Important Points

1. Assets = Liabilities + Stockholders Equity

2. A dividend is a not a cost of generating income instead it is a distribution of income back to shareholders.
3. Debentures = Long Term Non Collateral Unsecured Debt
4. Shareholders equity is the residual claim on assets after settling claims of creditors which is Assets – liabilities.
5. Retained Earnings = Net Income – Dividend
6. Treasury Stocks is repurchasing of own shares.
7. Difference between Debt and Equity –
 Debt holders get paid first but their return is capped and equity holders get nothing if the firm does poorly but
get all the upside if the firm does well.
 Debt Holders are paid (Interest + Principle) and Shareholders got (Dividend + Capital Gains).
8. Difference between Interest and Dividends
 Interest is subtracted in the calculation of net income but dividends are not.
 Interest is tax deductible but dividends are not.
9. Income Statement –
Sales – COGS = Gross Profit (EBITDA) – Operating Expense = Operating Profit (EBIT) – Non Operating
Expense = Earning before Tax – Tax = Net Income (PAT) – Dividend = Profit in Balance Sheet.
10. Retained Earnings at end = Retained Earnings at beginning + Income This Year – Dividends this Year
11. Resources (Assets) = Claims on Resources by Outsiders (Liabilities) + Owners (Shareholders Equity)
12. Shareholders Equity = Common Stock + Retained Earnings
13. Goodwill = Purchase price of a company - Difference between the fair market value of the assets & liabilities.
14.

15. Net Fixed Assets = Fixed Assets – Depreciation

16. Current Assets are Cash, Marketable Securities, Accounts Receivables, Bills Receivable and Stocks
17. If Sales > Cash Collected, then Receivables Go UP
If Sales < Cash Collected, then Receivables Go DOWN
18. Average Total Assets = (Opening Stocks + Closing Stocks) / 2
19. EBITDA is the amount of money the company makes after subtracting the operational expenses of the
company from its operating revenue.
20. Working Capital = Current Assets – Current Liabilities (Capital required to run daily operation by firm).
21. Payout Ratio = (Dividend / Earning available to shareholders) * 100
22. Working Capital Cycle = Inventory Days + Receivable Days – Payable Days.
23. Debt Service Coverage Ratio is the ability of a company to use its operating income to repay all its debt
obligations including repayment of principal and interest on both short-term and long-term debt.
24. DSCR = Operating Profit / Total Debt
25. IRR used for determining profitability of future investment. (CAGR of project)

26. Payback Period is the time required for net cash flows to equal to the amount invested.
27. IRR is the discount rate that makes the net present value (NPV) of a project zero.
28. Net Present Value = Initial Investment – Present Value of Cash Inflows.
29. Project IRR gives the return from whole project while Equity IRR provides return to shareholders.
30. Depreciation and amortization is way of spreading the cost of an asset over its useful life.
31. Share Capital = Number of Shares * Face Value
32. Surplus is where the profits of the company reside.
33. Dividends are paid out of the surplus
34. Share Capital = No. of shares Issued * Face Value
 Financial Ratios
1. Objective –
To quantify how efficient a company’s operations are and how profitable the business is set up to be.

2. Types –
a) Profitability Ratio
Earning capacity of business and efficiency with resources employed is utilised.

 Gross Profit Ratio = Gross Profit / Net Sales

 Net Profit Ratio = Net Profit (Profit after Tax) / Net Sales
 Operating Profit Ratio = Operating Profit / Net Sales
 Operating Ratio = COGS + Operating Expense / Net Sales
 Return on Capital Employed (ROC) = Operating Profit (EBIT) / Long Term Debt + Shareholder’s Funds
 Return on Shareholder’s Funds (ROE) = Net Profit (PAT) / Shareholder’s Funds
 Earnings per Share = Net Profit (PAT) – Preference Dividends / Number of Outstanding Equity Shares
 Dividend per Share (DPS) = Total Dividends Paid / Number of Shares Outstanding
 Price Earnings Ratio (P/E) = Market Value per Share / Earning per Share (EPS)
 Return on Assets = Net Income (PAT) / Average of Total Assets
 Dividend Payout Ratio = DPS / EPS

b) Liquidity Ratios or Short Term Solvency Ratios

To measure ability of company to pay its short term obligations.

