over 500 customers from India, Canada, Germany, Singapore, UK and US, dealing in
many industries. Our clients in India include Abbott, Amity, British Deputy High Commission, Dr. Reddy’s
Labs, Grasim, HPCL, Kodak, Monsanto, Maruti Suzuki, Nicholas, NITIE, Pfizer, PWC, SBH, SBI, TCS,
Wockhardt to name a few.

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Study material on Company Analysis

CONTENTS
About Us ....................................................................................................................................................... 3
Why Company Analysis? ....................................................................................................................... 6
Approach of P&L account ................................................................................................................... 6
Template of Company Analysis......................................................................................................... 10
1.0 Preamble ............................................................................................................................................... 10
2.0 Background ........................................................................................................................................... 10
3.0 Products and Services ............................................................................................................................ 11
4.0 Business Model....................................................................................................................................... 13
4.1 Value Proposition............................................................................................................................... 14
4.2. Target Customer................................................................................................................................ 14
4.3 Distribution Channel .......................................................................................................................... 14
4.4 Promotion .......................................................................................................................................... 15
4.5 Revenue Streams ................................................................................................................................ 15
4.6 Core Capabilities................................................................................................................................. 15
4.7 Value Configuration ........................................................................................................................... 15
4.8 Partner Network................................................................................................................................. 16
4.9 Cost Structure..................................................................................................................................... 16
5.0 Business Analysis.................................................................................................................................... 19
5.1. Segmental Analysis ............................................................................................................................ 19
5.2 Competition ....................................................................................................................................... 19
5.3. Issues and Challenges ........................................................................................................................ 20
6.0 Operational Performance ....................................................................................................................... 21
6.1 Sales and Sales growth ........................................................................................................................ 21
6.2 Segmental Sales Analysis..................................................................................................................... 22
6.3 PBDIT and OPM............................................................................................................................... 23
6.4. Segmental PBIT and OPM ................................................................................................................ 23
6.5 Cost Structure..................................................................................................................................... 24
7. Operating Metrics ................................................................................................................................... 25
7.1. Automobiles ...................................................................................................................................... 25
7.2. Banking ............................................................................................................................................. 26

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Study material on Company Analysis

7.3. Cement.............................................................................................................................................. 29
7.4 Steel.................................................................................................................................................... 32
7.5 Retail .................................................................................................................................................. 33
7.6 Telecom ............................................................................................................................................. 34
7.7. Hospitality ......................................................................................................................................... 35
7.8. Construction...................................................................................................................................... 36
7.9. ITSS .................................................................................................................................................. 36
7.10 Aviation............................................................................................................................................ 39
7.11. Power .............................................................................................................................................. 40
7.12. Oil and Gas ..................................................................................................................................... 41
7.13. Pharma ............................................................................................................................................ 42
7.14. Health care ...................................................................................................................................... 43
7.15. Shipping .......................................................................................................................................... 43
7.16. Roadways......................................................................................................................................... 45
8. Financial Performance ............................................................................................................................ 46
8.1. Net Profit Growth: ............................................................................................................................ 46
8.2 Debt to equity ratio ............................................................................................................................ 46
8.3 Return on Capital Employed (ROCE): ............................................................................................... 47
8.4. Return of Equity................................................................................................................................ 47
8.5. Cash flow analysis.............................................................................................................................. 48
9. Capital market Performance................................................................................................................... 49
10. Recent Strategies .................................................................................................................................. 50
11. Outlook ................................................................................................................................................. 51
12. Approach to Segmental analysis........................................................................................................... 51
13. Abbreviations ........................................................................................................................................ 55
14. Ratio Analysis ........................................................................................................................................ 57

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Study material on Company Analysis

Why Company Analysis?


After understanding the linkages between Economy and Industry Analysis, detailed company analysis gives us
more clarity about the company. We need to select a single company in already selected industry which is
being allotted by Cygnus. Understanding business model will help us how the company generates revenue
and how much it converts into profit. The analysis focuses on understanding of operating, financial and
capital market performance of the company for the last 6 quarters. Cygnus company looks at various
strategies adopted by company in expanding the top line and bottom line and how they are defending the
environment outside. These strategies will have major impact on the future top-line and bottom-line.
Assignment for Interns
The interns need to prepare a full fledged report on company analysis from the respective industry. The
intern shall follow the template given below. While carrying out analysis intern needs to follow some of the
guidelines and instructions while preparing the report.

Approach of P&L account


Before understanding the company template, we must understand about the Profit & Loss Account which is
given below.
Profit & Loss Account/Income Statement
Gross Revenue/Sales XXXX
Less: Excise Duty XXX
Net Sales / Income from Operations XXXX
Less: Operating Expenditure XXXX
Raw Materials* XXX
Cost of Power Purchased* XXX
Freight & Handling Expenses XXX
Staff Cost XXX
Other Expenditure XXX
EBITDA/PBDIT XXXX
Less: Depreciation XXX
EBIT/PBIT XXXX
Add: Other Income XXX
Less: Interest Paid/Financial Charges XXX
Profit Before Tax/Profit Before Exceptional Items XXXX
Add/Less: Exceptional Items XXX
Profit (+)/ Loss (-) from Ordinary Activities before Tax XXXX
Less: Tax XXX
Reported Net Profit (+)/ Loss (-) XXXX
Less: Dividend Paid to the Share Holders XXX
Add/Less: Extraordinary Items XXX
Adjusted PAT Transferred to Reserve & Surplus Account XXXX

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Study material on Company Analysis

*All these are not applicable for service industries like Banking, Telecom, ITSS, ITES, Retail and Insurance.

From P&L account we can measure how much a company is efficient and effective. Efficiency of a company
is measured by calculating operating profit margin (OPM/PBDIT margin/EBDITA margin) for all sectors
and effectiveness is measured by net profit margin (NPM/PAT Margin). Analyst/intern shall analyze
company from profitability point of view also through return on capital employed and return of equity.

Explanation of 3 important ratios of the company:

1. Operating Profit margin (OPM/ PBDIT margin/EBDITA margin):


OPM = PBDITA or EBDITA / Net sales *100

Operating profit margin is calculated by taking operating profit or PBDIT or EBDITA in numerator
and dividing by net sales multiplied by 100. The ratio is used to measure company’s operating
efficiency. The ratio will give understanding to analyst/intern how much profit is left over after
meeting internal obligation to meet external obligation. The margin is of high importance for
creditors of the company as margin shows them how much operating profit can cover interest cost
which is paid to creditors. It also measures the returns to company from the core business of the
company. While calculating OPM, we don’t consider other income as a part of operating income, as
it is not a part of core business.

Comparing with same companies


While comparing companies let’s say for e.g.: ACC has PBDIT Margin 32% for JFM09 compared to
28.2% for JFM08. It gives a clear indication that company has taken cost cutting measures which has
led to increase in OPM. This also clearly indicates that sales growth is higher than expense growth as
a result of OPM increases.

Comparing 2 different companies


While comparing two different companies in the same industry, we know that the company of higher
OPM is more efficient than the one of lower OPM. For eg., ACC’s OPM is 32% for JFM09
compared with Ultratech Cement’s OPM of 28.2%; it indicates that ACC is more efficient than the
latter.

Applicability: OPM/ PBDIT margin/EBDITA margin is applicable to all industries except for
banks

Net Interest margin = OPM in banks

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Study material on Company Analysis

All banks in India have different P&L a/c format compared to that given by the companies act,
1956. Since banks business is all about lending/ borrowing and receive/ pay interest to
lenders/depositors, top line has mainly 3 incomes – interest income, investment income and other
income. Bank receives Interest income from lending, income from investment from investing in G-
Secs and other income through commission, exchange, Brokerage, Profit on sale on investment,
Profit on exchange transaction, Miscellaneous income, Profit on revaluation of asset and Profit on
sale of asset.

Just like in other industries there is OPM, in banks there is net interest margin (NIM). NIM is the
difference between interest earned and interest expended expressed as a percentage over the total
assets. The higher the NIM, the better it is for the bank. A negative NIM denotes that the bank’s
interest expense is higher than its interest income. In most cases, interest earned is higher than
interest expended.

2. Net Profit Growth: It is calculated by following formulae (Applicable to all companies):

(Net profit of Current quarter or year – Net profit of previous quarter or year) / Net profit of
previous quarter or year * 100
The net profit growth when compared with YoY or QoQ basis or compared with sales growth or
operating profit growth it is due to following reasons
• Prudent financial management policies
• Better operational efficiency
• High sales growth

The net profit growth is applicable to all industries and can be used for comparing two companies in
same industry. This profit growth plays very important role for companies.
PAT margin = Net profit or PAT/Net Sales * 100 (Applicable only to banks)
Net profit margin is calculated by finding the net profit as a percentage of the revenue.

Net Profit Margin = Net Profit (after taxes) x 100%


Revenu

The ratio measures how much effective the business and performance of overall businesses of the
company. The NPM is very important as far as stakeholders are concerned, because the higher the
PAT margin the higher probability of dividends for stake holders. There are 3 factors that affect

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Study material on Company Analysis

NPM; the factors are high PBDIT growth, external expenditure like Depreciation, Interest and Tax,
and high growth in other income. While calculating NPM we consider other income too, because
while analysing NPM the company as whole is considered and not only its core business.

3. Return on Capital Employed (ROCE): ROCE is calculated as Earning Before Interest and Tax
(EBIT) to Capital Employed (Total Shareholders fund plus Long Term Debt)

ROCE = Net Profit x 100

Capital Employed

The ratio measures the efficiency and profitability of the capital investment. ROCE should always be higher
than company’s borrowing rate, otherwise any increase in borrowings will reduce shareholder’s earnings.

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Study material on Company Analysis

Template of Company Analysis


1.0 Preamble

Preamble justifies why the analyst selects a particular company in the industry. It is just a reason for selecting
the particular company in the industry. There should be at least one trigger point to select the particular
company, for e.g. Mergers & Acquisition or Government Regulations. The analyst shall take any trigger point
and select the company. Preamble will give the
Share Holding Pattern - ABC ltd Dec 2008
logic for selecting the particular company that has
come in the news in past 1-3 months. Body
Institution Corporate
47.71% 0.97%
Sentence Limit - Here, the sentence limit will be Individual
approx five to six lines in a single paragraph. s
Other
17.90%
18.03%
Sources – All business news papers, Business Others
0.13%
magazines and company press releases etc. Promoter
33.29%
Font size – Garamond 11 and Format –
Source: BSE india, Cygnus.
Paragraph

2.0 Background

In back ground the analyst shall give information with regard to year of incorporation of the company
followed by name of the promoters, major plants and capacity (for manufacturing companies), Location of
headquarters (only city) (for all companies), and lines of the business.

Sentence Limit - Sentence limit will be approx five to six lines in a single paragraph. Please don’t use bullet
points and don’t give the address of company.

Sources – All business news papers, Business magazines Company website, Annual report, Investors
presentation and Red herring prospectus etc.

Font size – Garamond 11 Format – Paragraph

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Study material on Company Analysis

Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches)

Text-box 1
Example of manufacturing company – Tata Power
Incorporated in 1913, Tata power is India’s largest private power generator company. It has pioneered power generation
in the country and it belongs to country biggest industrial house Tata group. Tata power is having close to 2700 MW as
its annual installed capacity with power stations located at Trombay in Mumbai, Jojobera in Jamshedpur and Belgaum in
Karnataka. The Hydro stations are located in Raigad district in Maharashtra and the Wind Farm in Ahmednagar. The
company gets revenue from 2 segments, one is from power generation and distribution and second one is others which
include electronic equipment, project consultancy.

