Project – 2 – Individual

Section – Managerial Finance

Take up your company balance sheet or take any other client company which you are
been dealing with and download the balance sheet from public sources of data,
identify key red flags and any issues you may perceive in any area of the balance
sheet. Justify why you feel the same (you can benchmark this by comparing other
companies which are of same industry)
The balance sheet, also called the statement of financial position,
summarizes the company’s resources and claims to those resources
at a certain point in time.

In this way, the balance sheet is similar to taking a snapshot of the business, where the
flow of revenue and expenses reported on the income statement is momentarily halted
and tallied in the permanent accounts. From this snapshot we can glean valuable
accounting information about a company’s profitability, liquidity, and financial strength.

The balance sheet balances the assets on one side with interests or claims to those
interests on the other. This relationship between assets, on one side, and liabilities and
owner’s equity on the other, is most clearly expressed in the accounting equation:

The Accounting Equation

Assets = Liabilities + Owner’s Equity

Though double entry accounting and each of the financial statements are centered on this
accounting equation, the balance sheet most clearly represents it.

A claim to an asset can be either a debt, called a liability, or what is owned by the
business, called owner’s equity. Owner’s equity is the sum of what the owner has invested
in the business, and the profits (or losses) accumulated from business operations.

Balance sheet analysis primarily includes measuring three key

accounting formulas: working capital, the current ratio, and the
quick ratio.

One of the most important measures to consider in financial statement analysis is

whether or not the business can pay debts to remain in operation. The current ratio,
quick ratio, and working capital can quickly assess a company’s short-term financial
strength. This is especially important since the profits of the business do not
accurately reflect cash on hand.

Under the accrual accounting method, the revenue is recognized when earned,
whether or not cash is received as payment. Since sales may be on credit, even
profitable companies may be at risk due to too much debt or a shortage of liquid
assets.

Therefore, applying financial ratios and accounting formulas to the company balance
sheet offers a quick way to assess the actual short-term liquidity and strength of the
business.
Present Project:
I attempted to extract Financial statements/ Balance sheet of Real estate
company – PURAVANKARA LIMITED and studied with respect to Brigade
Group and presented in following pages

Fundamental Analysis: Balance Sheet Analysis

How should an Investor look at a balance Sheet for fundamental analysis?

Introduction: Balance Sheet and P&L are the most objective way of looking at the
financial position of a company. Anything and everything that the business does, gets
impartially reflected in the numbers and thus ability to read such numbers intelligently
is the key to successful investing. Following are smart pointers as to what an investor
should look at in a balance sheet.

The balance sheet is a snapshot of a company’s financial situation at a point in time,

usually on the last day of its financial year. It captures everything the company owns
 and all the liabilities that it has to pay. In the broadest sense, it captures the
elements of the so-called balance sheet equation:

Assets = Liabilities + Shareholders’ funds

While the balance sheet is structured based on Schedule 3 of Companies Act, 2013
found here, and every listed company has to follow Indian Accounting Standards (Ind-
AS). Investors should be interested in the following heads:

1. Shareholders’ capital
2. Borrowings
3. Fixed assets
4. Net working capital

Extracted Data from Internet:

Brigade Puravankara
Parameter MAR'17 MAR'16 MAR'17 MAR'16
(₹ Cr.) (₹ Cr.) (₹ Cr.) (₹ Cr.)
EQUITY AND LIABILITIES
Share Capital 113.66 113.18 118.58 118.58