 Current Ratio = Current Assets / Current Liabilities (at least 2:1)

 Quick Ratio = Current Assets – Inventory– Prepared Expenses / Current Liabilities – Bank Overdraft (Max 1:1)

c) Leverage Ratio or Long Term Solvency Ratios

It indicates of how the company’s assets and business operations are financed (using debt or equity) and ability
to pay long term obligations.

 Debt to Equity Ratio = Long Term Debt / Shareholder’s Funds

 Debt to Capital Employed Ratio = Long Term Debt / Capital Employed or Net Assets
 Interest Coverage Ratio = Earnings before Interest and Tax (EBIT) / Interest Payment on Long Term Debts
 Proprietary Fund Ratio = Shareholder’s Funds / Capital Employed ( Net Assets )
 Debt Ratio = Total Liabilities / Total Assets

d) Turnover Ratio or Activity Ratio or Efficiency Ratio

Measures the efficiency at which a company can convert its assets (both current and noncurrent) into revenues
during the business cycle.

 Accounts Receivable Turnover Ratio =Net Credit Sales (Sales – Return) / Average Accounts Receivable
 Accounts Receivable Turnover (Days) = 365 / Average Receivable Turnover Ratio
 Accounts Payable Turnover Ratio = Net Credit Purchases / Average Accounts Payable
 Accounts Payable Turnover ( Days) = 365 / Accounts Payable Turnover Ratio
 Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets (Fixed Assets – Depreciation)
 Working Capital Turnover Ratio = Net Sales / Working Capital
 Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (Opening Stock + Closing Stock / 2)
 Inventory Number of Days = 365/ Inventory Turnover (Time taken to convert inventory into cash)
 Financial Statements (Business Activities and Financial Performance)

1. Profit and Loss Account

2. Balance Sheet ( Assets = Liabilities + Shareholder’s Equity)

i. Definition
 Balance Sheet (Statement of financial condition) reflects assets, liabilities and capital at a given date.
 Assets (Debit Balances) on Right hand Side and Liabilities & Equity (Credit Balances) on Left hand side.
 Owners Capital is the difference between the Assets and Liabilities also called Shareholders Equity or Net
worth.

ii. Components
 Total Assets = Current Assets + Fixed Assets or Tangible Assets + Non Tangible Assets
 Total Liabilities = Current Liabilities + Fixed Liabilities
 Total Shareholder’s Equity = Share Capital (Equity Capital + Preference Capital) + Surplus & Reserves
(Capital Reserve + Securities Premium Reserve + General Reserves + Surplus for the year).

3. Cash Flow Statement

i. Definition
Inflow of Cash & Cash Equivalents from various activities during a specific period.

ii. Components
 Cash Flow from Operating Activities
 Cash Flow from Investing Activities
 Cash Flow from Financing Activities

iii. Examples
 Accounting Concepts

1. Accounting Concepts and Conventions

 The Profit & Loss Account that shows net business result like profit or loss for a certain periods.
 The Balance Sheet that exhibits the financial strength of the business as on a particular dates.
 The Cash Flow Statement that describes the movement of cash from one date to the other.

2. Basis of Accounting Systems

i. Cash or Receipt Basis

 Cash accounting only records transactions when payment occurs.
ii. Accrual or Mercantile Basis
 Revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.
 Valuation

1. Aim
 Investor can compare intrinsic value with a security's current price in order to see whether the security is
undervalued or overvalued.
 Over the long term, the stock prices of a fundamentally strong company tend to appreciate, thereby creating
wealth for its investors.

2. Approaches to Security Analysis

a) Fundamental Analysis
 The intrinsic value of a share is the present value of all future expected cash inflows from the share.

Intrinsic Value of Share > Current Market Price Underpriced Share Good Buy

Intrinsic Value of Share < Current Market Price Overpriced Share Good Sell

b) Technical Analysis
 Future price movements can be well predicted on the basis of past price and volume data.
 Based on the trend analysis of charts and patterns to predict what should be the price of stocks.

