COMPANY ANALYSIS

Company analysis is a study of the variables that influence the future of a firm both qualitatively and
quantitatively. It is a method of assessing the competitive position of a firm, its earning and profitability,
the effeciency with which it operates, its financial position and its future with respect to the earning of
its shareholders. The company analysis helps to decide the company in which investment can be made.

The specific market and economic environment may enhance the performance of a company for a
period of time but it is ultimately the firm's own capabilities that will judge its performance over a long
period of time. For this reason the firms in the same industry are compared to one another to ascertain
which one is the best performer, i.e., which firm earns the most and outperforms its competitors.

In company analysis the investor analyses the risk and return associated with the purchase of the stock
to take better investment decision. The valuation process depends upon the investors' ability to elicit
information from the rela- tionship and inter-relationship among the company related variables.

In the case of company analysis, the financial statement should be analysed first. The basic financial
statement include income statement, the balance sheet and the statement of changes in financial
position. These statements are useful for investors, creditors as well as internal management of a firm
and on the basis of these statements the future course of action may be taken by the inves- tors of the
firm. While evaluating a company, its financial statement must be carefully judged to find out that they
are complete, correct, comparable and consistent. The important aspects to be studied for company
analysis are :

1. Trend analysis of the

the market. 2. Analysis of cost structure and break even analysis. 3. Financial statement analysis
including ratio analysis, fund flow analysis,

Cash flow analysis, Common size analysis, Index analysis, com son
with industry averages. 4. Trend analysis of book value per share. 5. Growth in dividend per share and
retention policy. 6. Estimation of dividend yield. 7. Estimation of P/E multiple. 8. Assessment of the
quality of assets.

9. Assessment of the quality of management. FACTORS AFFECTING COMPANY ANALYSIS

1. Marketing 2. Accounting Policies 3. Profitability 4. Capital Structure 5. Financial Analysis 6. Operating

Efficiency 7. Management

1. Marketing : The first variable that influences future earnings in terms of both quality and quantity is
the marketing results of the firm in comparison

the Company's market share vis a vis growth rate of to industry. This in turn is determined by the share
of the company in the industry, growth of its sales and stability of sales. A company in a strong
competitive position will provide greater earnings with more certaintity than a company in a poor
competitive position. The company with diversified activity should be competitive in all areas of its
production activity.

(0) Sales, (ii) Growth in sales, (iii) Stability of sales in the rupee amount of annual sales and share of
market help to determine a company's relative competitive position within the industry and how
successful it has been in meeting competition.

The annual growth in sales is equally if not more important than the amount of sale in determing the
competitive position of the company whereas size of sales protects the firm from economic fluctuation
growth in sales gives growth in profits.

Stability of sales will provide stable earning for a firm. A stability in sales will allow for better financial
planning and better utilisation of the plant.

2. Accounting Policies: Firstly, see the accounting policies before starting analysis of a company.
There is a risk of faulty interpretation of corporate earnings and consequent bad judgement in
purchasing, keeping or selling the stock. The accounting variations in reporting cost, expenses and
extraordinary items could change earnings to a great extent, some of accounting

(1) Inventory Pricing (ii) Depreciation Methods

Due to change in prices, the value the inventory may change greatly during an operating period. Several
methods f inventory pricing have been developed. These are :

(a) Cost or market value method (b) First in first Out (FIFO) (c) Last in first Out (LIFO)

The Inventory pricing method affects profitability and inventory cost, i.e., asset of the company are
reported in balance sheet. In inflationary situations FIFO will reflect higher profits because of increase in
the carrying inventory cost whereas LIFO method will make the inventory costs only historical cost and
thus will under-evaluate the assets of the company and will reflect lesser profits.

Depreciation refers to the reduction in the value of assets. Higher depreciation will reduce income and
undervalue the fixed assets of the firm. The three depreciation assessment methods used are:

(a) Straight Line Method (b) Sum of Year digits (c) Double Declining Balance

3. Profitability: When we buy a security, we are buying the right to future earnings. We are interested in
income stability and growth of these earnings. We usually select those companies that have stable and
growing sales. This rests on the assumption that the profitability is there :

The relatioship between the sales and earnings, will remain constant. To study the relationship of
expenses and sales we will have to study the trends of the profitability ratios namely:

OPYR
(1) Gross Profit Margin (ii) Net Profit Margin (iii) Earning Power (iv) Return on Equity (v) Earning per
share

Gross Profit Margin is operating income divided by sales. An increasing trend in gross profit margin will
indicate the increase in operating income because of reduction in operating expenses.