Share Warrants & Outstanding

Total Reserves 1,581.42 1,412.51 1,861.73 1,780.14

Shareholder's Funds 1,696.11 1,526.90 1,980.31 1,898.72

Long-Term Borrowings 0 0 0 0

Secured Loans 1,059.26 974.95 513.41 917.22

Unsecured Loans 0 0 0 15.77

Deferred Tax Assets / Liabilities 86.68 57.31 -38.27 -34.44

Other Long Term Liabilities 49.35 61.8 7.76 4.17

Long Term Trade Payables 0 0 0 0

Long Term Provisions 0.68 0.68 184.05 144.23

Total Non-Current Liabilities 1,195.97 1,094.74 666.95 1,046.95

Current Liabilities

Trade Payables 384.21 342.41 192.05 205.36

Other Current Liabilities 1,615.88 1,843.87 1,113.30 692.46

Short Term Borrowings 88.24 3.12 985.3 744.12

Short Term Provisions 12.58 18.26 1.33 22.1

Total Current Liabilities 2,100.91 2,207.66 2,291.98 1,664.04

Total Liabilities 4992.99 4829.30 4939.24 4609.71

ASSETS

Non-Current Assets
Gross Block 354.84 249.24 57.14 56.73

Less: Accumulated Depreciation 59.1 25.37 15.15 6.44

Less: Impairment of Assets 0 0 0 0

Net Block 295.74 223.87 41.99 50.29
 Lease Adjustment A/c 0 0 0 0

Capital Work in Progress 369.9 434.83 0.08 0

Intangible assets under
0 0 0 0
development
Pre-operative Expenses pending 0 0 0 0

Assets in transit 0 0 0 0
Non-Current Investments 1,907.29 1,630.94 72.6 462.12

Long Term Loans & Advances 445.72 462.62 611.11 571.37

Other Non-Current Assets 59.68 62.81 20.24 14.2

Total Non-Current Assets 3,078.33 2,815.07 746.02 1,097.98
Current Assets Loans &
Advances
Currents Investments 0 0 0 0
Inventories 1,538.88 1,679.20 3,460.14 2,687.25

Sundry Debtors 61.65 45.86 331.64 219.94

Cash and Bank 53.05 30.31 78.5 200.4

Other Current Assets 201.68 168.28 149.6 189.44

Short Term Loans and Advances 59.4 90.58 ## 173.34 214.7

Total Current Assets 1,914.66 2,014.23 ## 4,193.22 3,511.73

Net Current Assets (Including
-186.25 -193.43 ## 1,901.24 1,847.69
Current Investments)
Total Current Assets Excluding
1,914.66 2,014.23 ## 4,193.22 3,511.73
Current Investments
Miscellaneous Expenses not written
0 0 0 0
off
Total Assets 4,992.99 4,829.30 ## 4,939.24 4,609.71

Contingent Liabilities 112.85 142.77 ## 778.41 414.18

Total Debt 1,876.07 1,715.60 ## 1,549.97 1,805.60

Book Value (in ₹) 149.14 134.8 ## 83.5 80.06

Adjusted Book Value (in ₹) 149.14 134.8 ## 83.5 80.06

The following is the few of the useful ratios can be computed from the available data:

VALUATION

a. PBV RATIO
The formula: Share price/book value per share (or market cap net worth)

What does it mean?

It compares the market value of a stock to its net worth, or assets minus liabilities. A
low PB ratio means the stock is undervalued.

EFFICIENCY
a. Inventory Turnover ratio
The formula: Cost of goods sold/Average inventory

What does it mean?

Indicates how many times a company's inventory is sold and replaced in a year’s time
(more the better). Since this ratio varies across industries, compare it against
company's previous values or with similar company.

b. Account Receivables Turnover ratio

The formula: Total sales / Average accounts receivable (Total sales considered
because total credit sales not available)

What does it mean?

Indicates the number of times the average account receivable is collected in a year.
Since this ratio indicates the ability of a company to collect funds from debtors in a
timely manner, higher the ratio, the better. This ratio also varies across industries.

FINANCIAL STRENGTH

a. Current ratio
The formula: Current assets / Current liabilities

What does it mean?

Determines a company’s ability to pay back short-term liabilities. A high ratio means
the company is not utilising enough current liabilities. Be careful if ratio is below 1.

b. Quick ratio (Acid test ratio)

The formula: (Current assets - inventories) / Current liabilities

What does it mean?