3. Fundamental Analysis
a) Top Down Approach
First involved in making forecasts for the economy then for the industries and finally for the companies.
b) Bottom Down Approach
Forecast the prospects of the companies first then for the industries and in the last forecast for the economy.
c) Company Analysis
The intrinsic value of a company depends upon the amount of dividends and growth rate which in turn depends
upon the amount of earnings. The company level data is primarily collected from the annual financial
statements of the company such as
 Balance sheet
 Income statement
 Cash flow statement
 Notes to financial statements
 Auditor’s report
 Social and sustainability reports
 Corporate governance reports

4. Financial Parameters
a) Return on Equity (ROE)
Return on equity is that part of total earnings of the company which belongs to equity shareholders.
ROE = PAT – Preference Dividend / Shareholder’s Funds
ROE = PAT – Preference Dividend / Net Worth
b) Earnings per Share (EPS)
It shows how much amount is earned per equity share of the company.
EPS = PAT – Preference Dividend / Number of Equity Shares
c) Price Earnings Ratio (P/E)
P/E = Market Price per Share / EPS

High P/E Overpriced Share Market is Optimistic

Low P/E Underpriced Share Market is Pessimistic
 Fundamental Analysis
1. Overview
Higher the CAGR faster is the wealth creation process. (Compounding Effect)

Long Term Wealth Fundamental Analysis

Short Term Wealth Technical Analysis
2. Tools
 Annual Report of Company (Financial Statements are P & L Account, Balance Sheet & Cash Flow Statement)
 Industry Related Data
 Latest Market News
 MS Excel

3. Aspects

Qualitative Aspects Quantitative Aspects

Management Background Profitability and its Growth
Business Ethics Financial Statements
Corporate Governance Earning and its Growth
Share Transactions Operating Efficiency
Salaries paid to Promoters Dividend Payout
Operator Activity in Stocks Financial Ratios
Competitive Analysis Short Term and Long Term Debt


 Overview of Portfolio Management with Risk and Return Analysis

i. Aim
 Study of Pharmaceutical and Technology stocks of the Financial Year 2019-2020.
 Different Statistics like return, variance, covariance, correlation, beta and standard deviation are calculated for
each individual stock with help of functions on Excel. .
 Different portfolios are formed with stocks combinations for determination of portfolio with minimum risk and
maximum return.

ii. Sectors
 Pharmaceutical (Dr. Reddy Laboratories and Ajanta Pharma)
 Information Technology (Tata Consultancy Services and L & T Technology Services)

iii. Index
BSE 30 Sensex

iv. Key Deliverables

 Calculating Risk and Return of stocks with respect to Benchmark Index.
 Constructing an optimal diversified portfolio for minimizing risk and maximizing returns.
 Understanding portfolio process

v. Tools and Techniques

 Return = (Adjusted Closing Price – Opening Price) / Opening Price * 100
 Difference (D) = Return - Average Price
 Variance = Σ D^2 / (N-1)
 Standard Deviation (Risk) =√ Σ D^2 / (N-1)
 Beta = Covariance / Variance

vi. Formulas
i. Capital Asset Pricing Model
Rs = Rf + β (Rm – Rf)
 Rs = Expected return required on the investment
 Rf = Risk free return that can be earned on a risk free investment
 Rm = Average return on all securities
 β = Securities beta (systematic) risk factor

ii. Beta
Beta is a measure of a stock's volatility in relation to the overall market and a component of the Capital Asset
Pricing Model which calculates the cost of equity funding and determines the rate of return to expect relative to
perceived risk.

iii. Portfolio Mean (Return)

Rp = (Ra*Wa) + (Rb*Wb)
 Rp = Portfolio Return
 Ra= Return of A & Wa= Weight of A
 Rb= Return of B & Wb= Weight of B

iv. Portfolio Variance

Vp = Wa^2*Va + Wb^2* Vb + 2* Wa * Wb* Cov (Ra, Rb)
 Wa & Wb = Proportion of total portfolio invested in security A & B respectively
  Va & Vb = Variance of Security A & B respectively
 Cov (Ra, Rb) = Covariance of Ra & Rb respectively

v. Portfolio Standard Deviation (Risk)

Standard deviation of portfolio return measures the variability of the expected rate of return of a portfolio.
Risk = Vp^.5
7. Risk
 Actual return differs from expected return.
 Systematic Risk (Uncontroabale) and Unsystematic Risk (Controlled by Diversification).
 Risk management strategies – Diversification, Stop Loss, Dividend paying stocks and Rebalancing.