Net Profit Margin is the net profit after tax represented as percentage of sales for a period. Net profit
margin increases when reduction in corporate tax takes place and it will influence the intrinsic value of
the shares. This is the reason why share prices increase when government announces tax reduction.

Earning power is the earning of company after net of taxes, measured as a percentage of total assets.
Return on equity is the most important ratio to determine the intrissic value of the security. This ratio
represents how the firm is performing for the shareholders. This is the ratio of profit after tax on equity.

Earning per share is the ratio of firm's total earnings, net of taxes minus the preference dividend over
the number of equity shares.

The term cash flow is used to describe the cash generated from operation that remains after all cash
expenses have been subtracted. Cash earnings are significant because they give an estimate of
discretionary funds over which management has control,

4. Capital Structure: The equity return can be increased manifold with the help of financial leverage, i.e.,
using debt financing along with equity financing. The effect of financial leverage is measured by
computing leverage ratio. The debt ratio indicates the position of the long term and short term debts in
the company finance. The debt may be in the form of debenture and term loans from financial
institutions.

(i) Preference Shares (ii) Debt The Preferen

rence share capital has never been a significant source of capital. It is used as source of capital in the
tight money market. The leverage effect of the preference shares is comparatively lesser than the debt
because the preference share dividends are not tax deductible. Debt has an important role in long-term
financing of firms. It has advantage of low cost of capital, because interest is tax deductible for the
shareholders and has a good return for investors to make a good market acceptability.

5. Financial Analysis: In the financial analysis, the liquidity and solvency positions of the company are
examined. No company can be considered good for investment unless it has a good current financial
position. To assess the current financial position, the current assets, its composition and its relationship
with current liabilities and cash flow analysis need to be carried out.

The important ratios for financial analysis of a company are given as under: (i) Current Ratio (ii) Quick
Ratio (iii) Collection Period (iv) Inventory Turnover (v) Working Capital Turnover

Current Ratio is the ratio of current assets to current liabilities and helps us to determine the ability of a
company to pay its short term debt. Quick Ratio is a ratio of assets that can be liquidated into a cash in a
relatively shorter time to meet the current liabilities and it gives an idea of cash position of the firm in
the short run.

Collection Period is a ratio of receivables to sales represented in terms of number of days of sales. This
ratio indicates the cash management and the credit policy of the firm.

Inventory Turnover is a ratio of sales to inventory and reflects on the inventory management of the firm.

Working Capital Turnover is a ratio of net sales to net working capital and reflects on the working capital
management of the firm. These ratios are significantly important in determining the ability of the
company to finance sales growth

6. Operating Efficiency : The operating efficiency of a company directly affects the earnings of a
company. An expanding company that maintains high operating efficiency with a low break even point
earns more than the company with high break even point. A company with the stable operating rate will
have more stable revenues, income from sales is the result of efficient use of capital assets combined
with raw material, labour and management.

C) Operating Rate (ii) Capital Expenditure

The operating efficiency can be judged fi the utilisation of plant capacity and is also known as the
operating rate. The higher the operating rate higher would be the earning per share. Future earning
depends on the ability of the management to invest new corporate funds wisely and to maintain the old
efficiency.

The investment of capital funds is referred to as capital expenditure that determines the future
profitability of the company.

7. Management: Good and capable management generates profit for the investors. The management of
the firm should efficiently plan, organise, lead direct and control the activities of the company. The basic
objectives of management is to attain the stated objectives of a company for the good of the equity
holders, the public and employees. If the objectives of the company are achieved, investors will have a
profit.

Management is the attainment of organisational goals in an effective and efficient manner through
planning, organising, leading and controlling organisational resources.

The good management depends on the qualities of the managers. The special traits of an able manager
are as follows:

(i) Ability to get along with people (ii) Leadership (iii) Ability to get things done (iv) Judgement (v)
Industry

(vi) Analytical competence TECHNICAL ANALYSIS

As an approach to investment analysis, technical analysis is radically different from fundamental

analysis. While the fundamental analyst believes that the