23 August Financial Analysis For BusinessPresentation Transcript
FINANCIAL ANALYSIS FOR BUSINESS AFTERSCHO☺OL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL
FINANCIAL ANALYSIS FOR BUSINESS Dr. T.K. Jain. AFTERSCHO☺OL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk www.afterschoool.tk
Terms. . .
ROI = Return on investment = (NOPAT/CAPITAL EMPLOYED)
NOPAT= Net operating profit after taxes
ROCE = return on capital employed
ROE = Return on equity
EBIT= earnings before interest and taxes
PAT = profit after taxes
EAT = Earnings after taxes
Current assets are?
Inventory (not considered liquid asset)
BR (Bills receivables)
Short term investments
Current liabilities are ?
OD (bank overdraft facility)
CC (cash credit facility by bank – a type of working capital loan)
PC (packing credit loan for purpose of pre-exports)
LC (Letter of credit for post export)
BP (bills payable).
My cost of goods sold is Rs. 10 Lakhs, my opening inventory is 2 lakh and my closing inventory is 5 lakhs. What is my inventory turnover ratio and what does it denote?
My average inventory is (5+2)/2 = 3.5
My COGS = 10 Inventory turnover =10/3.5 = 2.8
Inventory turnover ratio of 2.8 shows that I have very high inventory (it depends on average industry ratio).. I should either reduce inventory or try to push sales.
My annual sales is Rs. 100 Crore (50% is credit sales). My debtors at the end of the year are 2 crores and in the beginning of the year, they were 8 crores. How is my credit management?
My daily average sales = 100/365 = .3 crore per day
My daily credit sales = 50/365 = .136 crore per day
Average debtors = (2+8)/2 = 5 crore
My average collection period: = 5 /.13= 35 (with is approx. 1 month, it is quite reasonable).
My Cash is 1 Lakh, Inventory is 2 lakh, Debtors are 3 lakhs and Creditors are 3 lakhs, OD is 2 Lakhs, CC is 1 Lakh, LC is .5 lakh, PC is .5 lakh. What is my liquidity position?
Current assets = 6 lakh
Current liability = 7 Lakh
Current ratio = 6/7 = .8 (should be >2:1)
Liquidity ratio = 4/7 = .57 (must be >1)
Both are extremely bad, and I have to immediately take WCTL or bring additional capital / debt to avoid crisis.
My EBIT are 20 crores, I have Equity of 40 crores and 10%Debt of 60 crores. How are my returns? Tax=.3
EBIT – I – T = PAT or EAT
PAT = (20-6)=14*.7 = 9.8
ROE = 9.8/40 = .245 or 24.5% returns
ROCE = 20/100 = .2 or 20%
ROI = (9.8+6)/100 = .158 or 15.8%
These are reasonable returns.
I am planning to start a new business. I shall get raw material on 1 month credit. I shall sell at 2 month credit. My GP ratio is 25%, my expected sales in first year is 10 Lakh. Raw material is 50% of cost, Labour cost is 30% of cost. What is my working capital requirement?
My cost of goods sold is 10*100/125 = 8
Raw material = 4, Labour 2.4 other expenses = 1.6.
Computation of working capital requirements:
-Raw material = 4*1/12 (creditors)
-Labour 2.4*1/12 (liability)
Cash = (we assume) = 1.6*1/12
Inventory of raw material = 4*1/12
Inventory = (we assume) =8*1/12
Sales (debtors) = 8*2/12
Working capital = ?
Gross WC, = ? Net working capital =?
Thus on an average we have ? lakh of funds
We have issued 1 lakh shares. We have taken debt of Rs. 20 Lakhs. Market price per share is now 205. What is value of my company?
Value of equity = 205 * 1 lakh
= 205 lakhs
Debt = 20 lakh
Total value of firm is 225 Lakhs Ans.
We have issued 1 lakh shares. We have taken 15% debt of Rs. 20 Lakhs. Investors expect 20% return. This year we have earned Rs. 12 Lakhs . Tax rate = 40% What is value of my company?
EBIT= 12 lakh, EBT=-12 interest = 9 Lakh
EAT = Deduct tax = 9*.6 = 5.4 lakhs
Value of equity = 5.4/.2 = 27 lakhs.
Value of Debt = 20 lakhs
Total value = 47 Lakhs.
We have issued 1 lakh shares. We have taken 15% convertible debenture of Rs. 20 Lakhs. Investors expect 20% return. This year we have earned Rs. 12 Lakhs . Tax rate = 40%Should we convert debt into equity to increase value?
The value of the firm is 47 Lakhs. If we have all equity, the value of the firm will be as:
EAT = 12*.6 =7.2
Value = 7.2 /.2 = 36 lakh (the value is reducing, so we should not convert).
We have issued 1 lakh shares. We have taken 15% convertible debenture of Rs. 20 Lakhs. Investors expect 20% return. We want to take additional Debt of Rs. 20 Lakh at 18%, Investors’ expectation will go up to 25%. Earnings will increase by 10%. Should we go for it?(EBIT 12 laksh)
EBT = 13.2 – (3+3.6) = 6.6
EAT = 6.6*.6 = 3.96
Equity value = 3.96/.25 = 15.84
Debt = 40. Total value = 55.84
Total value has increased, we can go for it.
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