Company Analysis

Presented by Anita Singhal 1

Tools for Company Analysis
 Qualitative
 Management reputation
 Market position
 Quantitative
 Financial indicators
 Profitability analysis
 Operational efficiency
 Capacity utilisation
 Cost vs sales efficiency
Presented by Anita Singhal 2
Qualitative Factors
 Management reputation
 Strong
 Growth oriented
 Professional
 Nature of its goals and principles
 Past behaviour pattern

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Qualitative Factors
 Market position
 Threat of New Entrants
 Threat of substitute products and services
 Bargaining power of suppliers
 Customer Bargaining power
 Existing rivalry

Presented by Anita Singhal 4

Case study Discussion
 Maruti Udyog Ltd
 Entry barriers
 Substitutes
 Suppliers
 Customers
 Competitors

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Ratio Analysis
 Profitability ratios
 Turnover ratios
 Leverage ratios
 Per share ratios
 Price Ratios

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Profitability ratios
 Operating Profit calculation
 Re-state the P&L statement
 Account for only the operating sales and operating
expenses
 Exclude financial and non-cash expenses
 Arrive at operating profit
 Operating Profit margin
 Operating Profit / Sales * 100
 Reflects true earnings capability
 And operational efficiency

Presented by Anita Singhal 7

Profitability ratios
 Net Profit Ratio
 Overall business performance
 Operating loss but net profits
 Check for presence of other income and other
extra-ordinary incomes
 Net profit / net sales * 100

Presented by Anita Singhal 8

Profitability ratios
 Return on Assets
 Indicates firm’s strategic success
 Cost leadership
 Product differentiation
 ROA should be rising or keep pace with
competitors
 Product of net profit margin and asset
turnover ratios
 Net profit/total income * total income/total
assets
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Profitability ratios
 Return on equity
 Measures how much an equity
shareholder’s investment is actually
earning
 Higher the return- the better it is
 Suggests usefulness of Co.’s projects
 [Net Profit /( value of specific owner’s
contbn.to business)] * 100
 Denominator different for equity and pref.
shareholders
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Liquidity Ratios
 Current ratio
 Match asset-liability structure profitably
 Liquidity position of the Co.
 Considered relative to industry standards
 Current assets / current liabilities
 Very high ratio not considered favourably
 Quick Ratio
 Current assets – inventory / current liabilities
 Only those assets which are cash and cash
equivalents
Presented by Anita Singhal 11
Leverage ratios
 Debt Equity ratio
 Total long-term debt / equity (shareholders’
funds)
 Ideal - 2:1
 Capital intensive industries have higher ratios
 Compare with industry averages
 Interest Coverage ratio
 Ability to pay interest obligations
 EBITDA (incl. other income) / interest
 Alternatively also include principal payments due
in denominator
 High ratio indicates high confidence levels
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Turnover ratios
 Inventory Turnover ratio
 Cost of goods sold / average inventory
 Indicates utilisation of inventory
 Larger the ratio better is the profit
performance
 Inventory holding period
 No. of days / inventory turnover ratio
 High inventory turnover ratio means low
holding period
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Turnover ratios
 Debtors Turnover ratio / collection period
 Ratio = Credit sales / average collectibles
 Collection period = no. of days / Drs. t/o ratio
 High ratio indicates fast collection
 Compare with industry average
 Creditors Turnover ratio / payment period
 Ratio = Credit purchases / average credit
obligations
 Payment period = no. of days / Crs. t/o ratio
 Compared with collection period
 compare with industry average
Presented by Anita Singhal 14
Per Share ratios
 Earnings Per Share
 Net profit / no. of shares
 Profit available to shareholders
 Calculated specifically for classes of
shareholders
 Actual growth in EPS is also a good
measure for determining investment
interest
 Very imp. ratio
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Per Share ratios
 Dividend per Share
 Total dividend payment / no. of shares
 Different interpretations
 Payout ratio
 DPS / EPS * 100
 Indicates percentage of payment to
shareholders
 {1 – payout ratio} indicates retention ratio
 Determine cash outflows and retained
earnings for ploughback
Presented by Anita Singhal 16
Per Share ratios
 Dividend yield
 Relate dividend to market price of the
share
 DPS / market price per share * 100
 High div. yields indicate under-valued
shares
 Low div. yields do not indicate over-valued
shares
 Real measure in such cases will be EPS
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Per Share ratios
 Book Value per share
 Gives historical valuation of the Co.
 Book value of shareholders funds –
intangibles / no. of shares
 Co.’s shares expected to have atleast book
value as starting point
 But historical accounting method
 Need not necessarily reflect the true worth
of the Co.
Presented by Anita Singhal 18
Per Share ratios
 Cash Earnings per Share
 Net Profit after Tax + non-cash expenses /
no. of shares
 Reflects cash flows
 However, not available to shareholders
 Utilised in business operations
 Increases operational efficiency

Presented by Anita Singhal 19

Price-Earnings Ratio (P/E)
 Current market price / EPS
 Mkt price reflects value of shares at present
 Low P/E multiplier might indicate undervalued
Cos.
 High P/E – could indicate over-valued
 Alone does not give true picture of the Co.
 Generally – low P/E Cos. Are considered
better investment opportunities
 But high price can also indicate management
potential and high quality of operations
Presented by Anita Singhal 20
Growth rates
 Growth in sales
 Sales in final period / sales in base period
 Growth In return
 ROA in final period / ROA in base period
 Growth in EPS
 EPS in final period / EPS in base period
 Inflationary growth
 Source of growth
 Determine cause of shortfall, if any
 Industry growth rates
Presented by Anita Singhal 21
Analyzing Ratios
 Time series analysis
 Compare Co.’s ratios over the last 3 years
 Arrive at improvement / worsening position
 Cross Series Analysis
 Compare ratios against peer/competitors’
 Compare against industry average
 Will arrive at position of Co. vis-à-vis peers

Presented by Anita Singhal 22

Projections
 Time Series Analysis
 Compare growth rates over minimum of
the last 3 years
 Estimate next years’ growth rates
 Consider present economic conditions for
greater accuracy
 Meet with Co. officers to get a better view
of sales estimations
 Check quarterly figures and their growth
rates
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Projections
 Common Size Analysis
 Analyse every item on the P&L as a
fraction of sales
 Check for consistency over the last 3 years
 Check for current cost control measures
 Check for a VRS scheme, if any
 Account for conditions in raw material
markets

Presented by Anita Singhal 24

Projections
 Draw up the P&L a/c for the next 2
years
 Estimate growth in sales
 All other costs as percentage of sales
 Difficult to estimate ‘other income’.

Presented by Anita Singhal 25