Example of Service Company- Taj Hotels


Established in 1903, Taj Hotels Resorts and Palaces is one of Asia's largest and finest group of hotels, comprising 65
hotels in 45 locations across India with an additional 15 international hotels in the Maldives, Malaysia, Australia, UK,
USA, Bhutan, Sri Lanka, Africa and the Middle East. From world-renowned landmarks to modern business hotels, idyllic
beach resorts to authentic Rajput palaces, each Taj hotel offers an unrivalled fusion of warm Indian hospitality, world-
class service and modern luxury. The Taj, a symbol of Indian hospitality, has recently completed the centenary of its
landmark hotel, The Taj Mahal Palace and Tower, Mumbai. Taj Hotels Resorts and Palaces is part of the Tata Group,
India's premier business house.

3.0 Products and Services

The analyst needs to mention about the products and services the company offers in the market (all
companies). If company has lots of products (FMCG or Chemicals), in this case find out the highest weight-
age products (% of revenue) and mention the major products.

Format – Table format


Sources – All business news papers, Business magazines and company press releases etc.
Font size – Garamond 11
Example of manufacturing

Indica Vista, Indica V2, Indica V2 Turbo, Indica V2 Xeta, Indica V2Dicor

Passenger Cars Indigo XL, Indigo, Indigo Marina, Indigo CS

Nano, Fiat Cars

Utility Vehicles Safari Dicor, Sumo Grande, Sumo, Xenon XT

Trucks Medium & Heavy Commercial Vehicles (Tata Novus)

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Study material on Company Analysis

Example of manufacturing

Intermediate Commercial Vehicles

Light commercial Vehicles (TL 4*4)

Small commercial Vehicles

Commercial Passenger
Buses, Winger, Magic
Carriers

Defence Vehicles -

Example of Services

Name of service/Product Details

It involves defining, designing and building applications tailored to meet t


Application Development business requirement. It is based on industry standard process quality framewo
(CMMI, CMM etc.)

Application Maintenance services help to get the best out of existing


Application Maintenance applications. The services cover offshore ability analysis, maintenance analysis, a
maintenance and enhancement.

BPM enables enterprises to align their business requirements with


Business Process
infrastructure. It defines, automates, and control business activities as a whole th
Management(BPM)
incorporates people, processes and systems.

Consulting service is a blended offering of high quality Business consulting ons


Consulting services and with impeccable Technology implementation offsite. Implementing package su
package implementation as oracle e Business suite, for client typically involves Business blue printing, g
analysis, configuration, testing, and package roll-out.

IT infrastructure management service provides different options to customers lik


Infrastructure conceptualisation and design, on going support and services, the technology

Management platform, implementation support and variety of projects to support entire


infrastructure.

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Study material on Company Analysis

Example of Services

Name of service/Product Details

Product Engineering These services involve research and development, product development, value
analysis/value engineering, analysis and optimisation, testing and automation,
Services maintenance and support, product re-engineering among other services.

System integration service uses a sensible approach to build well integrated IT


infrastructure system that addresses critical business needs. Services include
System integration
program management, technology consulting, solution architecture and
management among other services.

Include three services - Performance Testing, Test Automation and Testing cente
Testing Services
of Excellence.

Finacle is a universal banking solution product offered by the company. It is use


Products for financial solutions in areas like core banking, eBanking, mobile banking,
treasury, credit risk management etc.

4.0 Business Model


The understanding of any company comes from understanding its business model. Understanding business
model helps in analysing the factors that affect the company. It gives a clear picture as to which factor has
huge influence on the topline and bottom line. Further understanding business model helps us in doing
forecasting company’s financial statements and value the company. There are in fact 9 different parts of
business model of a company and has been discussed in details below. The business model can be bifurcated
into the following:
1) Value Proposition
2) Target Customer
3) Distribution Channel
4) Promotion
5) Revenue Streams
6) Core Capabilities
7) Value Configuration
8) Partnership Network
9) Cost Structure

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Study material on Company Analysis

4.1 Value Proposition

To stay in the cut-throat competition, company produces different products & services to cater their different
customers. The analyst/intern has to mention about the products or services names and details about it. To
be more precise, Value Proposition will define what the different kinds of products a company is
producing to cater its different set of customers.

4.2. Target Customer

It is a very true that every company has its target customer. Companies around the globe are producing
different products for their different segment of customers. The analyst/intern needs to find out whether
company targets niche customers like Daimler Chrysler, Only industry specific or middle class population,
students, business executives, corporates, self employed and professionals. The target customer can also be
classified as per rural/urban population or domestic/international.

4.3 Distribution Channel

Once the company’s products/services are identified and target customers are identified, it’s important to
analyse how company bridges the gap. The company bridges the gap between itself and customers through its
distribution channel. There are different forms of distribution channels like agents, dealers, franchisees,
internets and own outlets. Distribution channels are very much important for any organisation for its growth.
In some cases, distribution channel plays two important roles, one as a selling point and another as after sales
services point. Through this, the organisation will be in direct contact with their customers.

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Study material on Company Analysis

4.4 Promotion

To retain, maintain and increase its market share company needs to promote its brands, products and services
in the market. It is important for any organisation to retain old customers as they do mouth-to-mouth
advertising and promote company’s product. Sometimes companies directly engage themselves in promotion,
tie-ups or engage 3rd party in promoting. The promotion is done through various means like giving discounts,
gift vouchers, bonus, prizes, sponsoring, ad campaigns and pamphlets.

4.5 Revenue Streams

Revenue streams is a method of earning money and a way to collect it from those who buy product/service.
In other words, the mode through which company receives revenue is known as revenue streams.
Traditionally companies had only one single core business, but later on they got familiar with diversification
and risk management and started receiving other forms of revenue.

Till now what has been discussed is the front end part of business model. Front end means external activities
of company which is visible through naked eyes. In the back end part, which is not visible contains the
technology, processes, technical tie-up and business partners.

4.6 Core Capabilities

Core Capabilities can be defined as the core strength of any manufacturing concern, which comprises of
heavy machineries, plants, infrastructure, number of vehicles (roadways) number of towers (telecom)
branches (banks), equipments (construction equipments), IT (area and offices).The company’s core
capabilities will give understanding how much capacity company can scale up. In case sudden surge in
business can company is able to tap the market.

Company has different plants (Mfg. Cos.) as well as facilities from where they provide services or do
production. This defines the kind of infrastructure what the company has to convert the raw materials into
final products. Eventually, this core capability defines any companies strong positioning in the entire value
chain of the industry. Higher the core capabilities the more will be the profitability.

4.7 Value Configuration

A company’s infrastructure doesn’t generate value unless some technology deployed into the same. It is the
value configuration that transforms inputs to output. The company’s technology adds value to inputs and
transforms raw materials into finished products.

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Study material on Company Analysis

4.8 Partner Network

Partnership network plays a major role in the explicit performance of any company. This partnership network
can either be in initial process of the manufacturing or final process, where the final product reaches to the
customer. As defined earlier, apart from company which other players are depending upon apart from the
company. The partners can be raw material suppliers, technology support providers, transport vendors, food
contractors, real estate developers, warehousing agencies are partners in business model.

4.9 Cost Structure

Cost structure is one of the important parameters for the analyst while doing the analysis of any company.
Cost structure differs for all companies even though they belong to one industry. In Automobile industry for
example, if the analyst takes Tata Motors and Maruti Udyog Limitd, he will find their percentage of fuel cost
differ.

As per the Indian Accounting Standards, if any cost as a percentage of sales is more than 10%, company is
liable to show such expenditure differently. Analyst has to take care of such costs.

Style and Font Size – Garamond 11


Format – Each point shall be discussed in separate paragraphs along with sub heads.
Chart – pie chart

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Study material on Company Analysis

Example of business model – Services

Value Proposition:
Company defines, designs, and deliver technology enabled business solutions to companies established across the
globe. Company aims at adding value to client’s business by providing strategic differentiation and operational
superiority through various technological solutions. Company follows the Global Delivery Model (GDM) to
ensure distribution of its products and services in timely and cost effective manner.

Target Customers: Considering the company’s global footprint and its ability and experience to serve
clients spread across different segments, company is in a position to target various IT deals. However companies
belonging to sectors like BFSI, Telecom, Construction and Retail still remain its primary target as these are
technology dependent sectors. Also deal size in these sectors tends to be big and spread over multi-years,
providing enough clarity about future revenue stream.

Distribution Channel: Company’s Global Delivery Model (GDM) approach enables it to stay in touch
with its customers through out the execution of project. GDM gives 24 hours execution capabilities across
multiple time zones. Through its consulting groups and Software Engineering and Technological Labs
(SETLabs), company research and engineer new solutions tailored for its client and their industries. Also it uses
its end-to-end technological based solutions to extend the network of its relationship both with existing clients as
well as new clients.

Customer Retention: Through its project management methodology, company ensures timely, consistent
and accurate delivery of superior quality solutions to maintain high level of client satisfaction. Its ability to serve
entire software life cycle and strong domain expertise helps it to gain increased business from its existing client.
As a result, company has a history of client retention and derives a significant proportion of revenue from repeat
clients.

Revenue Stream: Company gets it revenue directly from its clients on the basis of type of contract entered
into. Arrangements with customers for software development and related service are either on fixed-price, fixed-
timeframe or on a time-and-material basis.

Core Capabilities: The core strength of company is its highly skilled and well trained professionals.
Company provides specialised technical and domain training to its employees. At its Mysore campus it has
capacity of around 33,500 trainees. Company has 15 Global Development Centers (GDC) and 28 marketing
offices located across the world... Further it has five subsidiaries in five different countries. It has also established
Software Engineering and Technological Labs (SETLabs) in India. SETLabs leverages emerging technologies for

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Study material on Company Analysis

improving engineering effectiveness and developing client-focused business solutions. Finacle, its universal
banking solution powers 109 banks across 60 countries. It is considered among the leaders in global evaluation of
retail core banking solutions.Company currently has two patents granted by US Patent and Trademark office. An
aggregate of 151 applications are pending in US Patent and Trademark office and Indian Patent office.

Value Configuration: SET Labs conducted 12 Innovation Workshops with customers from the US
and Australia, to identify research collaboration possibilities. SET Labs collaborated with leading national and
international universities such as the Indian Institute of Information Technology, Hyderabad, Purdue
University, University of Southern California, and Queensland University of Technology. Researchers from
BT Group PLC and SETLabs will also collaborate on research and innovation. A Memorandum of
Understanding (MoU) has been signed to this effect.

Partners Network: Some of the partners getting business from the company are transport service
provider, hotels, Airlines companies and canteen service providers. Company also entered in partnership with
global business firms and institutions to innovate and provide latest technological business solutions. Some of
the recent partnerships company entered in to are:
1. Alliance with Microsoft focusing on Supply Chain visibility and collaboration.
2. The University of Cambridge and Infosys has signed an agreement to undertake research in engineering,
management and business, architecture and pharma.

Cost structure: The major element of overall cost is salary expenses (72.7% of total expenses) under
different departments like software development and maintenance, selling and marketing and administration.
Company has taken various cost management measures like; increase in offshore efforts(76.9% vs 76%
QoQ), try to increase utilization rates(74.5% vs 73.7% QoQ), slow down in hirings (Net hiring in JFM09
2772 Vs OND08 5927), low number of trainees (7709 Vs 8119 QoQ), cutting in support activities.

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Study material on Company Analysis

5.0 Business Analysis

Segmental Analysis - Business Analysis-2008-


5.1. Segmental Analysis 09

With they becoming more risk averse,


companies are operating in more than one D2
13%
business segment. The intern/analyst needs to
D1 D3
analyse the business which the company gives
77% 9%
more concentration. The analysis shall be on
D4
annual yearly basis. (Refer segment analysis in detail in 1%
chapter 12) Source: Company Annual report

Style and Font Size – Garamond 11

Format –Separate paragraphs along with sub heads

Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches)

5.2 Competition

The market share of the company should plot in the pie chart at right hand side. In competition, intern/
analyst shall keep in mind the companies, which have been selected. The analysis shall include the stand of
the company in terms of competition. The strategies planned by the company shall be able to face and
withstand the competition. For calculating market share, different companies are given below.

