What is Buy side Companies?

Buy side companies are firms that manage money on behalf of their clients. They work with individuals,
organizations, or institutions who want to invest their money to earn a profit. These firms make investment decisions
and buy financial assets like stocks, bonds, and other securities for their clients' portfolios.

Why are they called as buy side?

They are called "buy side" firms because their main job is to buy financial assets for their clients. They are on the
buying side of the investment process.

What do they do (buy side firm)? Fund manager, research, and market

Fund Manager: A fund manager is like the captain of a ship. They are responsible for making important decisions
about how to invest the money of the clients' funds (like mutual funds or hedge funds). They carefully study different
companies and financial products to decide which ones are likely to grow in value. Just like you would want the best
captain to navigate a ship, clients want skilled fund managers to handle their investments.

Research Division: The research division in a buy side firm is like a team of detectives. They analyze companies,
industries, and economies to gather information and find out which investments are likely to be good choices. They
study a company's financial health, its products, competitors, and other important factors that could affect its future
success. This helps the fund manager make smart investment decisions.

Market Division: The market division in a buy side firm is responsible for executing the trades. When the fund
manager decides to buy a particular stock or bond, it's the job of the market division to place the order with the
stock exchange or other trading platforms to buy the asset at the best possible price.

Example:

Imagine you have some money saved up, and you want to invest it to grow your savings. Instead of doing it yourself,
you decide to hire a buy side firm to help you. The firm's fund manager carefully looks at different companies and
decides to invest some of your money in a company that makes cool gadgets. The research division did a lot of
investigation and found out that this company is likely to do well in the future because everyone loves their products.
The market division then buys the company's stock on the stock exchange using your money.

So, the buy side firm helps you by selecting the right investments, doing research to make sure they are good choices,
and then buying those investments for you to help your money grow over time.

Can buy side sell stock?

Yes, the buy side can sell stocks. The "buy side" refers to companies or investors that buy and hold investments like
stocks, bonds, or other assets in order to grow their wealth or achieve specific financial goals. Even though they
primarily focus on buying investments, they can also sell those investments when they believe it's the right time to
do so.

Example: Imagine you are an investor working for a mutual fund company on the buy side. You bought some shares
of a tech company a while back. If you think the tech company's stock price has reached its peak and is likely to drop,
you might decide to sell those shares to lock in profits before the price goes down further.

Can buy side do short sell stock?

No, the buy side typically does not engage in short selling. Short selling is a strategy used by investors on the "sell
side" to profit from a decline in the price of a stock or other financial asset. The sell side includes entities like
investment banks and hedge funds that facilitate the buying and selling of securities and may also provide research
and trading services.

Example: Let's say you work for an investment bank on the sell side, and you believe that a certain company's stock
price will fall soon. You can borrow shares of that company from someone else, sell them at the current market price,
and hope to buy them back later at a lower price. By doing this, you can make a profit on the price difference
between selling high and buying low. The buy side generally doesn't engage in such activities as their focus is on
buying and holding investments for the long term.

Traditional Long only AMC.

A traditional long-only AMC is a company that manages funds or portfolios for investors, and they primarily focus on
investing in assets for the long term without short selling. The AMC's goal is to achieve growth or income for their
clients over time.

Example: Let's say you have some savings, but you are not sure how to invest them. You decide to invest in a mutual
fund managed by a traditional long-only AMC. This AMC would use your money to buy stocks, bonds, or other assets
that they believe will grow in value over time. They won't engage in short selling or other risky strategies. Instead,
they aim to increase the value of your investment over the years, so you can achieve your financial goals, such as
buying a house or funding your education.

What is hedge fund? They do buy, sell and short

A hedge fund is like an investment company that pools money from lots of different investors (people who give their
money to someone else to invest for them). The hedge fund manager then uses that money to invest in different
assets like stocks, bonds, or other financial products. Hedge funds can do three main things with the money they
manage:

Buy: They can buy shares of companies they think will grow in value.

Sell: They can sell shares of companies they believe will go down in value (a process called shorting).

Short: Shorting is like betting against a company's stock. They can borrow shares from someone else, sell them at the
current price, and then hope to buy them back later at a lower price, pocketing the difference.

Different investment style of Buy side analyst? Value investing, Growth investing, GARP Investing

Value Investing: This is when an analyst looks for stocks that seem undervalued or cheaper than they should be. They
believe the stock's true worth is more than its current price, so they buy it and wait for the market to realize its
actual value. It's like finding a good deal during a sale. For example, if a popular toy is worth $50 but is on sale for
$30, a value-minded buyer would grab it, expecting it to go back to $50 later.

Growth Investing: In this style, analysts search for companies that have a lot of potential for growth in the future.
These companies might be rapidly increasing their sales, expanding into new markets, or creating innovative
products. The idea is to invest in these companies early on and benefit as their value goes up. It's like planting a seed
and watching it grow into a big tree.

GARP Investing (Growth at a Reasonable Price): This approach combines both value and growth investing. Analysts
look for companies that have good growth prospects but are not too expensive compared to their earnings or other
financial measures. They seek a balance between growth potential and the price they pay for the stock. It's like
finding a toy that's not only on sale but is also a popular one that kids love.

What is sell side company or research?

A sell-side company or research refers to a type of financial institution or firm that provides services to investors.
These firms offer advice and information to help people make decisions about buying or selling investments, such as
stocks, bonds, and other financial assets.

Why are they called as sell side company?

They are called sell-side companies because their main focus is on selling or providing services to clients who want to
invest their money in financial products like stocks. The "sell-side" refers to the side of the financial market where
these firms operate by offering their recommendations and analysis to potential investors.
What sell side firm do?

Sell-side firms have two primary functions:

a. Investment Banking: Sell-side firms in the investment banking sector help companies raise money by issuing stocks
or bonds to the public. They act as intermediaries between the companies that want to raise capital (like a big
company wanting to expand) and the investors who are willing to invest their money in these companies.