8. Application of Checklist
 CAGR of Gross Profit Margin (EBITDA) and Profit after Tax (PAT) for 5 years.
 EPS should not be diluted by issuing new shares good for existing shareholders.
 Gross Profit Margin > 20%
 Debt Ratio should be low. (High finance cost eating away the margin)
 Rising inventory with high PAT Margin.
 Inventory no. of days should decline.
 Receivable as % of sales should be less.
 Cash flow from operations should be positive.
 ROE >25%.
 High P/E Ratio indicates paying high premium price to buy the share (Overpriced Share).
 Low P/E Ratio indicates stock is available at low price in market (Under-priced Share).

9. Tools for Industry Analysis

 Porter 5 Forces
 SWOT
 PESTEL
 4P
 STP
 Competitive
 Life Cycle Model
 Financial Modeling and Analysis of PPP based Expressway Project in Hyderabad

1. Definition of Project Finance or Non-Recourse Finance

 Project finance is the long term financing of infrastructure  based upon the projected cash flows of the project
rather than the balance sheets of its sponsors.
 The debt and equity used to finance the project are paid back from the cash flow generated by the project.
 Project’s assets, rights and interests held as secondary security or collateral.

2. Case Details
 Location - Between Hyderabad to Anantapur
 Charge – Rs 160 per Vehicle
 Vehicle Traffic – 10000 per day with 5% increase per year
 Capital Expenditure – 201 crores
 Operating Expenditure – 28 crore
 Debt to Equity Ratio – 30:70
 Construction Period – 3 years
 Concession Period – 20 years
 Interest Rate -10 %
 Maturity - 12 years
 Tax Rate = 30%
 Depreciation Method – Straight Line
 Debt – 98 crore
 Equity – 42 crore
 Debt Service Reserve – 1 year

3. Revenue Model = (Vehicle Traffic per day * Base Price ) + Display Advertisement
4. Assumptions –
 Inflation – 8%
 Depreciation Rate – 7%
 Minimum Alternate Tax – 18.5%

5. Debt Schedule –
 Moratorium – 3 years
 Opening Balance – 141.25 crores
 Interest + Principle Payment

6. Fin flow Statement –

Revenue – Operating Expense = EBITDA – Depreciation= EBIT (Operating Profit) – Interest = EBT – Tax=
PAT (Net Income) – Dividend = Profit in Balance Sheet + Depreciation - Principal Amount – CSR (50% of
Net Income) + DSCR = Final Project Casflow

7. Result –
 DSCR was more than 1 for each year so project has positive cash flow. Higher DSCR, Higher Income to pay
off Debt.
 Equity IRR – 26.32% and Project IRR – 24.03% greater than the Discount Rate – 10% so project is feasible.
 Equity IRR represents the degree the returns of a project to the providers of equity capital which is higher than
WACC.
 Equity IRR is always higher than Project IRR for profitable investments.
 Capital Budgeting

Net Present Value = Total Present Value of Cash Inflows – Initial Cash Outflows

Payback Period

Time required when cash inflows become equal to initial investment.

Internal Rate of Return

To identify discount rate when present value of cash inflows become equal to initial investment.
 Go to marketing strategies of SAAS based products

 Conversion of sales data into insights and dashboards using Zoho analytics
 B2B Sales of Zoho products
 Target – small and medium enterprises
 Lead generation using social media platforms
 KPI – Net profit, Expenses, Region and product, Revenue
 Scheduling and online presentation of report to clients.
 Function of Fianance

1. Functions of Finance
i. Financing Decisions or Capital Mix Decision
Optimal Capital Structure (Best mix of Cost of Capital and Equity) to lower WACC.

ii. Liquidity Decisions or Short Term Asset Mix Decision

Investment in current assets affecting profitability, liquidity and risk of firm.
iii. Investment Decisions or Long Term Asset mix Decision
Allocation of capital to long term assets.
iv. Dividend Decisions or Profit Allocation Decisions
Optimum Dividend Payout Ratio

2. Analysing and working on the financial processes of the company and making necessary efforts to optimize the
same.
3. Financing Activities
 Financial Planning
 Forecasting Cash Inflows and Outflows
 Raising Funds
 Allocation of Funds
 Effective use of Funds
 Financial Planning (Budgetary and Non Budgetary)

4. Financial Goals
 Profit Maximization
 Shareholders Wealth Maximisation (Maximisation the market Value of shares)