Company Measurement
Automobiles No. of Units Sold
Power Mega Watts. (MW)
Steel Installed Capacity Units in million tonnes (Installed Capacity)
Cement Units in million tonnes (Installed Capacity)
Oil & Gas Units in million tonnes (Installed Capacity)
Telecom Units - No. of Subscribers
Banking Deposits
Retail Floor Area
All other cases Herfindahl Index

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Study material on Company Analysis

Style and Font Size – Garamond 11


Format –Separate paragraphs along with sub head
Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches)

5.3. Issues and Challenges

Any company operating in any part of value chain of industry will have to face some Issues and Challenges.
The issues and challenges can be either internal or external. The internal issues can be strike, lower capacity
utilisation, wastage of resource, idling plants, unutilised office space, leadership, attrition. The external
factors can be Prices of raw material, exchange rates, increase of tax levied by the government on the final
product, supply contracts, regulations, lack of reserves, Market penetration, change in customer preference
and Pricing of the product.
Here, all the paragraphs should have sub headings.

Sources– Annual report, Investor Presentation, Profit & loss account, BSE India and press releases etc. More
focus should be on analysis part.
Style and Font Size of Sub head – Garamond 11 bold
Style and Font Size of content – Garamond 11
Format – Each point shall be discussed in separate paragraphs along with sub head.

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Study material on Company Analysis

6.0 Operational Performance

In operational performance, analyst/intern needs to have a full understanding about the operations of
company’s business. The analyst/intern needs to measure company’s operational aspects and analyse the
performance. The analyst/intern shall find out the reasons for fluctuations in operational performance. In
operational performance, analyst/intern needs to analyse –

1) Sales and sales growth


2) Segmental sales analysis
3) Operating profit and operating profit margin
4) Segmental operating profit
5) Cost Structure
6) Operating metrics

6.1 Sales and Sales growth


Sales and Sales Growth
4000 12
In order to analyse operations of 3500 10
company, analyst/intern should take last 3000 8
6 quarter sales and sales growth. The 2500 6
Rs Mn

%
2000 4
focus of analysis must be on latest
1500 2
quarter and reasons thereon. For
1000 0
analysing IT/Biotech/Telecom, 500 ‐2
analyst/intern must do sequential QoQ 0 ‐4
(JFM09 VS OND08) analysis as JAS07 OND07 JFM08 AMJ08 JAS08 OND08

industry is more dependent upon Net Sa l es (LHS) Growth (RHS)


Source: BSE Website
Innovation and creativity. The rest of all
other sectors will have YoY (AMJ09 Vs AMJ08) growth analysis. In case of IPO for last two years, we will
consider performance on yearly basis (past three years). In the report, the analyst/student must mention the
reasons for cause in increase in sales. The reasons can be capacity addition, rise in realisation in case
commodities and power industry, new clients in case of ITSS, New products launches in case of Automobiles
and pharma, New subscribers additions and launch of new services in Telecom, and Launch of drugs in case
of Pharma cos.

If analyst/intern mentions that sales have increased by rise capacity, then specify which plant’s capacity has
increased. The analyst/intern shall develop an in depth understanding about the company and its business.

© Cygnus Business Consulting & Research Pvt Ltd. 2009 21


Study material on Company Analysis

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11

Data source - For data of companies plz refer to BSE India, NSE, SEBI or company website. PLz take only
stand alone results and all units to be in Rs. million.

Starting sentences - During the quarter ended June/Sept/ March/December 2009, company’s sales
witnessed Dip/growth of …% to Rs …….. million compared to CPLY/previous quarter. The strong growth
/ dip was due to ……….(plz give reasons).

6.2 Segmental Sales Analysis Segmental analysis and growth


1800 20.00
1600 15.00
In case company has more than one 1400 10.00
segments then analyst/intern shall 5.00
1200
0.00
analyse the revenue from segment wise 1000
Rs m

%
‐5.00
800
on YoY basis (JFM09 vs. JFM08) for ‐10.00
600
cyclical companies (other than IT, ‐15.00
400 ‐20.00
Telecom and Biotech) and for non
200 ‐25.00
cyclical companies, it shall be on QoQ 0 ‐30.00
basis (JFM09 vs. OND08). In case of D1 D2 D3 D4

IPO during last two years, analyst/intern Sales (LHS) YoY Growth(RHS)
Source: BSE India
will consider performance on yearly
basis (past three years). In operational performance the focus is on growth not % share in revenue. It is not
compulsory that segment that leads in terms of revenue will have a higher growth. Analyst/Intern should find
and analyse the reason of the strong growth of sales (segment wise).

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11

Data source - For companies data please refer to BSE India, NSE, SEBI or company website. Please take
only stand alone results and all units to be in Rs. million.

Starting sentences - During the quarter ended June/Sept/ March/December 2008/09, overall company’s
sales growth came … division compared to CPLY/previous quarter. The growth in the division was on
account of… The other divisions also performed well which added company’s top line growth. Of the all
divisions one division witnessed dip due to …

© Cygnus Business Consulting & Research Pvt Ltd. 2009 22


Study material on Company Analysis

6.3 PBDIT and OPM

In case of PBDIT and OPM, Operating and OPM


2900 60.00
analyst/intern shall analyse last 6 quarters 2800
55.00
and find out the margin. In analyzing, 2700

2600 50.00
analyst/intern has to define which factor

Rs ,m n
2500
45.00

%
plays the major role for the changes in the 2400

OPM on either side. Is it because of 2300 40.00

2200
increase in sales or fall in the operational 35.00
2100
expenditures or vice versa? The reasons 2000 30.00
JAS07 OND07 JFM08 AMJ08 JAS08 OND08
for fluctuation in OPM can be due to –
PBDIT(LHS) OPM (RHS)
High capacity utilisation, Captive power Source: BSE India, Cygnus
plants, VRS, high training cost, high raw
material cost, high transportation / logistics cost, rise in salary levels, high advt cost, shut down plants due to
floods, strike etc.

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11

Data source - For data of companies plz refer to BSE India, NSE, SEBI or company website. Please take
only stand alone results and all units to be in Rs. million.

Starting sentences - The company for the quarter ended June/September/December/March 2007/8 has
witnessed dip/rise in the margins compared to CPLY / QoQ. This is due to the fact that ………………..
While calculating OPM please remove other income from total income and calculate the OPM.

6.4. Segmental PBIT and OPM Segmental Analysis


1000 60
It is ritual that company that reports 800 50
segments sales should report segmental 40
600
Rs mn

operating profit and capital employed. 30


400
The analysis should focus on the 20
200 10
segment that generates high operating
margins. It is not necessary that the 0 0
Cement Sponge iron VSF Textiles
segment that generates highest sales PBDIT(LHS) Margins(RHS)
may not always have the highest Source; BSE India

© Cygnus Business Consulting & Research Pvt Ltd. 2009 23


Study material on Company Analysis

margins. The analyst/intern should be able to understand and draw conclusions, which segment among the
various segments generates maximum margin for the company. The segment that generates highest margins is
cash cow for the company. All the lenders to the company are interested on the segment that generates
maximum margin.

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11

Data source - For data of companies please refer to BSE India, NSE, SEBI or company website. Please take
only stand alone results and all units to be in Rs. m.

Starting sentences ‐ The company for the quarter ended June/September/December/March 2007/8 has
highest margins in …….segment. This is due to the fact that ………………..

100
6.5 Cost Structure Cost Structure as % of Sales
90

80
In cost structure analyst/intern should 70

analyse the trend of cost components of 60

the company as percentage of sales. The 50

40
comparison shall YoY for cyclical
30
industries and QoQ for non-cyclical 20

industries. The reasons for fluctuation in 10

cost components can be high capacity 0


OND07 OND08

utilisation, captive power plants, VRS, high Ra w ma teria ls Sta ff cos t Energy Sell ing Exp Other Interes t Depriciation Ta x

Source: BSE India, Cygnus


training cost, high raw material cost, high
transportation/logistics cost, rise in salary levels, high advt. cost, shut down plants due to floods, strike,
capital expenditure, high costly debt taken for expansion, converting debt into FCCE, corporate debt
restructuring scheme, strong financial policies and better tax management.

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11

Data source - For data of the companies please refer to BSE India, NSE, SEBI or company website and take
only stand alone results also all units to be in Rs in m.

Starting sentences ‐ The company for the quarter ended June/September/December/March 2007/08 has
witnessed dip/rise in the cost components on CPLY/QoQ basis. This is due to the fact that ………………..

© Cygnus Business Consulting & Research Pvt Ltd. 2009 24


Study material on Company Analysis

7. Operating Metrics

Operating metrics is a type of metrics used for measuring companies in terms of efficiency. Normally, if
anyone wants to measure companies, all look at the financial figures. However, analyst/intern shall look
beyond the financial figures in measuring efficiency of the company. Operating metrics is not applicable for
all industries; it depends upon data availability and disclosure of company. There will be no common ratio for
all the industries and operating metrics differ depending upon the industries.

7.1. Automobiles

In automobile industry, analyst/intern should analyse the following:


i) Segmental Monthly unit sales of automobiles and YoY growth
ii) Revenue per vehicle
iii) PBDIT per vehicle

In monthly sales segment, analyst/intern will come to know the seasonality of sales of auto units. In India,
especially passenger car, 2-wheeler sales are high during second half of the year because of major festivals.
During the time of schools and colleges re-open, the demand of Light commercial vehicle and 2-wheeler
bikes rises. Indian automobile companies sell different models at different prices and at different places;
analyst/intern will not get the data of price of models across the country. The best metrics would be revenue
per vehicle and PBDIT per vehicle.

Analysis of Revenue per vehicle = Revenue of the company (Rs in m) / Total vehicle sold (units)

Trend of Revenue per vehicle


In case, revenue per vehicle rises when
compared with YoY basis and growth of the 1500000
1249342.2
revenue is higher than growth of the auto unit 1200000
949160.03
sold, it means that the company has increased
900000
the prices and it decreases if vice-versa happens.
600000
The company will decrease the prices of
300000
automobile by giving huge discounts and
Rs

passing on the decrease in taxes. 0


OND07 OND08

Source: ALL

© Cygnus Business Consulting & Research Pvt Ltd. 2009 25


Study material on Company Analysis

Analysis of PBDIT per vehicle = PBDIT of company (Rs in m) / Total vehicle produced (units)

In case, PBDIT per vehicle rises when


110000 Trend of PBDIT per vehicle
compared with YoY basis and growth of
103781.05
105000
PBDIT is higher than growth of auto produced,
100000
it means that the company have opted for huge
95000
cost cutting as well as rise. If production units
90000 87254.416
are more or less same and simultaneously there
85000

Rs
is no change in cost structure of the company, it
80000
means that the company has increased the prices
75000
and it decreases if vice-versa happens. In case, OND07 OND08

while analyzing Mahindra and Mahindra and


Source: ALL
Eicher take only automotive division sales and
Trend of SBI bank NIM (%)
automobile operating profit only.
36.00

7.2. Banking 35.00

34.00

i) Net interest margin (6 quarters)


33.00

In banking industry, net interest margin is


32.00

one of most important indicators. The net


31.00

interest rate margin is the difference


30.00

between the interest earned by the bank JAS07 OND07 JFM08 AMJ08 JAS08 OND08

from lending and interest expended by Source: BSE India, Cygnus


the bank on borrowings as a percentage
of earnings assets of the bank. The difference between interest expended and earned is the interest spread
of the bank. The higher the NIM, the better is for the bank. A negative NIM denotes the bank interest
expense higher than interest income. In most of the cases, interest earned is higher than interest
expended. NIM and “spread” are the two key parameters that give an indication of a bank’s operational
efficiency. As a concept, NIM and spread are very similar, but there is a subtle difference between the
two. While NIM is arrived at by dividing a bank’s net interest income by its average interest-earning
assets, spread is the margin between the yield on assets and the cost of liabilities, or the difference
between interest income and interest expense as a percentage of assets. NIM can be higher or lower than
the net interest spread.