Example: Let's say "Company A" wants to build new factories, but they need a lot of money to do that. A sell-side
investment banking firm will help "Company A" by suggesting the best way to raise funds, such as issuing stocks
(shares of ownership) to the public. They will then find potential investors who are interested in buying those stocks
and connect them to "Company A."

b. Equity Research: This is where sell-side firms analyze and provide valuable information about various companies'
stocks. They study companies and their financial health, predict how well they may perform in the future, and
recommend whether investors should buy, sell, or hold the stocks of those companies.

Example: Let's say you're interested in buying shares of "Company B." A sell-side equity research firm will analyze
"Company B," look at its financial reports, assess the industry it operates in, and then give a report or
recommendation to you as an investor. They might say, "We believe Company B is doing well, and its stock has the
potential to grow, so it's a good investment."

What is issue with sell side firm? Like Biased reporting, cover few stock, sell buy side

a) Biased Reporting: One of the main issues with sell-side firms is that their research reports may sometimes be
biased. Sell-side analysts work for brokerage firms that have relationships with companies they cover. This could lead
to potential conflicts of interest, as the analysts may feel pressured to provide positive views on those companies to
attract more clients and generate more trading activity.

b) Coverage Limited to Few Stocks: Sell-side firms have limited resources, so they can't cover every company in the
market. As a result, they tend to focus on a select group of popular or larger companies, leaving out smaller or less
well-known ones. This limited coverage might not provide investors with a complete picture of all potential
investment opportunities.

c) Focusing on What Sells: Sell-side analysts may prioritize research on companies and sectors that are currently
popular and in demand by their clients. This might lead to overlooking some promising investment opportunities that
are not in the spotlight.

Role of Analyst?
Buy side – Stock picker Sell side – Trade picker.

Buy-Side Analyst (Stock Picker): Buy-side analysts work for investment firms, like mutual funds, hedge funds, or
pension funds. Their main responsibility is to research and analyze various companies' financials, industry trends, and
overall market conditions to identify promising stocks (shares) for their investment portfolios. They aim to pick stocks
that they believe will perform well over time, helping their investment firms earn profits for their clients.

For example, let's say a buy-side analyst researches different tech companies, examines their financial health, growth
prospects, and the industry's future. After thorough analysis, the analyst might recommend buying shares of a tech
company they believe will experience significant growth in the coming years.

Sell-Side Analyst (Trade Picker): Sell-side analysts, on the other hand, work for brokerage firms and investment
banks. Their primary role is to produce research reports and recommendations about various companies and sectors.
They help their firm's clients make informed decisions about buying or selling stocks. Unlike buy-side analysts who
focus on long-term investments, sell-side analysts often provide short-term recommendations.

For example, a sell-side analyst might issue a report advising clients to buy or sell a specific company's stock based on
short-term market trends or recent news events that could impact the stock's price.
Remember, both buy-side and sell-side analysts play crucial roles in the financial markets, but they have different
perspectives and objectives in their research and recommendations.

…the shareholders are a complete washout. As a class, they show neither intelligence nor alertness.

They vote in sheeplike fashion for whatever the management recommends and no matter how poor the
management’s record of accomplishment maybe. The only way to inspire the average shareholder to take any
independently intelligent action would be by exploding a firecracker under him.

The sentence talks about the shareholders, who are people who own a part of a company. It says that these
shareholders are not very effective or smart when it comes to making decisions. They usually just follow whatever
the company's leaders suggest, even if those leaders haven't done a good job in the past. The sentence suggests that
the only way to make them act on their own and think independently is if something sudden and surprising, like
exploding a firecracker, happens to wake them up."

In summary, the sentence is saying that the shareholders are not very proactive or thoughtful in their actions and
need something drastic to make them pay attention and make smarter choices.

Instead of focusing on Management most of investors spend their time.

• Finding Competitive Advantage/Moat

• Trading at the low Valuations
• Recent bull runs by the stocks.
• Some fools follow tips also.

What are the causes of Corporate Failure?

Economic Distress: Corporate governance failure can lead to economic distress, which means the company is facing
financial difficulties. This could happen because the company's leaders didn't make good decisions or didn't handle
money wisely.

Mismanagement: When corporate governance fails, it can result in mismanagement of the company. This means the
people in charge didn't run the business well, leading to problems and poor performance.

Technological Causes: Sometimes, corporate governance failures can be linked to not adapting to new technologies
or not using them efficiently. This can put the company at a disadvantage compared to competitors.

Working Capital Problems: Working capital refers to the money needed for day-to-day operations. Corporate
governance failure might cause problems in managing this money properly, leading to difficulties in running the
business smoothly.

Fraudulent Management: If corporate governance breaks down, it could lead to dishonest or fraudulent behavior by
those in charge. This means they might deceive others or misuse company resources for their own benefit, causing
harm to the company.

Remember, good corporate governance is essential for a company's success, as it ensures proper decision-making,
accountability, and transparency. When it fails, it can have serious consequences for the company and its
stakeholders.

Major Corporate Governance failure?

• Lack of Professional Management

• BODs were not independent in fact and most of the directors held multiple directorships.
• Excessive remuneration to employees.
• GAAP was not being followed.
• Diversion of funds to unrelated purposes.
Red Flags in Corporate Governance.

• Who runs the company?

• Do they have political connections?
• How did they get there? – Promotion? Hired from outside? Or arbitrary?
• Is the shareholding pattern rigged in the favor of management? Voting rights?
• For how long have the current managers been managing the business?
• How are senior managers compensated?
• Are senior managers continually increasing / reducing their ownership interest in the business?
• Does the management team focus on cutting unnecessary costs?
• Does the management only emphasize good news in its communications?
• Does the management think independently or often get swayed by what others in their industry are doing?
• is the CEO self-promoting?
• Assess composition of Board
• Are they qualified to hold the position?
• Disproportionate remuneration of independent directors?

What is operating leverage? With example and impact

Operating leverage refers to the extent to which a company's fixed costs are present in its cost structure. It shows
how sensitive a company's profits are to changes in its sales or revenue. A high operating leverage means that a
company has a significant portion of fixed costs in its operations, while a low operating leverage means that a
company's costs are mostly variable.

