Tpl financial analysis


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Tpl financial analysis

  1. 1. Torrent & Tata Power – FINANCIAL ANALYSIS for 2009 to 2011
  2. 2. Framework for Financial Analysis <ul><li>The purpose of financial analysis is to evaluate financial performance and financial position of a company. </li></ul><ul><li>Such an evaluation is done in 3 ways: </li></ul><ul><ul><li>Compare the data/results of the same company over a period of time – trend analysis </li></ul></ul><ul><ul><li>Compare the data with that of other companies/competitor </li></ul></ul><ul><ul><li>Compare the data with industry average </li></ul></ul>
  3. 3. Analysis of Income Statement <ul><li>Financial analysis links the data across the financial statements. </li></ul><ul><li>Let us begin with P&L/Income Statement. </li></ul><ul><li>The first parameter is trends in sales. </li></ul><ul><li>The growth in sales can be due to volume effect, price effect, and/or both. </li></ul><ul><li>The volume effect can be either due to better capacity utilization or due to expansion of capacity. </li></ul><ul><li>Torrent- ratiocomparison.xls </li></ul>
  4. 4. Income Statement (Contd.) <ul><li>What would be the impact of changes in sales on profitability? </li></ul><ul><li>Such relationships between sales and profitability are analyzed using profit margin ratios and return ratios. </li></ul><ul><li>We use Gross Margin, Operating Margin and Profit before/after Tax Margin. </li></ul><ul><li>They are expressed as % of sales. </li></ul>
  5. 5. Income Statement – Margins <ul><li>(1) Gross Margin % = (Sales – Cost of sales)/sales * 100. For Torrent Power, one can use the ratio of contribution margin i.e. Revenue from Power Supply less Electrical Energy Purchased. </li></ul><ul><li>(2) Operating Margin (EBITA Margin) % = Profit before Interest & Tax/Sales * 100 </li></ul><ul><li>(3) Profit before tax margin% = PBT/Sales * 100 </li></ul>
  6. 6. Income Statement – Margins (Contd.) <ul><li>What will be the impact of changes in sales on Margin ratios? </li></ul><ul><li>This depends upon the structure of various costs considered in computing margins. The proportion between variable costs and fixed costs decides relationship of sales with margins. </li></ul>
  7. 7. Income Statement – Margins (Contd.) <ul><li>In the industry, if the proportion of the fixed costs as % of cost of sales is higher, changes in sales would have higher impact on gross margin. Consider telecom sector and the focus on volume (number of customers). </li></ul><ul><li>Torrent- ratiocomparison.xls </li></ul>
  8. 8. Income Statement – Returns <ul><li>Return Ratios: </li></ul><ul><li>1. Return on Shareholders’ equity (ROE) = Profit after Tax (PAT)/Shareholders’ Equity *100 – Shareholders’ Equity is also called Net Worth and the ratio Return on Net Worth. </li></ul><ul><li>2. Return on Investment (ROI) or Return on Capital Employed (ROCE) = (Profit after tax + after-tax interest)/investment * 100 </li></ul><ul><li>After-tax interest = (1 – tax rate)*interest expense </li></ul>
  9. 9. Income Statement – Returns (Contd.) <ul><li>ROI is affected by efficiency of operations and asset utilization. </li></ul><ul><li>ROI = (PAT + after-tax interest) * Sales * 100 Sales Investment </li></ul><ul><li>ROI is widely used to evaluate the business segments/strategic business units. </li></ul><ul><li>Torrent- ratiocomparison.xls </li></ul>
  10. 10. Income Statement – Cost Analysis <ul><li>This is done in 2 ways: (a) Major costs are expressed as % of sales (b) Major costs are expressed as % of total costs. </li></ul><ul><li>Such analysis indicates behavior of costs over a period of time in relation to sales and in relation to total costs. </li></ul><ul><li>It also helps is benchmarking with other similar companies/entities. </li></ul><ul><li>Torrent- ratiocomparison.xls </li></ul>
  11. 11. Balance Sheet – liquidity ratios <ul><li>Changes in sales affect current assets particularly inventories and receivables. </li></ul><ul><li>Changes in sales also affect current liabilities. </li></ul><ul><li>In other words, changes in sales affect working capital (current assets – current liabilities) </li></ul><ul><li>(1) Current Ratio = Current Assets/Current Liabilities </li></ul><ul><li>(2) Quick ratio = (Current assets – Inventories)/Current Liabilities </li></ul>
  12. 12. Balance Sheet – liquidity (Contd.) <ul><li>The medium to long term liquidity also requires to be evaluated. </li></ul><ul><li>The capacity expansion requires funds and increase in sales require funds to finance working capital. </li></ul><ul><li>How does a company finance such requirements? Debt/borrowing or Equity? </li></ul>
  13. 13. Balance Sheet – liquidity (Contd.) <ul><li>Increase in borrowings increases financial risk (financial leverage). </li></ul><ul><li>(5) Long term debt/equity or total debt/equity </li></ul><ul><li>(6) Interest Cover = Profit before Interest & Tax (PBIT)/Interest </li></ul><ul><li>The above 2 ratios are used for evaluating medium/long term liquidity. </li></ul>
  14. 14. Balance Sheet – Managing Current Assets <ul><li>(1) Inventory holding period for raw materials and such inputs = Average inventory/daily material consumption </li></ul><ul><li>(2) Inventory holding period for work-in-process and finished goods = Average inventory/daily cost of sales </li></ul><ul><li>(3) Average collection period = average receivables/daily credit sales </li></ul><ul><li>Torrent- ratiocomparison.xls </li></ul>
  15. 15. Cash flow statement <ul><li>Consider cash flow statements for the 3-year period together to understand the financing pattern for investing and operating activities. </li></ul><ul><li>TorrentCashFlowAnalysis.xls </li></ul>