Analysis of NIM – If NIM rises, it means that the bank has increased the lending rates or borrowing
rate has gone down. The rise in lending rates of bank will increase due to rise in the cost of deposit rates,

© Cygnus Business Consulting & Research Pvt Ltd. 2009 26


Study material on Company Analysis

rise in CRR, repo rates and SLR by RBI. The borrowing rate will go down if the banks cost of deposit
decreases.

ii) NPA (6 quarters)


Trend of SBI bank NPA
In Indian banking industry, NPA is defined
as an advance for which interest or 80,000
70,000
repayment of principal or both remain out
60,000
standing for a period of more than two 50,000
quarters. The level of NPA acts as an 40,000

indicator by showing the bankers’ credit 30,000


20,000
risks and efficiency of allocation of
10,000
resource. The RBI has classified NPA under 0
4 categories - standard, sub standard asset, JAS07 OND07 JFM08 AMJ08 JAS08 OND08

doubtful and loss assets. The current Source: BSE India, Cygnus

economic slowdown, coupled with the impact of global recessionary trends on liquidity, has raised
concerns of rising NPAs (non-performing assets) in the Indian banking industry. The issue of NPA drags
on the balance sheet of banks assuming no change in business environment till March 2010. Recently,
RBI has argued all Indian banks to restructure the loans and rescheduling the principal repayment date,
or even reducing interest rates help to revive the borrower’s cash flows.

iii) C/D ratio (6 quarters)


C/D Ratio
Credit deposit ratio (C/D) is an important
0.8
indicator for the bank as it indicates the
0.78
credit given by bank to industry and how
0.76
much the bank has parked in government 0.74
securities. The major business of bank is 0.72
0.7
lending and borrowing and C/D ratios
0.68
helps in analysing how much business bank
0.66
is able to get its maximum revenue from 0.64
2005-06 2006-07 2007-08
core business and non core business
Source: BSE India, Cygnus
(Treasury). Higher the C/D ratio mean
higher will be the interest income. Lower C/D ratio and still banks are able to post profits then it means
profits came from non core business of banks like other income and treasury income.

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Study material on Company Analysis

iv) Business per Employee (3 years)


SBI Bank - Business and Profit per
In banks, analyst/intern should measure
employees
employee productivity through business per
50
employee. In this, he/she has to measure the
40
company’s capacity to generate total revenue
30
(total income) from all the departments.
20

v) Profit per Employee (3 years) 10

In banks, it is very important to measure the 0


2005-06 2006-07 2007-08
value addition of each employee is adding to
Business Per employees Profit per employee
the company. This can be analysed through
Profitability per branches
the metric profit per employee. In profit per
Profitability per
employee analyst/intern should be able to 1.9 branches

measure the overall total profit from all 1.85

employees in the departments. 1.8

1.75

vi) Profitability per branches (6 1.7

quarters) 1.65

All branches are the cost centres of banks as 1.6


2005-06 2006-07 2007-08
they have to maintain the assets and
Capacity Utilization
employees. Today, the trend is banks want to 95

be branchless office and offer more value


added services. 90

85
vii) Capital Adequacy Ratio (3 years)
%
According to BASEL II norms, the capital
80
adequacy ratio is required 12% of overall
capital. In case, banks maintain excess of CAR
75
over 12%, then the bank has too much of idle OND07 OND08

capital which was neither used for lending nor Source: BSE India, Company Website

investment.

© Cygnus Business Consulting & Research Pvt Ltd. 2009 28


Study material on Company Analysis

viii) CASA deposit as percentage of total deposit

In the Banking industry, the impact of any hike or cut in loan rates is felt immediately as a bank’s entire loan
book is re-priced, but that’s not the case with deposits as the new rates are applicable only when the existing
deposits mature or new deposits flow in. Indeed, CASA (Current Account and Savings Account) plays an
important role in lowering the cost of deposits. The “CA” of CASA, or current account, is primarily meant
for companies, public enterprises and entrepreneurs who have numerous banking transactions daily. Such
accounts are cheque-operated and a customer can deposit or withdraw any amount of money in any number
of times. The cost of CASA will go up from April 2010 when banks will have to pay interest on the daily
balance in SAs, which means banks will have to pay 3.5% on savings deposits instead of the 2.8% which they
are paying now.

7.3. Cement

In cement/steel industry, being one of the core industries, some of the operating ratios are more or less
common, so, analyst/intern shall analyse the following operating ratios:

i) Capacity utilisation CPLY (Corresponding Period Last Year)


ii) Realisation per tonne CPLY
iii) Energy cost per tonne CPLY
iv) PBDIT per tonne CPLY
v) Employee per tonne CPLY

i) Capacity utilisation on YoY basis - measures the company’s leveraged existing capacity. In order to
calculate the capacity utilisation, the analyst/intern should take the actual production in the year and divide by
annual installed capacity. To calculate the capacity utilisation for the quarter ended, he/she need to divide the
quarterly production by the quarterly installed capacity. To arrive at quarterly installed capacity divide annual
installed capacity by 4. For ex: In 2008, ACC has annual installed capacity of 25 million tonnes and for a
quarter maximum it can produce is 6.25 million tonnes. First analyst/intern shall find out the actual
production, let suppose ACC produced 4.5 million tonnes during AMJ09, then capacity utilisation for AMJ09
= (4.5/6.25)*100 i.e., 72%. The company shall leverage its assets for the maximum to add value to the
company. The better the capacity utilisation the higher will be the margins i.e., company could produce more
without an additional capital expenditure. In weak macro environment or negative inflation or higher
competitive environment, companies will not able to hike prices, but still can maintain higher margins with
higher capacity utilisation. In case, there is a decline in capacity utilisation then the reasons can be slowdown
in demand, plant shut down for maintenance, strike floods and natural calamity. (Applicable to cement/steel/any
commodity)

© Cygnus Business Consulting & Research Pvt Ltd. 2009 29


Study material on Company Analysis

ii) Realisation per tonne - means how much the


3850 Realization per ton
company could realise by selling of one unit in the 3800
market. In order to find out the realisation per 3750

Rs per ton
ton, the analyst/intern shall divide net sales (Rs in 3700

m) by sales in volume (m tonnes). 3650


3600
3550
In weak macro environment or negative inflation
3500
or higher competitive environment, realisation per
3450
ton will fall. But in case, strong macro OND07 OND08

environment or positive inflation or supply is less Source: BSE India, Company Website

than the demand or costlier inputs, companies would hike prices of output. Growth rate in sales would be
higher in case it is due to higher realisation than through rise in volumes. In case the realisation in
international markets higher than the domestic market, Indian companies would prefer to sell their product in
international markets due to higher realisation. It has happened in case of cement industry during 2007-08
and 2008-09, cement companies were selling more in international markets due to better realisation and they
made huge profits. As a result, supply of cement
in domestic markets dipped but demand was Energy Cost per ton

higher; it resulted to prices went up in domestic


860
markets. (Applicable to cement/steel/any commodity) 840
820
Rs per ton

iii) Energy cost per tonne (CPLY) 800


780
For any commodity industry like cement or steel
760
or aluminium manufacturing, energy/power; cost 740
is one of the major components. In order to 720

measure the efficiency of company, the 700


OND07 OND08
analyst/intern should find out the company’s
Source: BSE India, Company Website
spending in terms of energy per unit of
production. For capital-intensive industries, energy requirement is very high. In order to de-risk the inefficient
power supply from the government, many companies have started with captive power plants. Today, when
the government gives high priority to the power industry in terms of coal allocation, capital-intensive
industries are importing coal from international market to meet the power requirement. The lesser energy per
unit would be helpful to get the better margins of the company. (Applicable to cement/steel/any commodity)

© Cygnus Business Consulting & Research Pvt Ltd. 2009 30


Study material on Company Analysis

iv) PBDIT per tonne (CPLY) Trend of PBDIT per ton


3000
In commodity industries like cement/steel,
analysis of operating per unit is one of most 2500

Rs per ton
important metric.. Due to high intensity of 2000

manufacturing activity, operating profit per unit


1500
will give a clear picture about the efficiency of
1000
companies. While comparing two companies, the
company which is having highest PBDIT per 500
OND07 OND08
tonne is better in terms of efficiency. It could be
Source: BSE India, Company Website
due to various reasons like keeping operating cost
at the minimum, highest capacity utilisation, buy semi-finished products from others and covert it into
finished product and rise in sales. To arrive at PBDIT per tonne, the analyst/intern need to take PBDIT
divided by production. The reason for taking production is to calculate profit from operations per tonne..
(Applicable to cement/steel/any commodity)

Em ployee Production

v) Employee per tonne (CPLY) – In order to 28.21


28.2
measure how much productive employees are
28.19
Production/employees

analyst/intern can have a look at production / 28.18


28.17
employee. The higher the ratio means better
28.16
productive the employee. However, the challenge 28.15
28.14
is that while taking number of employees, non-
28.13
production employees are also be considered. 28.12
AMJ08 AMJ09
Further, many manufacturing companies take
casual labourers who in fact take part in Source: BSE India, Company Website

production but they do not account in number of employees. In India most of companies give standalone
number of employees. It is most challenging to obtain the data of actual number of employees who are in
production, non-production and casual labourers. (Applicable to cement/steel / any commodity)

© Cygnus Business Consulting & Research Pvt Ltd. 2009 31


Study material on Company Analysis

7.4 Steel
In steel industry, the analyst/intern should analyse the following ratios:

i) Capacity utilisation CPLY


ii) Realization per tonne CPLY
iii) Energy cost per tonne CPLY
iv) PBDIT per tonne CPLY
v) Employee per tonne CPLY
vi) Blast furnace productivity and coke rate
vii) Energy consumption

Points i) to v) have already been explained in the cement sector. The same is applicable to this
sector.

vi) Blast furnace productivity and coke rate: This is measured in terms of tonnes of hot metal produced
per cubic meter of blast furnace volume, per day
Coke rate
(T/cubic met/day). The Blast furnace operation
606
demands the highest quality of raw materials,
604
operation, and operators. Coke is the most 602

important raw material fed into the blast furnace 600


kg/THM

in terms of its effect on blast furnace operation 598

596
and hot metal quality. A high quality coke
594
should be able to support a smooth descent of
592
the blast furnace burden with as little 590
AMJ08 AMJ09
degradation as possible while providing the
lowest amount of impurities, highest thermal Trend of blast furnace productivity
8.4
energy and highest metal reduction, for the flow
8.2
of gaseous and molten products. Introduction of
8
high quality coke to a blast furnace will result in
Kcal/Tcs

7.8
lower coke rate, higher productivity and lower
7.6
hot metal cost. The coke rate measures in kgs of
7.4
BF Coke consumed per tonne of Hot Metal
7.2
produced in the Blast Furnace (Kg/Ton Hot 7
metal). AMJ08 AMJ09

Source: BSE India, Company Website

© Cygnus Business Consulting & Research Pvt Ltd. 2009 32


Study material on Company Analysis

vii) Energy consumption: The energy consumption for steel plant is measured in Gcal/TCS (Giga calorie
per tonne of crude steel). This is measured in Giga Calorie (i.e. 1000 million calorie) per tonne of Crude Steel
produced (Gcal/TCS). The lesser Giga/TCS is lesser energy consumption, lower cost and higher margins.
The higher energy consumption increases the steel production cost.