Example of operating leverage:

Let's consider two companies, Company A and Company B, both selling smartphones. Company A has higher fixed
costs, such as rent, salaries, and depreciation of machinery, while Company B has lower fixed costs and relies more
on variable costs like raw materials and labor.

Impact on financial statements:

If both companies experience an increase in smartphone sales, Company A will enjoy a higher increase in profits
compared to Company B because it benefits from the economies of scale and spread its fixed costs over a larger
number of units. Conversely, if smartphone sales decline, Company A will suffer a bigger decline in profits because it
still needs to cover its fixed costs, while Company B can adjust its costs more easily.

What is financial leverage? with example and impact

Financial leverage, on the other hand, refers to the use of debt to finance a company's operations and investments. It
shows how much a company relies on borrowed funds (debt) compared to its equity (ownership). Financial leverage
amplifies the returns for equity investors when the company's investments generate a higher return than the cost of
borrowing. However, it also magnifies losses if the investments do not perform well.

Example of financial leverage:

Company X wants to expand its operations by purchasing new equipment. They can either use their own money
(equity) or borrow from a bank (debt) to fund the purchase. If they decide to borrow 80% of the equipment's cost
and invest only 20% from their own funds, they are using financial leverage.

Impact on financial statements:

When the company earns a return higher than the cost of borrowing, financial leverage works in favor of the
shareholders. For instance, if the new equipment helps increase profits significantly, the return on equity (ROE) will
be higher than if the company had only used its own funds. However, if the company's investments do not generate
sufficient returns, the interest on the borrowed funds will still need to be paid, reducing the return for equity
investors. High financial leverage can also lead to higher interest expenses, which may impact the company's overall
profitability.

How would to arrive CFO from EBITDA

To arrive at CFO (Cash Flow from Operations) from EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization), you would need to follow these steps:

Start with EBITDA: EBITDA represents a company's operating profit before accounting for interest, taxes,
depreciation, and amortization expenses.

Add or subtract working capital changes: Adjust the EBITDA by accounting for changes in working capital. Working
capital includes items like accounts receivable, accounts payable, and inventory. If working capital increases, it
consumes cash, so you subtract the increase from EBITDA. If working capital decreases, it releases cash, so you add
the decrease to EBITDA.

Who required more working capital B2B or B2C

In general, B2B (Business-to-Business) companies require more working capital than B2C (Business-to-Consumer)
companies. B2B businesses usually deal with larger orders, longer payment cycles, and higher inventory needs, which
require more funds to operate. B2C companies, on the other hand, often have shorter payment cycles and lower
inventory requirements, making their working capital needs relatively smaller.

IF one company has cash conversion cycle of -30days and other has 30days then which one is better and why

A cash conversion cycle measures how long it takes a company to convert its resources into cash. In this case, we
have two companies: Company A with a cash conversion cycle of -30 days and Company B with a cash conversion
cycle of 30 days.

Company A is better because it has a negative cash conversion cycle. A negative cash conversion cycle means that the
company receives cash from its customers before it needs to pay its suppliers and vendors. This is beneficial because
it allows the company to use the money it receives from sales to cover its expenses, reducing the need for external
financing or borrowing.

On the other hand, Company B has a cash conversion cycle of 30 days, which means it takes 30 days for the company
to collect cash from customers after paying its suppliers. A longer cash conversion cycle can strain the company's cash
flow and may require it to rely more on external sources of funding to bridge the gap between paying suppliers and
receiving cash from customers.

In summary, Company A with a negative cash conversion cycle is better because it can manage its cash flow more
efficiently and may require less external financing compared to Company B with a positive cash conversion cycle.

Goodwill:

Goodwill is an accounting term that represents the intangible value of a company's reputation, brand recognition,
customer loyalty, and other non-physical assets. It's the extra value a company has beyond its tangible assets like
buildings and equipment. For example, if a company is well-known and trusted by customers, that positive reputation
adds value to the company beyond its physical assets.

Recognizing Goodwill:

Goodwill is recognized when one company acquires another company for a price higher than the fair market value of
the acquired company's net assets. The difference between the purchase price and the net asset value is considered
goodwill.

Impairment Charges:
Sometimes, the value of goodwill might decrease due to factors like changes in the market, increased competition, or
poor financial performance. When this happens, a company might need to "impair" its goodwill by reducing its value
on the balance sheet. This is done to reflect the true current value of goodwill accurately.

Example:

Imagine Company A acquires Company B for $10 million. Company B has net assets (like buildings, equipment, and
cash) worth $6 million. The difference, $4 million, is recognized as goodwill on Company A's balance sheet because it
paid more for Company B than the value of its tangible assets.

Years later, due to increased competition and changing customer preferences, Company B's reputation starts to
decline. As a result, its brand value and customer loyalty decrease. This negatively impacts the goodwill associated
with Company B.

Company A assesses the situation and determines that the goodwill related to Company B has lost its value. The
initial $4 million of goodwill needs to be adjusted downwards. This is called an "impairment charge." Let's say they
determine that only $2 million of goodwill is now accurate.

So, Company A will adjust its balance sheet:

Goodwill will be reduced by $2 million (from $4 million to $2 million).

A corresponding expense will be recorded on the income statement to reflect this impairment charge, which could
affect Company A's reported profits.

In simple terms, think of goodwill like the extra value a company has because of its reputation and customer loyalty.
When this value goes down, it's like a company admitting that its reputation isn't as strong as before, and they adjust
their financial statements accordingly by taking an impairment charge.

Remember, this is a simplified explanation, and accounting standards can be more complex in practice.

What are the 3 Financial Statements?

Income Statement: This shows how much money a company made (revenue) and how much it spent (expenses) over
a specific time. The difference between these is the profit or loss.

Balance Sheet: It's like a snapshot of a company's financial position at a specific moment. It lists what a company
owns (assets), what it owes (liabilities), and the remaining value for the owners (equity).

Cash Flow Statement: This tracks the movement of money in and out of a company. It shows where the cash came
from and where it went, helping to understand how cash is managed.

Difference between Standalone Financial Statements and Consolidated Financial Statements?

