Sheet] (Gales - Excise Duty) + Other recurring income incidental to main business) (Other income not included) (1) Minus (Operating Expenses excl. Interest, Depreciation & Amortisation) or PAT Hax+Int-Dep-Other income) @ya) Tmterest on borrowings ‘Depreciation for the year 5 i (2) Minus (4) Minus (5) ‘In case of any special item like lease rentals, amortisation etc., between EBIDTA | “Operating Profit (OP) & OP, it need to be calculated appropriately 7Non-operating Income ‘Income not from normal course of business net of non-operating expenses BT (6 Plus (7) (excluding other ineome) Si a ‘OPAT (8) Minus Tax (incl. Deferred Tax) = 40PAT/TOI(%) (ova) Hey = 14/Net Cash Accruals (NCA) __PAT + Depreciation - Dividend + Non-cash charges+ Deferred Tax Provision 42.Net fixed assets [Net Fixed Assets Paid up share Capital + Reserves - Revaluation Reserves - Intangible assets (patents, goodwill, prelim. Expenses, bad / doubiful expenses not provided for 13/Tangible Networth (TNW) etc.) aT Exposure in subsidiaries 14/Group Cos. Investments + Loans and Advances 14(a) [Investments [Investments in subsidiaries / group companies 14(b) Loans and advances ‘Loans & Advances subsidiaries / group companies T 15 /Adjusted TNW (ATNW) (13) Minus (14) ri ‘Debt greater than one year (term loans, debentures, preference shares, DPGs, other term debt (LTD), term lables) excluding installments due within one year | ‘Debt due within one year (includes demand loans, unsecured loans etc.) but| 47 Short term debt (STD) ane Working Capital Finance as given in (18) below ecured and unsecured working capital availed from the Banks (include, Bills) discounted / purchased, Cash Credit / WCDL, Demand loans, Export finance ‘49|Working Capital Bank Finance etc.) | (16) Plus (17) Plus (18) (a9y(13) (1613) (Total Current Liabilities + Total Debt *Deferred Tax Liability) / (13) (Total Current Liabilities + Total Debt +Deferred Tax Liability) / (15) |All assets with maturity less than one yearOne needs to know balance sheet analysis and to find out whether based on the company’s, balance sheet, it is a credit worthy borrower. For this, we use the following- e Operating income, i.e. net sales (not including other income) EBIDTA (Earnings before interest, depreciation and taxes) This would be ‘exclusive of other income also. This we can compute by PAT+ taxes+dep+ int- other income. « PBT excluding other income ° PAT We then compare the above items for the latest year as well as for the year before that, to compare whether its performance has improved or deteriorated over time. We then look at the ratios. There are three things that are to be broadly looked at to understand whether a company is performing well. They are profitability margins, liquidity (both short term as well as long term) and debt servicing ability. © Profitabilit ‘we use EBIDTA/Net Sales as the most important ratio. This is the core margin from the business. This indicates, whether the business is viable in the first instance. PBT/Sales would indicate whether there is any surplus after the servicing of interest and enough money after that to set aside funds to replenish the fixed assets by way of depreciation charge. PAT/Sales would finally indicate whether the business would also leave anything for the shareholders. ROCE : EBIDTA/ (equity + long term debts+ short term debts+ bank borrowings) The denominator is also called capital employed. Please note that current liabilities like expenses payable, bills payable are not included. Equity would be Capital+ reserves & surplus (excluding revaluation reserves). Also, any miscellaneous expenditure or deferred revenue expenditure is set. off from the equity. © Liquiduty: * we use Total debt (both short term as well as long term) /(net worth) also called gearing. This ratio would indicate the long term liquidity of the business. The lower it is the better. Nowadays, we ideally look for anything below 1 for this ratio. The past notion of 2:1 is no more a thumb rule nowadays. * Bank borrowings for working capital are considered as short term debts, though by actual nature, itis a long term debt only, because it never gets paid in reality by the company . A company would normally keep on renewing these limits every time, with the result that they never get paid off, or otherwise, if one banker wants to close these facilities, the company would try to have