7.5 Retail

In retail, there are three following metrics:


i) Revenue per sq ft Net Sales per sq.ft
ii) Number of foot-falls
2500

Net Sales per sq.ft( in mn)


iii) Conversion ratio
2000

1500
i) Revenue per sq ft: In retail industry 1000
revenue per sq ft is one of the most 500
important operating metrics. For retail 0
JAS07 OND07 JFM08 AMJ08 JAS08 OND08
companies, if the revenue per sq ft
shows the increasing trend, the company Net Sales per sq.ft

will get more revenues. The revenue per Source: BSE India, Company Website

sq ft will rise during festival seasons, new product launches, reopen of schools and colleges, marriage
seasons, unique offering or on auspicious days. In order to measure it, the analyst/intern shall take
net sales and divided by area in sq ft.
Customer Entry
ii) Number of foot-falls: In retail
200
Customer Entry( in mn)

industry in order to get higher revenue


150
per sq ft, it is important to have more
number of foot falls. There are some 100

factors like events or discount or 50

stock clearance sales though footfall 0


increases but there will not be any rise 2005-06 2006-07 2007-08

in revenue per sq ft. It also gives an Customer Entry


understanding that there is a strong Source: annual reports

growth in window-shopping, but there will not be corresponding growth in the revenues. If the foot
falls rise on continuous basis then the mall is able attract and retain more consumers.

iii) Conversion ratio: The most challenging task of any retail company is convert number of footfalls
into actual customer. The conversion is possible through better marketing, new offers, new products,

© Cygnus Business Consulting & Research Pvt Ltd. 2009 33


Study material on Company Analysis

and innovative ways to attract customers like giving prizes and conducting games. The company
strategy should be how to convert the number of footfalls into sales. Number of footfalls will give
probable customers it is up to the company what strategy it uses to convert probable customers into
actual customers.

7.6 Telecom
ARPU & ARPU Growth
350 ARPU Growth 0.04
In the telecom industry, there are the following 300 0.02
250 0
metrics, which has to be analysed:

Per Sub.
-0.02
i) Average revenue per user 200
-0.04 %
150
ii) Average revenue per minute -0.06
100 -0.08
iii) Minutes of Usage
50 -0.1
iv) Subscribers base 0 -0.12

AMJ07

JAS07

OND07

JFM08

AMJ08

JAS08

OND08
i) Average Revenue Per User/subscriber
Source: BSE India, Company Website
(ARPU): In the telecom industry, the most
important indicator is revenue per user. Under the normal conditions, it will show the falling trend
with falling tariffs and falling mobile handset prices. If ARPU shows
the negative growth rate, the company will not make any change in Formula of ARPU -
tariffs but the company is able to attract more subscribers. In order Net Revenue (Rs mn)
to calculate ARPU, the analyst/intern shall take net revenue from No of subscribers (mn)
telecom business of the company and divided by number of subscribers. The trend of metric has to
be observed on quarterly basis. ARPU is a measurement used primarily by customer communications
and networking companies and it is the total revenue divided by the number of subscribers. ARPU
measures the amount of revenue brought in
by a single subscriber per month. Measuring MOU & MOU Growth
450 25
revenues of per customer, or per unit basis 400 20
350
300 15
can help to explain how good specific
Per Sub.

250 10
%
products are generating revenues. ARPU is 200 5
150 0
also very useful when it can be compared to 100
50 -5
other user-specific metrics. 0 -10
JAS07

AMJ08

JAS08
OND07

OND08

ii) Average revenue per minute: Measure of


JFM08

the overall level of revenue achieved by an


operator for each minute carried on its MOU GROWTH(RHS)

network. Source: BSE India, Company Website

© Cygnus Business Consulting & Research Pvt Ltd. 2009 34


Study material on Company Analysis

iii) Minutes of usage: A metric used to


compute billing and/or statistics for Subscriber Base &Subscriber Base
Growth
telephone calls or other network use. It 40 18
35 17
measures efficient utilisation of its 30 16

P er S ub.
network. 25 15
20 14 %
iv) Subscriber base: The main indicator for 15 13
10 12
telecom industry is the subscriber base. 5 11
This indicator measures the market share 0 10

JAS07

OND07

JFM08

AMJ08

JAS08

OND08
of the company and level of competition.
Subscriber base depends upon the scheme Subscriber Base Growth (RHS)
offers and tariffs, which the company Source: BSE India, Company Website

charges from its subscribers.

7.7. Hospitality

In the hotel industry, the following metrics are used:

i) Occupancy rate
Occupancy rate- Room’s occupied
ii) Average room rate
/ Total number of rooms
iii) RevPAR
i) Occupancy rate: Occupancy rate indicates that percentage of rooms occupied in the total rooms available
in a hotel. The metric will also give the understanding that the percentage of tourists or travellers attracted by
the hotels. It will give another indicator that how much effort company is putting in marketing its brand.

ii) Average Room Rent (ARR): It implies the company’s charges for letting out the room. ARR fluctuates
from season to season and one city to another city. Since, hotel
ARR- Income from letting out
business is linked to travel and tourism, international/domestic rooms / Total number of rooms
tourist arrivals are higher in second half due to Christmas and
other festivals. Domestic travel will be very high in quarter-ended April-May-June due to summer vacations.
Further, the inflows of travel will be different during different seasons, so, ARR fluctuates during the
quarters. Apart from tourist travellers, business travellers who come for business purpose and people come to
participate in events need accomodation.

iii) Revenue Per Available Room (RevPAR): It indicates the


RevPAR- ADR * occupancy rate
average room, which is calculated by multiplying a hotel's
average daily room rate (ADR) by its occupancy rate. It may also be calculated by dividing a hotel's total
guestroom revenue by the room count and the number of days in the period being measured. RevPAR does

© Cygnus Business Consulting & Research Pvt Ltd. 2009 35


Study material on Company Analysis

not take into account of revenue from other hotel services, such as restaurants, spas, golf courses, marinas,
casinos, etc.

7.8. Construction

i. Order book position last 6 quarters – In the construction industry, revenue depends upon number
of orders to be executed in the quarter or year. If the order book position becomes higher then it is
easier for the company to sustain in terms of revenue. The order book position depends upon the
company’s capacity and expertise to execute projects in deadline and projected cost. The factor that
influences the order book position are capacity expansion in manufacturing industries, government
thrust to complete infrastructure projects just before the general elections and company’s capacity to
execute.

ii. Order book inflow last 6 quarters: Order book inflow is nothing but the difference between order
book positions of two different periods. It shows the incremental order received by the company.
Normally the order inflow will be very high in 3rd and 4th quarters as there will be less of rains and
construction activity will be in full swing.

iii. Sales to order book position last 6 quarters: Sales to order book position ratio will give an
understanding the ability of the company’s pending orders to convert it into revenue. In
construction, the revenue model follow ‘S’ curve as in the initial stages, when the project starts, the
construction company will get less amount but gradually when the project is nearing to completion, it
receives the full amount.

7.9. ITSS

i. Business per employee last 6


quarters: In ITSS, the analyst/intern
should measure employee productivity
through business per employee. In this
industry, the number of employees has
direct correlation with business. If
business per employee increases on
QoQ basis, the same number of
employees are able to generate more
business. It also gives one more
Source: HCL

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Study material on Company Analysis

understanding that employees are more productive. If business per employee increases on QoQ
basis, but the number of employee rate falls, it implies that unproductive employees have been laid
off.
Business per employee -
Style and Font Size of Sub head – Garamond 11
Total income from software/ Total
bold number of employees
Style and Font Size of content – Garamond 11
Data source - For data of the companies, please refer to BSE India, investor presentation, press
release or company website.
Starting sentences – During the quarter ended June/September/December/March 2009 has
witnessed dip/rise in business per employee on YoY/QoQ basis. This is due to the fact that
………………..
ii. Profit per employee last 6 quarters: It is very
Profit per employee - Net Profit /
important to measure the value addition of each
Number of employees
employee which is adding to the entire company. In
profit per employee, the analyst/intern should be able to measure the overall profit from all the
employees in the departments. In case, profit per employees is increasing from the previous quarters,
it indicates that the employees are more productive. Employees are able to generate more value by
keeping least cost and increase the business per employee. In case business per employee is
decreasing but profit per employee is rising, it means company has gone for cost cutting or strong
rise in other income due to foreign exchange profits or company has huge tax refunds.

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11
Data source - For data of companies, please refer to BSE India, investor presentation, press release
or company website.
Segmental analysis of TC S
Starting sentences – During the 400000 20
350000 15
300000 10
quarter ended 250000 5
Rs

200000
%

150000 0
June/September/December/March 100000 5
50000 10
2009 has witnessed dip/rise in profit 0 15
Travel & Hospitality
Manufacturing
Telecom

Life Sciences &


BFSI

Distribution

Hi-tech

Media&Entertainm

Others
Energy & Utilities

per employee on YoY/QoQ basis.


Retail &

Healthcare

This is due to the fact that


ent

………………..
iii. Vertical wise revenue in last QoQ: IT
LHS:Reveuve for quarter Ended June 09 RHS:Growth rate%
companies cater to IT requirements
Source: TCS
of different industries called verticals.

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Study material on Company Analysis

In software, major verticals are BFSI, Retail, Manufacturing, Logistics, Healthcare, Telecom and
others. For Indian IT companies, BFSI is major vertical but due to the current slowdown in global
economy, it is witnessing a slowdown. The analyst/intern has to measure the QoQ growth and YoY
growth of each vertical stating the reasons for growth.

Style and Font Size of Sub head – Garamond 11 bold


Style and Font Size of content – Garamond 11
Data source - For data of company’s please refer to BSE India, investor presentation, press release
or company website.
Starting sentences – BFSI/Telecom/Media/Manufacturing/Retail witnessed growth/dip during
the quarter ended June/September/December/March 2009 on YoY/QoQ basis. This is due to the
fact that ………………..

iv. Offshore and Onshore revenue last


6 quarters: IT companies have
facilities in offshore and on-shore.
Most of the time, the company does
work on on-shore or off-shore at
client site. India's offshore outsourcing
business has been affected this year by
the economic downturn, as its
customers in key markets like the US
have deferred decisions on new Source: BSE

projects. US customers are attempting


to bring down prices, and some of S EG M ENT W IS E REV ENUE

them are introducing benefit sharing 4000


3500
programs that will typically reduce the 3000
2500
Rs in cr

outsourcer's revenue from a contract. 2000


1500
Also as outsourcers do more of the 1000
500
work offshore in India than on-shore 0
Development

Engineering &
Enterprise

Consulting

Business
Process
Solutions

at client sites, revenue from that work


Application

Global
Industrial

will fall.
Q u a r te r e n d e d Ma r 0 9 Q u a r te r e n d e d Ju n e 0 9

Source:TCS

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Study material on Company Analysis

v. Segment wise revenue QoQ and YoY - IT companies offers different IT services like application
development, ERP, Consulting, data integration to its customers. India is known for cheap cost of
application development. The segment will give analysis which services have major growth.

vi. Geography wise revenue QoQ and


YoY - As most of IT Companies are
doing outsourcing business it is also
better to look for revenue generation
from geography point of view too.
Since US and Europe account for
60% of overall IT exports from India
it is better to analyze under geography
wise revenue stream. The analysis will
also give clear understanding about
exposure of company to different Source: HCL

currencies.

vii. Client’s concentration on QoQ and YoY- In IT industry, major part of business comes from
bigger clients and it is economical to depend upon bigger clients rather than smaller clients. The
more the number of bigger clients, much diversified would be the business model and therefore
lesser risk. The intern/analyst need to analyse whether the company has economies of scale in getting
more business from existing clients or getting more business from new clients. It is more risk for a
company incase it depends upon one client. Contracts - The Indian software industry uses two
different models for revenue recognition. The first is the Time and Material (T&M) Contracts model
in which customer are billed on the basis of hours worked by the employees of supplier software
companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to
arrive at the revenue that is to be recognised. The second is the Fixed Price Project Model (FPP), in
which the total contract price is agreed by both the parties. Billing may be done either at the end or
over the period of the contract on the basis of the agreed milestone for billing.