Standalone financial statements and consolidated financial statements are two types of financial reports used by
companies.

Standalone Financial Statements:

These show the financial position and performance of a single company on its own. They don't include any
information about its subsidiaries (other companies it owns).

Consolidated Financial Statements:

These combine the financial information of a parent company and its subsidiaries. They give a bigger picture of the
entire group's financial situation and performance. This helps in understanding how all the connected companies are
doing together.

In simple terms, standalone is like looking at one company alone, while consolidated is like looking at a group of
companies together.
When are Balance Sheets made public?

Balance Sheets are released with H1 and H2 Results

H1 results consist of Financials upto 30th Sept

H2 results consist of Financials upto 31th Mar

Example of a H1 Balance Sheet

H1 results are unaudited whereas H2 are audited

What is Equity?

It is Net Worth or Book Value of the company. It is the amount of money returned to the company's shareholders if
all assets are liquidated and all the debts are paid off. Equity = Assets – Liabilities.

What is Equity Share capital?

Equity Share capital is the money that people invest in a company by buying its shares. These shares represent
ownership in the company. When you own equity shares, you are a part-owner of the company. The company uses
the money from selling these shares to fund its operations and growth. In return, shareholders might get a portion of
the company's profits as dividends and can also benefit if the company's value goes up, as the value of their shares
can increase.

Suppose you started a company that sells momos with an investment of 10 lakhs. The company issued 1 Lakh with
face value of Rs 10. Share Capital = 1 Lakh x Rs 10.

The market price of the share does not doesn't impact face value or share capital.

What is other equity items?

These are things that affect a company's value but aren't from regular business activities. They include things like
gains or losses from selling assets, changes in the value of investments, or adjustments to accounting rules.

Capital Reserve: This is like a special savings account for a company. It's money set aside for specific purposes, like
buying new equipment or paying off debts. It's not meant for everyday expenses.

Securities Premium: Imagine you buy a ticket to a special event for $50, but its actual value is only $30. The extra $20
you paid is like a "premium." Similarly, when a company sells shares of its stock for more than their original price, the
extra money is called securities premium.

Retained Earnings: Think of a company as a piggy bank. Every year, it makes money (profit) or loses money (loss).
Retained earnings are like the total of all the money the company has saved up from its profits over time.

Other Comprehensive Income: This is like a summary of all the extra money changes that don't show up in the
regular profit or loss. It includes things like currency exchange differences or gains and losses from investments that
the company hasn't sold yet.

Can Retained Earnings be Negative?

Yes, retained earnings can be negative. Retained earnings is like a savings account for a company, where it keeps
some of its profits. But if a company has lost more money over time than it has earned, the retained earnings can go
into the negative, kind of like owing money instead of having savings.

Yes, If the company keeps reporting losses exceed retained earnings.

What is Qualified Institutional Placement?

Qualified Institutional Placement (QIP) is a way that big and professional investors, like big companies or investment
funds, can give money to a company in exchange for its shares. This helps the company raise funds without going
through the usual process of selling shares to the public on the stock market. QIP is like a private sale of shares to
important investors instead of to everyone.
What are types of Types of Liabilities?

Current Liabilities: These are debts or obligations that a company needs to pay off within a short time, usually within
a year. Examples include bills, salaries, and short-term loans. The portion of long term debt that needs to be paid
within the next 12 months.

Long-Term Liabilities: These are debts that a company has to pay over a longer period, usually more than a year.
Examples include long-term loans and mortgages.

So, in simple terms, liabilities are the things a company owes money for, and they can be either short-term or long-
term.

What are types of Types of Non-Current Liabilities?

Non-current liabilities are debts or obligations a company owes that are not expected to be settled within a year.
Here are the types of non-current liabilities:

Long-term Borrowing: This is money a company borrows from others and agrees to pay back over a long period,
usually more than a year.

Any amount of outstanding debt (amount of money the company has borrowed) a company holds that has a

maturity of 12 months or longer. It is classified as a non-current liability on the company’s balance sheet

Time to maturity> 12 months

Bank Loans, Debentures, Related Parties Advances, Deposits, Long term, Lease obligation

Long-term Provisions: These are set aside to cover future costs that a company knows it will have to pay but isn't
sure of the exact amount or timing yet.

These represent money that is provided for future liabilities like any payment expected beyond one year on account
of leave encashment or for warranties on products, gratuity, leave encashment, provident funds etc.

Deferred Tax Liabilities: These are taxes a company will owe in the future because of differences between accounting
rules and tax rules. They become due over time.

Other Long Term Liabilities: This category includes various long-term obligations that don't fit in the previous
categories, like certain types of agreements or debts.

So, these are the different kinds of non-current liabilities that a company might have.

What are the Types of Current Liabilities

Types of Current Liabilities are the debts and obligations that a company needs to pay off within a short period of
time, usually within a year. Here are the different types:

Trade Payables: These are the amounts a company owes to its suppliers for goods or services they've provided. For
example, if a company bought materials from a supplier and hasn't paid for them yet, it's a trade payable.

These are obligation payable within 365 days to vendors who supply to the company

Raw Material?, Electricity bills?, Newspaper bill?

Short-term Provisions: These are amounts set aside to cover future expenses that are likely to happen, but the exact
amount is not certain. It's like saving money for expected costs that might occur soon.

Short-term provisions deal with setting aside funds for:

1) Provision for Dividend

2) Provision for Taxation

3) Provision for Warranties, etc.

4) Employee benefits such as gratuity, leave encashment, provident funds etc.

Short-term Borrowings: When a company needs money quickly, they might borrow from banks or other sources for a
short period, like a year. These loans are considered short-term borrowings.

These are obligations payable within 365 days to the lendor.

Working Capital Loan, Loan payable on demand, Related Parties

Other Short-term Liabilities: These are miscellaneous obligations that a company needs to settle soon, like taxes that
are due or other debts that have to be paid off within a year.

In short, current liabilities are the bills and debts a company has to deal with in the near future. They include things
like money owed to suppliers, future expected costs, short-term loans, and other obligations that need to be taken
care of within a year.

