EBIT EPS ANALYSIS

Sandeep Kulshrestha
  One of the most important decisions in Financial
Management
CAPITAL  To understand how much capital should be raised to
expand a business
STRUCTURE -
 To understand various sources of capital, the costs
FINANCING involved in raising those sources
DECISIONS  To understand how those sources will effect the
earnings available for the company’s crucial investors,
the shareholders
  Capital Structure refers to the mix of various
sources of capital in a company’s financing
 Every company needs capital to either expand
the business or the acquire another business.
WHAT IS A For example if a company needs to expand its
CAPITAL market to other regions, it would need additional
STRUCTURE capital to create office, hire people, start a new
factory etc. Now, which sources of capital should
a company tap is a decision which needs to be
taken (example: Debt/Equity or Bank Loan)
  Equity Shares (also called Stock, Common
Stock and Ordinary Shares)
DIFFERENT
 Preference shares (Also called Preferred Stock
SOURCES OF and Preferred Shares
CAPITAL  Debentures and Bonds (Individually and
Together known as “Debt”
  Interest on Debt is paid first after the profits
are declared
 Interest on Debt is a tax-deductible expense
(tax is calculated on income after debenture
interest is paid off)
Some rules  Shareholders have the last right over a
company’s income
 Shareholders are paid dividend (a part of profit
as a gratitude)
 Preference shareholders are paid the dividend
before the equity shareholders are paid
  EPS refers to Earnings per Share
 The portion of a company's profit allocated to
each outstanding share of common stock.
Earnings per share serves as an indicator of a
What is EPS company's profitability.

Calculated as:

Profit After Tax – Preference Dividend/Number

of outstanding shares
  EBIT refers to “Earnings before Interest and
Tax”, also known as operating profit
 EBT refers to “Earnings before tax”
Some key  EAT refers to “Earnings after Tax)
terms
 Net income also refers to “Residual money for
shareholders”
  Delphi Limited has equity share capital of 5,000
(500 shares of 10 each) and preference share
capital of 5,000 (500 shares of 10 each). The
An example dividend paid to preference shareholders is 5%.
The capital raised through 10% debentures is
Rupees 5000. Its current operating profit is
7000 and given tax rate is 30%. Calculate EPS
 EBIT: 7000
Less: Interest @5% 500
EBT 6500
Less: Tax @30% 1950
EAT 4550
Less: Preference Div 5% 250
Solution
Net Income 4300

EPS= Net Income/Number of equity shares

= 4300/500 = 8.6
 Try the earlier example, assuming that the
company raised additional capital of 3000
through equity shares of Rs 10 each
Comparison of  When a company wishes to expand its
different operations and need to raise additional capital,
the finance professional compares the costs
sources of and benefits of such sources, also measuring
Capital impact on EPS
 End of the presentation