Tests the company’s ability to pay off current liabilities at short notice. Inventories are
not considered as they take time to liquidate. Ratio above 0.5 times is .. considered
good.

Cash-rich businesses have high ratio (Quick ratio (times))

c. Debt-Equity ratio
The formula: Long-term debt / Net worth (or shareholders’ equity)

What does it mean?

A high debt-equity ratio indicates that most assets are funded by debt. While zero
debt companies are best, investors should be careful if this ratio is above 2.

Investors should be wary of ratio above 2 (Debt/equity (times))

PROFITABILITY

a. Return on equity (ROE)

The formula: Profit after tax / Net worth (or shareholders’ equity)

What does it mean?

It measures the returns the company is generating on shareholders’ equity. More the
better. This ratio should be significantly higher than the returns available in the
market.

Concentrate on companies with very high ROE (ROE %)

b. Return on capital employed (ROCE)

The formula: Profit before interest and tax / Total capital employed

What does it mean?

The comparison here is between operating profit and total capital employed, including
debt. More useful than ROE to evaluate the longevity of a company.

Companies should match your cost of capital (ROCE %)

c. Return on assets (ROA)

The formula: Profit after tax / Total assets

What does it mean?

Measures the efficiency with which the management is utilising assets. Since this ratio
varies across industries, one needs to compare it against the company’s previous
values or ratio of a similar company.

Bet on companies with high ROA (ROA %)

Extracted Data from Internet:

CURRENT VALUATIONS
BRIGADE
PURAVANKARA
ENTERPRISES
P/E (TTM) x 15.9 26.8
P/BV x 1.1 1
Dividend Yield % 1.3 2.2
FINANCIALS

EQUITY SHARE DATA

BRIGADE
PURAVANKARA
ENTERPRISES
Mar-17 Mar-17
High Rs 248 70
Low Rs 138 41
Sales per share (Unadj.) Rs 178.1 59.3
Earnings per share
Rs 14.7 5.4
(Unadj.)
Cash flow per share
Rs 25.5 6.1
(Unadj.)
Dividends per share
Rs 2.5 2.25
(Unadj.)
Dividend yield (eoy) % 1.3 4.1
Book value per share
Rs 169.1 100.7
(Unadj.)
Shares outstanding (eoy) m 113.66 237.15
Bonus/Rights/Conversions ESOP -
Price / Sales ratio x 1.1 0.9
Avg P/E ratio x 13.1 10.3
P/CF ratio (eoy) x 7.6 9.2

Price / Book Value ratio x 1.1 0.6

Dividend payout % 17 42
Avg Mkt Cap Rs m 21,942 13,150
No. of employees `000 0.7 0.9
Total wages/salary Rs m 1,433 1,007
Avg. sales/employee Rs Th 30,762.00 15,033.30
Avg. wages/employee Rs Th 2,178.10 1,076.20
Avg. net profit/employee Rs Th 2,541.00 1,358.00
INCOME DATA
Net Sales Rs m 20,241 14,071
Other income Rs m 342 214
Total revenues Rs m 20,584 14,285
Gross profit Rs m 5,748 4,064
Depreciation Rs m 1,226 165
Interest Rs m 2,469 2,504
Profit before tax Rs m 2,396 1,610
Minority Interest Rs m 0 0
Prior Period Items Rs m 12 46
Extraordinary Inc (Exp) Rs m 0 0
Tax Rs m 736 385
Profit after tax Rs m 1,672 1,271
Gross profit margin % 28.4 28.9
Effective tax rate % 30.7 23.9
Net profit margin % 8.3 9

BALANCE SHEET DATA

Current assets Rs m 28,000 35,190
Current liabilities Rs m 26,645 29,568
Networking cap to sales % 6.7 40