Other Current Liabilities are:

Obligations related to statutory requirements & other short term payables

1) Current maturities of long term debt

2) Advances from dealers

3) Interest accrued but not due on borrowings

4) Interest accrued and due on borrowings

5) Unclaimed & Unpaid dividends

6) Application Money received for allotment of securities and due for

7) Refund and Interest accrued thereon

8) Unpaid matured deposits and interest accrued thereon

9) Unpaid matured debentures and interest accrued thereon

10) Other payables

What is lease liability? and how its measured and its impact?

Lease liability is like a debt that a company owes because of leasing something, like a building or equipment. It's the
money the company needs to pay over time to use that thing.

To measure lease liability, we figure out how much money the company will need to pay during the lease. This
includes the regular payments plus any other costs.

The impact of lease liability is that it shows up on the company's financial statements as a kind of debt. This can
affect how investors and lenders see the company's financial health. It's important for companies to manage lease
liabilities well.

With the introduction of Ind AS 116 now all leases are to be recognised in the balance sheet as an Asset and Liability.

The lease liability is measured at the present value of lease payments to be made over the lease term.

1. On the lease liability we will charge interest which will be reflected in P&L.

2. On the Liability side we will put Lease Liabilities under Long term debt.

3. To balance with the Liabilities, we will also create an entry of Right of Use Assets

4. Net impact of the above change Profit & Loss Statement - Increase in EBITDA (no lease rentals) but consequent
decrease in initial years in net profit (higher depreciation & interest cost).
Balance Sheet - Increase in Assets & Liabilities

What is Right of Use assets?

"Right of Use" assets refer to the things a company can use because they have a legal right to do so. These things are
often related to leases, like renting office space or equipment. The company doesn't own these things, but they can
use them as if they do. These assets are important for a company's financial records because they show what the
company is allowed to use even if they don't own it.

What are the Assets?

Assets is what a company owns or possesses. Assets tells us where the money has been utilized.

What are the type of assets?

There are two main types of assets:

Current Assets: These are things a company owns that can be easily turned into cash within a year, like cash itself,
inventory (stuff they plan to sell), and money owed by customers.

Assets that will benefit for less than 1 year.

Non-Current Assets: These are things a company owns for the long term, like buildings, machinery, or investments,
which usually take more than a year to turn into cash.

Assets that will benefit for more than 1 year.

So, it's like having things you can quickly sell for cash (current assets) and things you own for the long haul (non-
current assets).

Non Currents Assets are fixed assets, right of use assets and long term investment

Fixed assets includes tangible Fixed assets, Capital WIP, Intangible Assets.

Tangible Assets are building, Land, machine, furniture, factory, Aircraft, computer, truck

Intangible assets are Brand, trademark, software and Patents

Digital centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets.

Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these
sectors taking the top five spots on the 2019 edition of their report.

Which assets cannot be depreciated? Land and CWIP and why?

Depreciation is a way to account for the decrease in value of assets over time. It's commonly used for things like
machinery, equipment, and buildings. However, not all assets can be depreciated, and two examples of such assets
are land and CWIP (Construction Work in Progress).

Land: Land is a bit different from other assets because it usually doesn't lose its value over time. The land you own
today will likely have the same value or even increase in value over the years. So, there's no need to depreciate land
because it doesn't wear out or get used up like other assets do. In accounting terms, land is considered to have an
indefinite useful life, which means it's expected to remain valuable for a very long time.

CWIP (Construction Work in Progress): CWIP refers to the costs associated with construction projects that are still in
progress. These costs include things like materials, labor, and overhead expenses. Since the construction is ongoing
and not yet completed, it doesn't make sense to start depreciating the assets involved in the project. Depreciation is
usually applied once the project is completed and the assets start being used for their intended purpose.

To sum it up, land is not depreciated because its value usually doesn't decrease, and CWIP is not depreciated because
the assets are still being built and not yet ready for use. Depreciation is a way to allocate the cost of an asset over its
useful life, but it's not needed for assets that don't lose their value or for assets that aren't yet completed.
What is Goodwill? and how it is recognized in balance sheet?

Goodwill is an accounting term used to represent the intangible value of a business beyond its physical assets. It
includes things like the company's reputation, customer loyalty, skilled workforce, and favorable location. Goodwill
arises when one company acquires another for a price higher than the fair value of its net assets.

In a balance sheet, Goodwill is recognized as an asset. Here's a simple way to understand it:

Acquisition Price: When Company A buys Company B, if the purchase price is more than the net value of Company
B's assets (like buildings, equipment, etc.), the excess amount is considered as Goodwill.

Calculation: Goodwill is calculated as Purchase Price - Fair Value of Net Assets of Company B.

Balance Sheet: The calculated Goodwill is then added to Company A's balance sheet as an intangible asset. It
represents the premium paid for acquiring the business's intangible qualities.

Amortization: In the past, Goodwill used to be amortized (spread out over time) on the balance sheet. However,
accounting rules have changed, and now it is subject to an impairment test to see if its value has decreased. If the
value drops, it's written down on the balance sheet.

Remember, Goodwill reflects the extra value a company believes it's gaining from intangible assets, and it's important
to periodically assess its value to ensure it's still accurate.

High Goodwill is RED FLAG

When Goodwill is impaired and why?

Goodwill impairment occurs when a company's recorded goodwill value on its balance sheet is deemed to be
overstated. This happens when the value of the assets acquired in a business acquisition decreases over time, leading
to a situation where the company paid more for the acquisition than the assets are currently worth.

Goodwill impairment is necessary to reflect the true value of the assets and to ensure that a company's financial
statements accurately represent its financial health. It's usually triggered by a significant drop in the company's stock
price, financial performance, or changes in the industry that impact the acquired business. When these conditions
occur, the company needs to assess the value of its assets, including goodwill, and adjust it if necessary to reflect the
current economic reality. This process helps investors and stakeholders make informed decisions based on accurate
financial information.

Non-Current Investment: Investment which are done for more than 1 years.

What are Current Assets? And types of Current Asset.