7.10 Aviation

i) Aircraft utilisation - Represents the average number of block hours operated per day per aircraft
for the total aircraft fleet.
ii) Available Seat Kilometers, or ASKM - Represents the aircraft seating capacity multiplied by the
number of kilometres the seats are flown.

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Study material on Company Analysis

iii) Breakeven load factor - Represents the Passenger Load Factor that will result in Net Passenger
Revenues being equal to Total Expenses less cargo and Non-operating Revenues.
iv) Cargo tonnage - The total cargo carried on an aircraft expressed in metric tonnes.
v) Cost per ASKM - Represents total cost less cargo revenue net of commissions, excess baggage,
other income and non-operating revenue including interest income, divided by the ASKMs.
vi) Flight Hours - Refers to the time elapsed from the moment the wheels of an aircraft leave the
ground on a take-off until the wheels of an aircraft next touch the ground.
vii) Revenue Passenger Kilometers, or RPKM - Represents the number of kilometres flown by
revenue passengers.
viii) Revenue passengers - Represents the total number of fare paying passengers flown on all flight
segments (excludes passengers redeeming their frequent flyer miles).
ix) Revenue per ASKM - Net Passenger Revenue divided by ASKMs.
x) Revenue per RPKM - Net Passenger Revenue divided by RPKMs.
xi) Yield - Passenger Revenue earned per kilometer flown.

7.11. Power

i) Forced outage – The shutdown of a generating unit,


Plant load factor formula -
transmission line, or other facility for emergency reasons Total MWh generated in period x 100 /
or a condition in which the generating equipment is Maximum Load (MWe) x period (hours)
unavailable for load due to unanticipated breakdown. Forced outage rates are used when calculating the
overall reliability of an energy delivery system. The unplanned outage requires the plant to be taken out of
service immediately or before the next planned outage.

Trend of Plant load factor


ii) Plant load factor YoY basis- Every unit that 81
80
generates power has been given a load factor,
79
which the unit has to maintain. Indirectly plant 78
77
load factor measures the capacity utilisation of 76
%

75
unit. Higher PLF and higher utilisation of unit 74
73
indicates better efficiency. Generally gas based
72
plant has higher PLF than coal based plant. It is 71
AMJ08 JAS08 OND08 JFM09 AMJ09
because in gas-based plant nothing is left out
Source: BSE India, Company Website
compared to ash in coal-based plant.

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Study material on Company Analysis

7.12. Oil and Gas


i. Gross refining margins last 6 quarters
Trend of Gross Refining Margins
(Down stream) – In crude oil refining 16

14
industry, gross refining margins (GRM)
12
measures the difference sale price of 10

US$/bbl
8
crude products and purchase price of
6
crude oil. GRM is difference between 4

selling price of refined crude and 2


0
purchase price of raw crude oil. The AMJ08 JAS08 OND08 JFM09 AMJ09

refining margin is thus the difference Source: BSE India, Company Website

between the total value of petroleum products produced by the oil refinery and the price of the input
i.e. crude oil. GRM is measured in US$ per barrel and India has highest GRM due to fourth largest
refining capacity in the world. GRM will give an understanding how much money is left out to meet
the expenses of the company. It is applicable for downstream companies in oil and gas industry.
GRMs (in US$ per barrel) can be defined as the difference between the costs of raw material (majorly
crude) and weighted average prices of petroleum products. Given the fact that GRMs of the refining
business depends on the weighted average prices of petroleum products, there is a need to
understand the pricing mechanism of the petroleum products followed by the Indian refineries.
Assume that a refinery processed 1 barrel of crude and derives output in the form of 28 gallon of
diesel and 14 gallons of other products (say petrol and heating oil). Assuming the crude prices are
US$65 and price of diesel (Refinery gate prices) are US$ 2.0/gallon, while the weighted average prices
of other products are US$1.4/gallon. Then the GRMs are = (28* 2.0 + 1.4*14) - 65 US$10.6 per
barrel
ii. Reserve/production ratio in last 3 Reserve / Production ratio
1.65

years (Upstream) – In order to measure 1.6

the life of upstream company it is better 1.55

1.5
to measure the production/reserve ratio.
1.45
The ratio will help in analysing the life of
1.4
a company in years. If ratio shows down 1.35
trend then it is due to non-addition of 1.3
2006-07 2007-08 2008-09
new reserves in the company. As reserves
Source: BSE India, Company Website
are depleted there is more oil being
extracted, this ratio is called as depletion ratio. The upstream company on one hand shall have higher
extraction and on the other hand, shall have longer life. The upstream shall be able to manage both
production and adding new reserves. This will ensure not only efficiency but also better future of the

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Study material on Company Analysis

company. The ratio will give an understanding of how much oil is being produced from existing
reserves. In case there is more production it
Formula for Reserve Production ratio -
means there is higher demand. This ratio is used
Amount of known resource) /
by companies and government agencies in (Amount used per year)
forecasting the future availability of a resource to
determine project life, future income, employment, etc, and to determine whether more exploration
must be undertaken to ensure continued supply of the resource. Annual production of a resource can
usually be calculated to quite an accurate
number. However, reserve quantities can Reserve Replacement Ratio
2
only be estimated to varying degrees of 1.8
1.6
accuracy, depending on the availability of 1.4
1.2
information and the methods used to

R atio
1
evaluate them. 0.8
0.6
0.4
0.2
iii. Reserve replacement ratio in last 3 years
0
(Upstream) - One measure of oil company 2006-07 2007-08 2008-09

performance is the "reserves replacement Source: BSE India, Company Website

ratio" (RRR), the ratio of new reserves to oil produced, which ideally should be greater than 1.
Reserve replacement is calculated by summing the total reserves added over a five-year period. The
ratio is calculated by dividing replacement by production over the same period. Proved reserves
replacement ratio is a performance measure that is calculated using proved oil-equivalent reserves
additions divided by oil-equivalent production. Both proved reserves additions and production
include amounts applicable to equity companies.

7.13. Pharma Dr Reddy R&D Expenses as % of Sales


12

i. R&D Expenditure as % of sales – In 11

pharma industry sustenance of revenue 10

depends upon the amount spend by the


9
%

companies on research and development to


8
develop new drugs. This amount on R&D
7
as % of sales indicates the amount of new
6
drugs being developed. The companies that JFM08 AMJ08 JAS08 OND08 JFM09 AMJ09

operate in formulation generally spend Source: BSE India, Company Website

more when compared to bulk drugs and generics segments. Hence, in India most of the pharma
companies are in bulk drugs and generics that spend less in R&D activities.

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Study material on Company Analysis

ii. Drugs in pipeline – Generally to develop drugs or formulation, it takes 12-13 years. Companies
develop multiple drugs that can be launched once approval is received from regulatory authorities. In
case of generics, company will be sole producer of drug for 180 days and in case of formulation,
company will be sole producer till expiry of patent rights.
iii. Drugs waiting for approval from USFDA – The companies need approval from US Food and Drug
Administration to launch drugs. FDA gives approval for not only drugs but also for plants. The
process is lengthy and lot of regulatory parameters has to be met to get approval. Higher number of
drugs waiting for approval means higher expected revenue in future.
iv. Number of filings ANDA/DMF – Abbreviated New Drug Approval (ANDA) is an application for
the US drug approval for an existing licensed medication. An applicant may manufacture and market
the generic drug product to provide a safe, effective, low cost alternative to the American public. A
Drug Master File (DMF) is a submission to the Food and Drug Administration (FDA) that may be
used to provide confidential detailed information about facilities, processes, or articles used in the
manufacturing, processing, packaging, and storing of one or more human drugs.

7.14. Health care

i. Revenue per bed – The efficiency of a hospital can be


analysed by its revenue per bed. The major factor that Revenue per bed –
Total revenue /Total number of
influences revenue per bed is length of stay in the beds
hospital. The average length of stay has a significant
impact on the profitability of a hospital since a major portion of revenues are generated in the first
few days of admission and therefore decreasing the average length of stay can help increase the
turnover per bed and also the revenue per occupied bed per day.

ii. Occupancy rate – Hospitals, like hotels, have perishable inventory and optimising its utilisation
would be the most important measure to increase
Occupancy rate –
profitability. The hospital business is extremely capital Beds occupied /No. of beds
intensive and involves long gestation periods. Hospitals available
have traditionally relied on "word-of-mouth" publicity and have grown as a doctor driven practice
rather than service orientation with brand identity for the corporate.

7.15. Shipping

i. Bunker cost – Bunker fuel is used as fuel oil in ships. The price fluctuation in bunker has an impact
on the profitability of shipping companies. The lower the bunker price, the higher would be the
profits of shipping company. Bunker price is residue from refining crude so the price of crude and

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Study material on Company Analysis

bunker are positively correlated. If the oil price increases, the bunker cost and baltic index also
increases.
ii. Revenue per ship/Vessel – To analyse a shipping company with a fleet of ships, a better indicator
would be measuring revenue per ship. Basically the
Revenue per ship –
ship owner has 3 types of revenue like voyage charter, Overall revenue /total no of ships
time charter and bare boat charter. Indian shipping
companies which are engaged in transportation of heavy bulk commodities and tankers. It is better to
analyze the extent ships are utilised to generate the revenue.
iii. Revenue per tonne – The capacity of the ships which are utilised can be measured by the metric
revenue per tonne. To calculate the ratio analyst/intern shall take gross registered tonne and not
DWT (Dead Weight Tonne) as DWT includes weight of entire ship. The revenue ships gain depends
upon 2 factors––by maximising utilisation of capacity and charges.
iv. DWT – It measures the weight that a ship can carry safely or is carrying. It is the sum of the weights
of cargo, fuel, fresh water, ballast water, provisions, passengers and crew. The term is often used to
specify a ship's maximum permissible deadweight when the ship is fully loaded.

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7.16. Roadways

i. Revenue per vehicle – To analyse a roadway company with a fleet of vehicles, a better indicator
would be measuring revenue per vehicle. Indian roadways companies which are engaged in
transportation of agriculture commodities, heavy bulk commodities, oil tankers and chemical tankers.
It is better to analyse the extent vehicles are utilised to generate the revenue. The Roadway
Company’s efficiency can be assessed by using the fleet and in case vehicles are kept empty then the
revenue per vehicle will fall. Hence it becomes necessary for the company to see that it has higher
revenue per vehicle by utilising the assets to its maximum. There are two factors that affect revenue
per vehicle–– one is carrying capacity and other is freight charges. In India vehicles cannot be
overloaded, so revenues can be enhanced through increasing rentals, using of hub and spoke model
and no idling of trucks.

Judgement of Supreme Court on overloading of trucks


In a significant judgement on November 9, 2005, the Supreme Court has quashed the issuance of
Gold Card/Tokens by the State Governments permitting overloading of trucks in excess of
prescribed weight limit. The Court has mandated that the trucks found on roads carrying illegal excess
load will have to offload the cargo crossing the legal weight limit. This judgement is expected to have
multiple impact on various stakeholders in the trucking and automobile industry.

ii. Revenue per km per vehicle – In roadways, revenue per km per vehicle is very important metric for
measuring the efficiency. The metric depends upon the distance covered and tariff charged on the
vehicle for transportation. In case vehicle runs empty then revenue per km per vehicle will come
down which will affect the top-line of the company.

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8. Financial Performance

In financial performance, analyst/intern needs to analyse the following:

8.1. Net Profit Growth:


It is calculated by the formula given below:

(Net profit of current quarter or year – Net profit of previous quarter or year)/Net profit of previous
quarter or year multiplied by 100

The net profit growth, on YoY basis or QoQ basis, when compared with sales growth or operating profit
growth analyst/intern can conclude that growth in net profit was higher due to following reasons

• Prudent financial management


300
PAT and PAT growth rate 6
policies
• Better operational efficiency 250 5

• High operating profit sales 200 4

growth
Rs m n

150 3
%

• Better asset utilisation


100 2
• Better tax planning
• Corporate debt restructuring 50 1

scheme 0 0
OND06 JFM07 AMJ07 JAS07 OND07 JFM08
• High growth in other income OND08(LHS) NPM (RHS)

The growth is applicable to all Source: BSE India, Company Website

industries and can be used for comparing two companies in the same industry. Net profit margin is
an important financial indicator but has limitations due to inclusion of other income.