Current ratio x 1.1 1.2

Inventory Days Days 408 1,181

Debtors Days Days 7 111

Net fixed assets Rs m 29,943 1,141
Share capital Rs m 1,137 1,186
"Free" reserves Rs m 18,087 22,696
Net worth Rs m 19,224 23,882
Long term debt Rs m 15,885 7,961
Total assets Rs m 63,520 61,709
Interest coverage x 2 1.6
Debt to equity ratio x 0.8 0.3
Sales to assets ratio x 0.3 0.2
Return on assets % 6.5 6.1

Return on equity % 8.7 5.3

Return on capital % 13.9 13.1
Exports to sales % 0 0
Imports to sales % 0 0
 Exports (fob) Rs m NA NA
Imports (cif) Rs m NA NA
Fx inflow Rs m 735 25
Fx outflow Rs m 160 67
Net fx Rs m 574 -43

CASH FLOW
From Operations Rs m 3,978 -2,517
From Investments Rs m -3,346 5,007

From Financial Activity Rs m -1,085 4,373

Net Cash flow Rs m -453 6,609

SHARE HOLDING
Indian Promoters % 57.5 75
Foreign collaborators % 0 0
Indian inst/Mut Fund % 3 9
FIIs % 4.6 9.9
ADR/GDR % 0 0
Free float % 34.9 6.1
Shareholders 66,193 23,965
Pledged promoter(s)
% 0 0
holding

Red Flags:
The potential red flags are already highlighted in the above statement, however some
of them are explained as below:
Low current ratio: The ratio of a company’s current assets to its current liability is the
current ratio. In case of Puravankara and Brigade, this ratio is: 1.2 and 1.1. This
indicates a highly liquid company Current ratio under 1, signals that the company has
trouble meeting its immediate obligations and may indicate other problems. Though,
keep in mind that capital intensive industries will have a lower current ratio.
Debt to equity ratio: Debt-to-equity ratio indicates how the company has sourced the
funds to meet their liabilities. This is a matter of choice, and there is no ideal value of
this ratio. Though it is wise to compare the ratio to industry averages. Equally, pay
attention to the interest rates the company has to pay and whether it has enough
head room in case the business faces a pressure on margins. There is always a risk
that the debtor can call for payment anytime, whereas equity is forever with the
company.

The Debt to equity ratio of Puravankara is 0.3 compared to Brigade 0.8

Inventory Days: The inventory days for days Puravankara is more than 1000 Days
when compared to 408 Days for Brigade.

Cash and short-term investments: A strong company will have piles of cash,
substantial bank balance and short-term investments. This not only means that the
company can fund its current liabilities but can also return value to shareholders
through dividends and stock repurchase. It is evident from the above table that
Puravankara is in better position than Brigade.

Stock-in-trade: In balance sheet, stock-in-trade is referred to as inventory. It is the

stock of finished goods that has not been sold yet. In case of KFA, from the snapshot
above, it rose from Rs. 187Cr to Rs. 204Cr. Though it is listed under assets based on
the assumption that all of it will be sold, it is important to pay attention to the trend in
the values over longer periods. But higher quantums of inventory carry risks of
obsolesce, spoilage and shrinkage. Always compare this value to the industry average
to get a sense of proportion. Ideally, it should stay close to the averages unless a Just
In Time system is employed, in which case it should be low.

Low or zero long-term borrowings: The best companies to invest in are the ones with
zero long-term debt. Long term debt in both companies ie. Puravankara and Brigade
are more. However, Puravankara is better placed based on the above values.

Undervalued assets: In a balance sheet fixed assets are held at cost less accumulated
depreciation. This means their actual value may be different from the book value.
Investors should look at real estate and intellectual properties that may be
undervalued in the balanced sheet.

Conclusion: Balance Sheet analysis is the foundation for understanding any company.
The composition of assets and liabilities play an important role in deciphering the
quality of business its strengths and weaknesses. Without reading the balance sheet
investors should not invest. Had anyone read the balance sheet of KFA no one would
have invested. Countless monies of the investors would be saved if they simply read
and understand balance sheet in the way described above. To prepare balance sheet
an expert is required but to read that balance sheet common sense is required and
that’s all is needed to become successful investor.

Thank You