Current Assets are the resources a company owns that are expected to be converted into cash or used up within a
year. They are essential for a company's day-to-day operations.

Types of Current Assets:

Trade Receivables: These are amounts owed to a company by its customers who have purchased goods or services
on credit. It represents money the company expects to receive in the near future.

It is the portion of sales made on credit net of allowances of doubtful debts.

Trade Receivables = Good trade receivables – Allowance for doubtful debts

Inventory: Inventory includes the goods a company holds for sale or materials used to produce goods. It's an
important asset because it can be turned into cash once sold.

Raw Materials – It is the total cost of stock that have not yet been used in WIP & finished products.

Work in Progress- WIP inventory refers to materials that are waiting to be assembled and sold.

Finished good- final stock that is read to sell

Examples: Wine which have to be aged for 24-36 months as a part of inventory

Rice which have to be aged for 18-24 months as a part of inventory.

Short-Term Advances: These are loans or amounts given by a company to others with the expectation of receiving
the money back within a short period. It's like lending money for a brief time.

Short-Term Investments: These are financial instruments a company invests in temporarily, such as government
securities. They offer a chance to earn some returns while ensuring the money is accessible if needed.

Cash & Equivalents: This is the most liquid form of current asset. It includes actual cash on hand and cash in bank
accounts, as well as highly liquid investments that are almost as good as cash, like money market funds.

It includes cash in hand, bank balance and short-term deposits with maturities less than 3 months.

Remember, these assets are crucial for a company's smooth operations and help determine its financial health and
ability to meet short-term obligations.

What is Income Statement?

An Income Statement is like a financial report card for a company. It shows how much money the company made
(revenue) and how much it spent (expenses) during a specific period, usually a year or a quarter. The statement
subtracts expenses from revenue to calculate the company's profit or loss, which is also called net income or net loss.
It's a way to understand if the company is making money or not.

The statement of revenue and expense, the income statement primarily focuses on the company’s revenue and
expenses during the a particular period of time.

Net profit = Total Revenue – Total expenses

Sales – Cost of good sold = Gross profit

Gross profit Marign or Gross Margin = Gross profit / Sales

Gross profit – Operating expenses = EBITDA

EBITDA Margin = EBITDA/Sales

EBITDA – Dep & Amortization = EBIT

EBIT Margin = EBIT/ Sales

EBIT -Interest = PBT

PBT Margin = PBT/Sales

PAT – Tax = PAT

PAT Margin = PAT/Sales

PAT/ Number of shares outstanding shares

REVENUE

Revenue is made up of two main components:

Core Operations Revenue: This is the money a company earns from its primary business activities. For example, a
technology company's core operations revenue would come from selling its software or devices.

Non-Core Operations / Other Operating Revenue: This is revenue a company generates from activities outside of its
main business. For instance, if that same technology company also rents out office space, the rent income would be
considered non-core operating revenue.
In simple terms, revenue includes money from what a company does best (core operations) and money from other
things it might do on the side (non-core operations).

What is EBITDA? What does it shows?

EBITDA stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization." It shows the profitability of a
company's core operations, excluding certain expenses. In other words, EBITDA gives you an idea of how much
money a company is making from its main business activities before considering interest payments, taxes, and non-
cash items like depreciation and amortization. It's like looking at the cash operating profit of the company.

Its shows cash operating profit

What is Cost of Goods sold?

Cost of Goods sold is the direct costs attributable to the production of the goods sold in a company.

It is the raw material cost that the company requires to manufacture finished goods.

It is calculated as Opening stock + Purchases - Closing stock

Note: Closing stock of previous year will always be the opening stock of Current year.

What is Purchases of stock in trade?

Goods that are bought and sold without any processing.

This is called purchase of stock and refers to all the purchases of finished goods that the company buys towards
conducting its business.

What is change in inventory of finished goods?

This refers to the costs incurred in the past on the goods which are sold in the current year.

A negative amount indicates that the company produced more items in the current year that it managed to sell or it
could also be due to the company incurring inventory gains.

A positive amount indicates that company might have incurred an inventory loss.

What is Selling, General and Administrative expenses (SG&A)?

Selling, General, and administrative expenses (SG&A) are the costs that a company incurs to run its day-to-day
operations and sell its products or services. SG&A expenses are not directly tied to producing goods or services but
are essential for the overall functioning of the business.

Its cost of doing business. They include rent and utilities, marketing, and advertising, sales and accounting,
management and administrative salaries. Examples Rent, power cost, auditor fee, employee cost, advertisements,
miscellaneous.

What is Depreciation and Amortization?

The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical assets over
its useful life. Depreciation represents how much of an asset’s value has been used. It allows companies to earn
revenue from the assets they own by paying for them over a certain period of time.

Because companies don’t have to account for them entirely in the year the assets are purchased, the immediate cost

of ownership is significantly reduced. Not accounting for depreciation can greatly affect a company’s profits.

Companies can also depreciate long term assets for both tax and accounting purposes.

Three Methods to calculate Depreciation?

Straight Line Method:

Formula: Depreciation = (Cost of Asset - Salvage Value) / Useful Life

Example: You bought a computer for $1,000, and it's expected to last 5 years. The salvage value is $200.

Depreciation = ($1,000 - $200) / 5 = $160 per year.

Written Down Value Method (WDV):

Formula: Depreciation = (Current Value of Asset × Depreciation Rate)

Example: You have a car valued at $20,000 with a 20% annual depreciation rate.

Year 1 Depreciation = $20,000 × 20% = $4,000.

Year 2 Depreciation = ($20,000 - $4,000) × 20% = $3,200.

Expected Patterns of Consumption:

This method considers how the asset is used or consumed over time.

Example: In a bakery, an oven is used for baking. The oven's value depreciates based on the number of batches
baked. If it's expected to last for 500 batches, and each batch has a $10 depreciation cost, then after 100
batches, the depreciation would be $1,000.

These methods help businesses account for the wear and tear of assets over time and allocate these costs for
accurate financial reporting and tax purposes.

What is Finance Cost?

Finance cost is the interest & other related payments that company is paying on its borrowings. Companies can

Borrow from anyone like banks, private lenders, directors or from related parties. It also includes interest on lease

liabilities.