Period – last 6 quarters YoY or QoQ


Chart – Column and line chart
Style and Font Size – Garamond 11
Format – One single paragraph along with sub head

8.2 Debt to equity ratio

The analysis of long-term debt to equity ratio will give the inference of leverage of company. The share
holders will be always be happier i presence of debt holder because of tax shield. Indian companies have
a D/E ratio of 2:1. The presence of debt in the capital structure reveals cost of capital also. In India there

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Study material on Company Analysis

are companies without debt like Infosys but


in the companies like Pantaloons, Shopper Trend of D/E ratio
1.4
Stop and Vishal, debt is more than net 1.2

worth. 1

0.8
Period – last 3 years
0.6
Chart –Line chart 0.4
Style and Font Size – Garamond 11 0.2
Format –One single paragraph along with 0
2005‐06 2006‐07 2007‐08
sub head
Source: BSE India, Company Website
8.3 Return on Capital Employed (ROCE):

ROCE is calculated as Earning Before 33.5 Trend of ROCE


Interest and Tax (EBIT) to Capital 33
32.5
Employed (Total Shareholders fund plus
32
Long Term Debt). The ratio measures the 31.5
efficiency and profitability of the capital 31
%

30.5
investment. ROCE should always be
30
higher than the company’s borrowing rate 29.5

otherwise it reduces the shareholder’s 29


28.5
earnings. 2005‐06 2006‐07 2007‐08

Period – last 3 years Source: BSE India, Company Website

Chart –Line chart Trend of ROE


25.5
Style and Font Size – Garamond 11
25

Format – One single paragraph along 24.5

with sub head. 24

23.5
%

8.4. Return of Equity 23

22.5

It is the amount of net 22

21.5
income returned as a percentage of
21
shareholders equity. Return on equity 20.5
2006-07 2007-08 2008-09
measures the profitability, a company
generates with the money invested by the Source: BSE India, Company Website

shareholders. A higher ROE indicates the efficiency of a company in using its equity.

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8.5. Cash flow analysis

Cash flow is determined by three components: core operations, investing and financing. The
analyst/interns need to analyse the component which is generating maximum cash to company.
Measuring the cash inflows and outflows caused by core business operations, the operations component
of cash flow reflects cash generated from a company's products or services. Changes in equipment, assets
or investments relate to cash from investments. Usually cash changes from investing are a "cash out"
item, because cash is used to buy new equipment, buildings or short-term assets such as marketable
securities. However, when a company divests of an asset, the transaction is considered "cash in" for
calculating cash from investments. Changes in cash from financing are "cash in" when capital is raised,
and "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company
receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.

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9. Capital market Performance

In capital market performance, 120 Re la tiv e S to c k M a rke t


100 Pe rfo rm a n c e
analyst/intern has to compare share price
80
of company in BSE/NSE with BSE 60
Sensex/Nifty/Industry index. They need 40
S to c k
to construct relative market performance 20
S ensex
for share price and 0

17-Oct
9-Jun

19-Jan
11-Aug

24-Sep

10-Feb
4-Mar
27-Mar
16-May

10-Nov
30 JUN
21 JUl

2 Sep

3 Dec
26 Dec
1 APR
24 APR
Sensex/Nifty/Industry index.

While constructing relative market


performance, analyst/intern should Source: BSE India, Cygnus Research

consider both share prices and


Sensex/Nifty/Industry index as 100. In second step, they should find out the return from first day share price
Sensex/Nifty/Industry index and add 100. Then the analyst/intern shall make the first observation as
constant and finds out the return of each day compared to the first day. They need to take share price and
Sensex/Nifty/Industry index together and plot a line chart.

The analyst/intern has to analyse the reasons for deviations between the movement of share price and
Sensex/Nifty/Industry index. In case, movement of share price and Sensex/Nifty/Industry index move in
same direction then both are positively correlated. The reasons for difference between share price and
Sensex/Nifty/Industry index could be:
• Corporate results
• Increasing capacity
• Launching new product
• New markets
• Regulations
• Technology
• Capacity utilisation
• Reduction in cost
Period – Daily share prices and Sensex/Nifty/Industry index
Chart – line chart
Style and Font Size – Garamond 11
Format – One single paragraph along with sub head

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Study material on Company Analysis

Applicability of industry index – Oil and gas, Steel (Metals), Pharma (HC), Healthcare, ITSS (Tech),
Telecom, Consumer durables, Power and Realty.

10. Recent Strategies

Strategies has very important role to play as it gearing up to face the competition in industry in the future. In
recent strategies, analyst/intern shall discuss growth drivers and value drivers. Growth drivers are the factors
that affect the top-line whereas value drivers affect the bottom-line. Some of the growth drivers are –

• Increasing capacity (All commodities and manufacturing)


• Launching new product (Automobiles, FMCG, Pharma, Textiles)/service (Banking, Insurance, ITSS,
Telecom)
• New markets (Pharma, ITSS, Telecom)
• Increasing the price/realization (all commodities)
• Increase in number of branches/ATM (banking)
• Subscribers (telecom)
• Order book (Construction)
• FDA approvals New ANDA filing, R&D expenses – Pharma

Value drivers – The steps taken by companies to reduce the cost, either operational or administration,
enhance efficiency are value drivers. They are:

• Capacity utilisation – leveraging assets to the best (All mfg)


• Reduction travel cost, printing cost, marketing and administrative expenses (ITSS, banks)
• Reduction in staff cost/layoff – Only fixed component no variable salary
• Production in SEZ or tax free zones – automobiles
• Better investment opportunities apart from core business
• Change in depreciation methodology, inventory valuation and asset revaluation
• Taking positions or hedging in commodity/currency markets for raw materials and foreign currency
• Cheaper raw materials – Cement (Fly ash , slag)
• Deploying captive power plants – Cement/Steel/Textiles/Chemicals
• Change in Technology
• CRAMS/CTO/CRO – Pharma

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Each of the strategy has to be separately discussed


Style and Font Size – Garamond 11
Format – Every point shall have small paragraph along with sub head

11. Outlook

In outlook, analyst/intern should analyse forward-looking statements, which have major impact on
company’s future top-line, operating margins and bottom-line. The analyst/intern need to look for the
following points:

• Economy Scenario – Expected growth in economy, future direction/trend of indicators/triggers


that affects company.
• Industry Scenario – Expected change in industry in terms of demand and supply, regulations,
competition, prices, new products and technology.
• Company – The points covered above affects the growth in top-line, direction/trend of operating
margins and impact on bottom-line of the company.
Style and Font Size – Garamond 11
Format – Each point shall be discussed in separate paragraphs along with sub head.

12. Approach to Segmental analysis

In the wake of globalisation, today most of companies across the world are not only focusing in
single/domestic market but also in other/international markets. When company has some of its revenue
arising out from other segments/geography it becomes mandatory for company to disclose the same to
shareholders.

According to Cygnus, there are four types of companies, from disclosure point of view.

1. Single Business(Segment), Single location (Geography)


2. Single Business(Segment), Multiple location (Geography)
3. Multiple Business (Segment), Single location (Geography)
4. Multiple Business (Segment), Multiple location (Geography)

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Study material on Company Analysis

1. Single Business (Segment), Single location (Geography)


The analyst/intern should carry out analysis limiting to respective business or geography. The analyst/intern
should understand the business model, operating metrics and others that have already been covered.

2. Multiple Business (Segment), Single location (Geography)


In the second category, analyst/intern should prepare the following table for better understanding:

Analysis of Segment

Division 1 Division 2 Division 3 Division 4 Total

Sales XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

QoQ Growth XXX XXX XXX XXX XXX

% Share of Sales XXX XXX XXX XXX XXX

PBIT XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

QoQ Growth XXX XXX XXX XXX XXX

% Share of PBIT XXX XXX XXX XXX XXX

Margin XXX XXX XXX XXX XXX

Capital employed XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

% Share of Capital employed XXX XXX XXX XXX XXX

ROCE XXX XXX XXX XXX XXX

In any disclosures made by company whether it is segment or geography, there are three metrics; they are
segment revenue (sales), segment results (PBIT) and Capital employed.

While analysing sales analyst/intern should look into YoY growth for Non IT/Telecom/biotech and QoQ
growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the contribution of each

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Study material on Company Analysis

segment to sales of company. The analyst/intern should go beyond the numbers to analyse the reasons for
fluctuation of numbers.

While analysing PBIT (Segment results), analyst/intern needs to look at YoY growth for Non
IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should
find out the contribution of each segment and operating margin to overall PBIT of company. It is not
compulsory that the geography/region that contributing highest in PBIT and growth have highest margin.
This would help analyst/intern to know the geography/region, which is a major source of income. The
analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers.

While analysing capital employed, analyst/intern should look at YoY growth for Non IT/Telecom/biotech
and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the
contribution of each segment to overall capital employed of company. The analyst/intern should go beyond
the numbers to analyse the reasons for fluctuation in numbers.

For eg: In Grasim industries, there are five business segments like Cement, Textiles, Chemicals, Sponge iron
and Viscose stable fibre. In Kesoram industries there are 3 business segments tyres, cement, chemicals and
rayon. In most of the banking companies 3 major segments are interest income, treasury and others; and in
some of the private sector banks wholesale, retail and others. In telecom companies segments are on the basis
of technology like GSM and CDMA and on the basis of post or pre-paid connection. In IT companies there
are different segments like from geography point of view(Americas, Europe, Asia Pac), verticals point of view
(BFSI, Healthcare, Telecom, Retail, manufacturing), services wise (application development, ERP, data
support, consulting and BPO), contracts (Time and Material and Fixed Price Project Model) and business
from clients (existing and new).

3. Single Business (Segment), multiple locations (Geography)


Analysis of Geography/region

Asia
Americas Europe MEA Pacific Total

Sales XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

QoQ Growth XXX XXX XXX XXX XXX

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Study material on Company Analysis

Analysis of Geography/region

Asia
Americas Europe MEA Pacific Total

% Share of Sales XXX XXX XXX XXX XXX

PBIT XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

QoQ Growth XXX XXX XXX XXX XXX

% Share of PBIT XXX XXX XXX XXX XXX

Margin XXX XXX XXX XXX XXX

Capital employed XXX XXX XXX XXX XXX

YoY Growth XXX XXX XXX XXX XXX

% Share of Capital employed XXX XXX XXX XXX XXX

ROCE XXX XXX XXX XXX XXX

While analysing sales, analyst/intern needs to look at YoY growth for Non IT/Telecom/biotech and QoQ
growth for IT/Telecom/biotech. Apart from growth, they should find out the contribution of each
geography/region to sales of the company. It is not compulsory that the geography/region contributing
highest sales have the highest growth. The analyst/intern should go beyond the numbers to analyse the
reasons for fluctuation in numbers.

While analysing PBIT (Segment results), analyst/intern needs to look at YoY growth for Non
IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should
find out the contribution and operating margin of each geography/region to overall PBIT of company. It is
not compulsory that the geography/region that contributing highest in PBIT and growth have highest
margin. This would help analyst/intern to know the geography/region, which is a major source of income.
The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers.

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Study material on Company Analysis

While analysing capital employed, analyst/intern should look at YoY growth for Non IT/Telecom/biotech
and QoQ growth for IT/Telecom/biotech. Apart from growth analyst/intern should find the contribution of
each segment to overall capital employed of company. The analyst/intern should go beyond the numbers to
analyse the reasons for fluctuation of numbers.