these facilitites with some other banker. What really happens is that in acash credit facility or in an overdraft, there would be deposits and withdrawals, so a company would keep depositing as well as drawing from these facilities. The other important liquidty indicator is the current ratio. Normally here we do not consider the short term debts and bank borrowings and instalments of term loans payable within 1 year. But by theory, the bank borrowings are to be paid off at beck and call. So banks consider the entire bank borrowings along with the current liabilities and provisions in the denominator. Additionally, for banks, any debt which is repayable in one year from the balance sheet date is also a current liability. This is also the basis of classifying the debts between the long term and the short term ones. So all the short term debts (i.e. those debts which are payable within 1 year ) and that portion of the long term debts which are repayable within 1 year are also included in the denominator. « Debt servicing ability: * The most popular ratio nowadays is the Total debt/Net cash accruals. Total debt is long term debt + short term debt + bank borrowings. (This definition is also vaild for total debt wherever the term is used). Net cash accruals would be PAT- Dividends (both preference, equity as well as dividend tax)+ Depreciation. This ratio actually stems from the central theme of lending nowadays that the debt is ultimately serviced by the business from its cash flows. Therefore one tries to see how llong it would take for the company to repay all its debt, if it wants to repay them out of internal sources. Therefore thew lower the ratio, the better. Good companies would have this as low as 2 years, while the moment it crosses 5 years, it would be considered as low debt servicing ability. * The other ratio is interest cover defined as EBIDTA/ interest - the higher this is, the better. Ideal- excess of 3 times. DSCR corrections- * DSCR - PAT+Depriciation+interest+ amortization / (interest+ instalemts) This is extremely important for the long term lenders. Ideally it should be around 15 times. (in DSCR-- numerator is a post tax measure not pre tax, Logic being that a company will service debt only from the surplus retained in the business after paying the taxes.) ‘The above completes the ratio analysis. Having done this, qualitative statements like Director's report, particulalry, the management discussion and analysis, and also the auditor's report, and the annexure to the auditor's report for any adverse remarks, and the notes to accounts are also scanned. Here one would keep an eye on the following: . Contingent liabilities- The items that one would normally find here are: * Estimated amount of contracts remaining to be executed on capital accounts . uaemecs given to banks and financial institutions for loans provided by lemShputede Nd waking Gr CAS. We) Net Waller Gplfal Con CL)~ Banking Corporation Ltd. First Method of Lending | Actuals | Estimates Year, 2005-06 | 2006-07 | 4. Total Current Assets (Form-iV-9) | 6183.86 8860.72 loo 2, Other Current Liabilities (other than | bank borrowings (Form-iv-14) 3982.44 5819.88 2O 3. Working Capital Gap (WC) (1-2) | 2801.42) 3040.84 Wo 4, Min, stipulated net working capital: | (25% of WCG excluding export receivables) | 700.36 © 760.21 «10 5 Actual / Projected net working capital - (Formet-45) | 96349 630155 1D x 6.ltem-3 minus item-4 | 2101.07, 220063 30 ~ 77 qe 7. ltem-3 minus Item-5 1837.93, 2649.29 [ ) 8. Max, permissible bank finance | (item-6 or 7, whichever is lowor) 1837.93 2280.63. 9, Excess borrowings representing shortfall in NWC (4-5) Ch — NC Lina teel dy a Meow 367. He raglidrumeds 4 we. § thod of ir 1. Total Current Assets (Form-IV-9) 6183.86, 8860.72 |®> | 2. Other Current Liabilities (other than : bank borrowings (Form-iV-14) | 3382.44 sei98g 66 i 3. Working Capital Gap (WCG) (1-2) 2201.42, 304084 Yo 4. Min. stipulated net working capital: (25% of total Current Assets excluding export receivables) 1545.97, 2215.18 \0 - 5. Actual / Projected net working capital (Form-ll-45) 963.49 301.55 6.ltem-3 minus Item-4 1255.46 826.66 30 ~ 741% CA, 7. ltem-3 minus ltem-5 1837.93, 2649.28 [| 8. Max. permissible bank finance {item-6 or 7, whichever is lower) 1255.46) 825.66) 9, Excess borrowings representing shortfall in NWC (4-8) | _ 1823.63 wee- nwe Ainuke 45 4 +} oh