What are exceptional items?

These items are truly exceptional as they can occur due to N number of reasons.

It can be either exceptional income or exceptional loss that happens.

Its very important to look past exceptional items to consider their nature.

What is segmental profitability?

Segmental profitability refers to the analysis and assessment of the profits generated by different segments or
divisions within a company. Instead of looking at the company as a whole, segmental profitability breaks down the
financial performance of individual parts or business units. This helps investors and analysts understand which parts
of the company are making money and which ones might be less profitable or even losing money. It's a crucial tool in
equity research and valuation because it provides a clearer picture of a company's overall health and where it might
need improvement.

SOME REVENUE METRICS TO CHECK VALUE/VOLUME OF DIFFERENT INDUSTRIES

-LIQUOR- Realisations/Volume growth per case (One case has 12 bottles of 750ml each)

-BEVERAGES- Realisations + Volume growth per case (24 bottles per case)

-HOTELS - Average Revenue Per Room (It increases when industry turns around, and less rooms are available)

-HOSPITALS - Average Revenue per Occupied Beds (ARPOB)

-TELECOM - Average Revenue per user

-CEMENT OR CHEMICALS OR STEEL TUBES- Realisation Per tonne (EBITDA per tonne)

What is Cashflow Statement?

Summarises the movement of cash and cash equivalents (CCE) that come in and go out of a company.

The CFS measures how well a company manages its cash position, meaning how well the company generates cash to
pay its debt obligations and fund its operating expenses.

As one of the three main financial statements, the CFS complements the balance sheet and the income statement.

Why Cashflow Statement is need?

Most companies use the accrual basis accounting method. In these cases, revenue is recognized when it is earned
rather than when it is received.

It causes a disconnect between net income and actual cash flow as not all transactions in net income on the income
statement involve actual cash items.

Certain items must be reevaluated when calculating cash flow from operations. Cash flow is concerned with the
actual cash that flows into the company and the cash that flows out.

Why Cashflow Statement is Important?

The Cash Flow Statement is important because it shows how much actual cash a company generates or uses during a
specific period. It helps investors and analysts understand a company's liquidity, its ability to pay bills, and its overall
financial health. It's a crucial tool for assessing whether a company can sustain its operations and investments in the
long run.

Cashflow Statement can be Further Divided into 3 parts.

Cashflow from Operating Activities: This section shows the cash generated or used in the company's core
operations, like selling goods or providing services.

The cash that is concerned with the core operations of the business.

Cashflow from Investing Activities: Here, it reveals the cash spent on investments, like buying or selling assets (e.g.,
property, equipment) and investments in other companies.

Cash that is concerned with the investing activities of the business.

Cashflow from Financing Activities: This part displays the cash from or used for financing, such as taking on debt,
repaying loans, issuing, or buying back stocks, and paying dividends to shareholders.

Cash that flows into or flows out of the company through financing activities like repayment of debt or raising debt.

Calculating CFO (Cash Flow from Operations) using the indirect method

Start with Net Income (P&L)

Depreciation is added back (Non-Cash Charges)

Finance Cost is added back (It get subtracted in CFF)

All non core operating income is subtracted or added back. Eg: sale or gain on the sale of an asset. (CFI/CFF)

Changes in Working Capital

What is Depreciation?

Depreciation is a method used in accounting to allocate the cost of a tangible asset (like machinery or buildings) over
its useful life. It reflects the gradual reduction in the asset's value as it gets older or wears out. This allocation helps
businesses accurately report expenses and determine the asset's book value over time.
Description means cost of physical assets divided in years when assets will be used. For example, You bought an asset
of Rs. 1 lakh which you will use for next 5 years. So here depreciation amount will be Rs 20,000 (Rs 1,00,000 / 5 yrs).
Now you will charge this 20k per year in P&L as Depreciation (assuming salvage value is 0).

Why is Depreciation added back in Cashflow from Operation?

Depreciation is added back in Cashflow from Operations because it's a non-cash expense. In other words, it's an
accounting measure that represents the decrease in the value of assets over time. While it reduces profits on the
income statement, it doesn't involve actual cash leaving the company. By adding it back, we get a more accurate
picture of how much cash the company generated from its core operations.

My actual cash outflow is -1,00,000 in Year 1 to purchase the asset. The 20,000 per year is a non-cash expense.
Hence, it will be added back. This is just an accounting entry.

Why is Finance cost is added back in Cashflow from Operation?

Finance costs are added back in Cash Flow from Operations because they are considered an expense on the income
statement, but they do not represent an actual cash outflow related to day-to-day operations. By adding them back,
we show how much cash a company generated from its core business activities before considering the financial costs
associated with borrowing or debt. This provides a clearer picture of the company's ability to generate cash from its
operations, excluding the impact of financing decisions.

Finance cost means interest paid on the borrowings of a company. Since this is not part of the day-today business
activities, so it will be added back and will be covered in cash flow from financing activity.

NON CORE INCOME ADDED OR SUBTRACTED in Cashflow from Operation?

Non core income like 1) Dividend received is subtracted. 2) Loss on sale of assets is added back. 3)Gain on sale of
assets is subtracted

WHY?

These are not part of core business activities, hence is non core income

WORKING CAPITAL CHANGES

1. After all the adjustments we do, we come to working capital changes

2. Working capital is the capital of a business which is used in its day-to-day trading operations.

3. Key components of working capital are

• Trade Receivables
• Inventory
• Trade Payables

WHAT IS CASH CONVERSION CYCLE?

The Cash Conversion Cycle (CCC) is a financial metric that measures how long it takes for a company to convert its
investments in inventory and other resources into cash from sales. It consists of three main components:

Inventory Days: The number of days it takes for a company to sell its inventory.

Receivable Days: The number of days it takes for a company to collect money from customers after making a sale.

Payable Days: The number of days it takes for a company to pay its suppliers for goods and services.

The CCC helps assess a company's efficiency in managing its working capital. A shorter CCC indicates quicker cash
generation, which is generally favorable for a business.

