23 August Financial Analysis For Business

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FINANCIAL ANALYSIS FOR BUSINESS

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FINANCIAL ANALYSIS FOR BUSINESS

Dr. T.K. Jain.

AFTERSCHO☺OLCentre for social entrepreneurship

BikanerM: 9414430763

[email protected]

www.afterschoool.tk

http://www.afterschool.tk/

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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? Cash Inventory (not considered liquid asset) Debtors BR (Bills receivables) Short term investments Etc.


Current liabilities are ? Creditors 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 = 15.84Debt = 40. Total value = 55.84Total value has increased, we can go for it.


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23 August Financial Analysis For Business

Economy & Finance

Transcript of 23 August Financial Analysis For Business