4. Multiple Business (Segment), Multiple location (Geography)


To analyse fourth category companies, analyst/intern should consider companies having multiple segments
and locations. The two approaches under Multiple Business (Segment) and Multiple location (geography)
category are:

a. Geography/Region segment wise analysis


b. Segment wise Geography/Region analysis

a) Geography/Region segment wise analysis – There is a need to look at segmental revenue of


companies from region wise or geography wise. For eg: If a company has segments in 4
regions––Americas, Europe, Africa and Middle East and Asia Pacific. The analyst/intern
should assess not only the business done in hardware and software but also the growth
opportunities these regions.

b) Segment wise Geography/Region analysis – There is a need to look at segmental revenue of


companies from segment wise or division wise. For eg: If a company has 2 divisions in
hardware and software. The analyst/intern should assess the business done in hardware and
growth opportunities in these regions.

13. Abbreviations

Sl no Abbreviations Full form

Earnings/Profit Before Depreciation, Interest and Amortization also called


1 EBDITA/PBDITA
operating profit

2 OPM Operating Profit Margins

3 JFM* January - February - March

AMJ* April - May - June

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Study material on Company Analysis

JAS* July - August - September

OND* October - November - December

4 IT Information Technology

5 YoY Year on Year (YoY) eg: JAS09 VS JAS08

6 QoQ Quarter on Quarter (JAS09 VS AMJ09)

7 CRAMS Contract Research and Manufacturing Services

8 CTO Clinical Trials Outsourcing

9 CRO Contract Research Outsourcing

10 SEZ Special Economic Zone

11 ANDA Abbreviated New Drug Application

12 FDA Food and Drug Administration Act

13 SLR Statutory Liquidity Ratio

14 BSE Bombay Stock Exchange

15 NSE National Stock Exchange

16 SEBI Securities Exchange Board of India

17 NPA Non Performing Assets

18 CPLY Corresponding Period Last Year

* In India accounting year starts from April to March. When comparing the quarters of companies it becomes
difficult as some companies follow accounting year and some follow calendar year. It leads to more confusion
for readers/clients so it is better to use the initial letter of each month.

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Study material on Company Analysis

14. Ratio Analysis

A. LIQUIDITY RATIOS - Short Term Solvency

Ratio Formula Numerator Denominator Significance/Indicator


1. Current Ratio Current Assets/ Inventories + Debtors Sundry Creditors (for goods) Ability to repay
Current + Cash & Bank + + Outstanding Expenses (for short-term commitments
Liabilities Receivables/Accruals services) promptly. (Short-term
+ Short terms Loans + Short Term Loans Solvency) Ideal Ratio is 2:1.
+ Marketable &Advances (Cr.) High Ratio indicates
Investments + Bank Overdraft/Cash Credit existence of idle current
+ Provision for taxation assets.
+ Proposed or Unclaimed
Dividend
2. Quick Ratio or Quick Assets/ Current Assets Current Liabilities Ability to meet
Acid Quick Liabilities Less: Inventories Less: Bank Overdraft immediate liabilities. Ideal
test ratio Less: Prepaid Less: Cash Credit Ratio is 1.33:1
Expenses
3. Absolute Cash (Cash+ Cash in Hand Sundry Creditors (for goods) Availability of cash to meet
Ratio Marketable + Balance at Bank + Outstanding Expenses (for short-term commitments.
Securities)/ (Dr.) services)
Current + Marketable + Short Term Loans &
Liabilities Securities & Advances (Cr.)
short term + Bank Overdraft/Cash Credit
investments + Provision for taxation
+ Proposed or Unclaimed
Dividend
4. Interval Measure Quick Assets/ Current Assets Total Cash Expenses/365 Ability to meet regular cash
Cash Expenses Less: Inventories Cash Expenses = Total expenses.
Per Day Less: Prepaid Expenses less Depreciation and
Expenses write offs.

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Study material on Company Analysis

B. CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long-term solvency

1. Equity to Shareholder's Funds/ Equity Share Capital Total Long Term funds Indicates Long-Term Solvency;
Total Total Funds +Preference Share employed in business = mode of financing; extent of own
Funds Ratio Capital + Reserves Debt+Equity. funds used in operations.
& Surplus
Less: Accumulated
Losses
2. Debt Equity Debt/Equity Long-Term Equity Share Capital Indicates the relationship between
Ratio Borrowed Funds, +Preference Share debt & equity; Ideal ratio is 2:1.
i.e. Debentures, Capital + Reserves &
Long-Term Surplus
Loans from Less: Accumulated
institutions losses, if any
3. Capital Fixed Charge Bearing Preference Share Equity Share Capital Shows proportion of fixed charge
Gearing Capital/Equity Capital + Reserves & Surplus (dividend or interest) bearing
Ratio Shareholder's Funds + Debentures Less: Accumulated capital to equity funds; the extent
+ Long-Term LoansLosses of advantage or leverage enjoyed
by equity shareholders.
4. Fixed Asset Fixed Assets/ Net Fixed Assets i.e. Long-Term Funds = Shows proportion of fixed assets
to Long-Term Long-Term Funds Gross Block Shareholder's (long-term assets) financed by
Fund Ratio Less: Depreciation funds (as in B1) + Debt long-term funds. Indicates the
funds financing approach followed by
(as in B2) the firm i.e. conservative,
_ matching or aggressive; Ideal Ratio
is less than one.
5. Proprietary Proprietary Funds/ Equity Share Capital Net Fixed Assets Shows extent of owner's funds
Ratio Total Assets + Preference Share + Total Current Assets utilised in financing assets.
(See Note Capital (Only tangible assets will
below) +Reserves &Surplus be included.)
Less: Accumulated
losses
Note: Proprietary Funds for B-5 can be computed through two ways from the Balance Sheet:
Liability Route: [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated losses
Assets Route: [Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities.

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Study material on Company Analysis

C. COVERAGE RATIOS – ABILITY TO SERVE FIXED LIABILITIES

Debt Service Ratio Earnings for Debt Net Profit after taxation Interest on Debt Indicates extent of current
Coverage Service/ Add: Taxation Add: Instalment of earnings available for
(Interest + Instalment) Add: Interest on Debt Debt meeting commitments and
Funds (principal repaid) outflow towards interest
Add: Non-cash operating and instalment; Ideal ratio
expenses(e.g. depreciation must be between 2 to 3
and amortizations) times.
Add: Non-operating
adjustments (e.g. loss on
sale of fixed assets)
2. Interest Coverage Earnings before Earnings before Interest Interest on Debt Fund Indicates ability to meet
Ratio Interest & Tax/ and Taxes =Sales Less interest
Interest Variable and Fixed Costs obligations of the current
(excluding interest) (or) year.
EAT + Taxation Should generally be greater
+ Interest than I.
3. Preference Earnings after Tax/ Earnings after Tax = Dividend on Indicates ability to pay
Dividend Preference Dividend EAT Preference Share dividend on
Coverage Capital preference share capital.
Ratio

D. TURNOVER/ACTIVITY/PERFORMANCE RATIOS

1. Capital Turnover Sales/ Sales net of returns See Note 1 below: Ability to generate sales
Ratio Capital Employed per rupee of long-term
investment. The higher the
turnover ratio, the better it
is.
2. Fixed Asset Turnover/ Sales net of returns Net Fixed Assets Ability to generate sales
Turnover Fixed Assets per rupee of Fixed Asset
Ratio
3. Working Capital Turnover/ Sales net of returns Current Assets Less Ability to generate sales
Turnover Ratio Net Working Capital Current per rupee of Working
Liabilities Capital.

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Study material on Company Analysis

4. Finished Goods Cost of Goods Sold/ For Manufacturers: (Opening Stock + Closing Indicates how fast
or Stock Turnover Average Stock Opening Stock Stock)/2 inventory is used/sold.
Ratio + Cost of Production or A high turnover ratio
Less: Closing Stock (Maximum Stock + generally indicates fast
For Traders: Minimum Stock)/ 2 moving material while
Opening Stock low ratio may mean dead
+ Purchases or excessive stock.
Less: Closing Stock
5. WIP Turnover Factory Cost/ Materials +Wages + (Opening WIP + Closing Indicates the WIP
Ratio Average Stock of Production Overheads WIP)/2 movement/production
WIP cycle.
6. Raw Material Cost of Material Opening Stock of RM (Opening Stock + Closing Indicates how fast raw
Turnover Ratio /Consumed Average +Purchases Stock)/2 materials are used in
Stock of RM Less: Closing Stock production.
7. Debtors Credit Sales/ Credit Sales net of Accounts Receivable= Indicates speed of
Turnover Average Accounts returns Debtors +B/R Average collection of credit sales.
Ratio Receivable Accounts Receivable =
(Opening bal. + Closing
bal.)/2
8. Creditors Credit Purchases/ Credit Purchases net of Accounts Payable Indicates velocity of debt
Turnover Average Accounts returns, if any =Creditors + B/P payment.
Ratio Payable Average Accounts
Payable = (Opening bal.
+ Closing bal )/2
Note 1: Assets Route: Net Fixed Assets - Net working Capital
Liability Row: Equity Share Capital + Preference Share Capital + Reserves & Surplus + Debentures and Long Term
Loans Less Accumulated Losses Less Non-Trade Investments
Note 2: Turnover ratios can also be computed in terms of days as 365 / TO Ratio, e.g. No. of days average stock is held
= 365 / Stock Turnover Ratio.

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Study material on Company Analysis

E. PROFITABILITY RATIOS BASED ON SALES


1. Gross Gross Profit Gross Profit as per Sales net of returns Indicator of Basic
Profit Ratio Sales Trading Profitability
Account
2.Operating profit Operating Profit/ Sales Less cost of sales Sales net of returns Indicator of Operating
ratio Sales (or) Net Profit Performance
Add: Non-operating of business.
expenses Less: Non-
operating incomes
3. Net Profit Ratio Net Profit/ Net Profit Sales net of returns Indicator of overall
Sales profitability.
4.Contribution Sales Contribution/ Sales Less Variable Sales net of returns Indicator of
Ratio Sales Costs profitability in
Marginal Costing (also
called PV
Ratio)

PROFITABILITY RATIOS – OWNER'S VIEW POINT


1. Return on Total Earnings/ Profits after taxes Assets Route: Overall profitability of the
Investment Total Capital Add: Taxation Net Fixed Assets business for the capital
(ROI) or Return on Employed Add: Interest (including intangible assets employed; indicates the
Capital Employed Add: Non-trading like patents, but not return on the total capital
(ROCE) expenses fictitious assets like employed. Comparison of
Less: Non-operating miscellaneous expenditure ROCE with rate of
incomes like rents, not written off) +Net interest of debt leads to
interest working capital financial leverage. If
and dividends Liability Route : ROCE > Interest Rate,
Equity Share Capital use of debt funds is
+ Preference Share justified.
Capital + Reserves R
Surplus +Debentures and
Long Term Loans
Less: Accumulated Losses
Less: Non-Trade
Investments

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Study material on Company Analysis

2. Return on Equity Earnings after Taxes/ Profit After Taxes Net Fixed Assets Profitability of Equity
ROE Net Worth + Net Working Capital Funds invested in the
Less: External Liabilities business.
(long term)
3. Earnings Per [PAT - Preference Profit After Taxes Equity Share Capital Return or income per
Share EPS Dividend]/ Less: Preference Face Value per share share, whether or not
Number of Equity Dividend distributed as dividends.
Shares
4. Dividend Per Dividends/ Profits distributed to Equity Share Capital Amount of Profits
Share DPS Number of Equity Equity Face Value per share distributed per
Shares Shareholders share
5. Return on Assets Net Profit after taxes/ Net Profit after taxes Average Total Assets or Net Income per rupee of
(ROA) Average Total Assets Tangible Assets or Fixed average fixed assets.
Assets, i.e. IA of Opening
and Closing Balance

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