Higher the trade receivables, the lesser the flow of cash, and vice versa

The lower the Inventory, lesser the cash gets blocked. Thus, higher cash flow. Also true vice versa
Higher the payables, the more you are working on someone else's. thus, higher the cash flow. The Opposite is also
true.

HOW WORKING CAPITAL IMPACTS CFO

Increase in Current Assets: This will decrease CFO because more cash is tied up in assets, reducing available cash for
operations.

Decrease in Current Assets: This will increase CFO because less cash is tied up in assets, freeing up cash for
operations.

Increase in Current Liabilities: This will increase CFO because it means you have more cash available from the delay in
paying off liabilities.

Decrease in Current Liabilities: This will decrease CFO because it implies you are paying off liabilities faster, reducing
available cash for operations.

Inversely proportional with current assets and directly proportional with current liabilities

Q1. Which business will have higher working capital requirements?

B2C (Business-to-Consumer) businesses typically have higher working capital requirements compared to B2G
(Business-to-Government) businesses.

Q2. B2G Business or B2C Business?

B2C (Business-to-Consumer) businesses generally have higher working capital requirements than B2G (Business-to-
Government) businesses.

CASH FLOW FROM INVESTING ACTIVITIES

Cash flow from investing activities refers to the money a company either receives or spends on investments in assets
such as property, equipment, or other businesses. Positive cash flow means the company received more money from
these investments than it spent, while negative cash flow means it spent more than it received. It's a key part of a
company's overall cash flow statement and helps investors assess how well a company is managing its investments.

Cash Flow from Investing Activities includes:

Capex in PP&E (Capital Expenditures in Property, Plant, and Equipment): This represents the money spent on
acquiring, upgrading, or maintaining physical assets like buildings, machinery, and equipment. And it includes Capital
work in progress.

Other Investing Activities: This category encompasses various transactions, including:

Purchase of Equity/Bonds: Money spent on acquiring stocks or bonds of other companies.

Business Acquisition: Funds used to buy other businesses or assets, including mergers and acquisitions.

Dividend/Interest Income: Income received from investments, such as dividends from stocks or interest from bonds.

These items collectively show how a company is managing its investments and whether it is acquiring or disposing of
assets.

When Property Plant and Equipment is purchased. It will show cash outflow. It indicates that the company has
incurred capex and cash has flown out of the company towards PPE Purchase. On sale of PPE, cash will flow into the
company. Thus, proceeds from sale will be positive. Purchase of Investments will lead to outflow of cash. Thus,
negative. Redemption of investments will lead to inflow of cash. Thus, will show as positive.

Cash Flow from Financing Activities

Cash Flow from Financing Activities refers to the amount of money a company receives or spends as a result of its
financing activities, such as issuing or repurchasing stocks and bonds, paying dividends to shareholders, or taking out
or repaying loans. It helps assess how a company manages its capital and whether it's using debt or equity to fund its
operations. Positive cash flow from financing means the company is raising money, while negative cash flow indicates
it's repaying debts or returning money to shareholders.

Cash Flow from Financing Activities includes:

Loan Taken: This represents the money borrowed by the company during a specific period.

Issuing Equity: This includes funds raised by the company through selling shares or equity to investors.

Dividend Payments: This represents the cash paid out to shareholders as dividends.

Loan Repayment: It refers to the repayment of loans or debt by the company during the specified period.

WHAT HAPPENS WHEN A BUSINESS RAISES DEBT?

Whenever a business raises debt or borrowings then it is shown as a positive cash inflow under Cash Flow from
Financing Activities. When a business repays borrowings, funds flow out. Thus, it is shown as cash outflow under
Financing activities.

If a company Raise Equity or does a QIP for investing in a capex plan?

Will that be a part of CFO, CFI or CFF?

When a company raises equity or does a QIP (Qualified Institutional Placement) for investing in a capital expenditure
(capex) plan, it will be a part of the Cash Flow from Financing (CFF).

What happens when a business retires Equity by doing a share buyback?

Will that be a part of CFO, CFI or CFF?

When a business retires equity by doing a share buyback, it's essentially buying its own shares from the market or
shareholders. This reduces the number of outstanding shares.

This transaction is typically categorized as a Cash Flow from Financing (CFF) activity. It's considered a financing
activity because the company is using its cash to buy back its own equity (shares), which impacts its capital structure
and ownership.

So, in summary:

Share buybacks are part of Cash Flow from Financing (CFF).

WHAT IS NET CASH FLOW?

= Cash Flow from Operations + Cash Flow from investing Activities + Cash Flow from Financing Activities = Net Cash
Flow.

Net cash Flow reflects the movement of cash and equivalents on the balance sheet as compared to the previous year.

POINTS TO REMEMBER

CFO Includes:

• Adding back Depreciation Linked to core operations of the business

• All non core income is added or subtracted
• Working capital changes are added or subtracted
• Taxes are subtracted

CFI Includes:

• Purchases of Property plant and equipment (negative cash flow)

• Sale of Property plant and equipment=Positive cash flow
• Purchase of investments (negative cash outflow)
• Redemption of investments (inflow)
• Dividend received on investments (inflow)

CFF Includes:

• Payment of Dividend
• Raising Equity
• Debt raising/repayment Foreign
• exchange losses/gains
• Bonds/debentures issued
• Interest paid.

If the company pays Dividend. Will that be a part of CFO, CFI or CFF?

If a company pays a dividend, it will be a part of the Cash Flow from Financing Activities (CFF) on the cash flow
statement.

Why Ratio Analysis?

Ratio analysis is essential in investment banking and equity research because it helps us evaluate a company's
financial health and performance by comparing different financial metrics. It simplifies complex financial data into
easy-to-understand ratios, enabling us to make informed investment decisions.

Ratio analysis is a mechanism of gaining insight.

1. Company’s Capital Allocation

2. Liquidity

3. Operational Efficiency

4. Profitability

It shows how a company is performing overtime.

Ratio analysis can be used to do a peer to peer comparison within the same industry or sector

Allow investors to evaluate the historical track record using various metrics.

Classes of Ratios

Activity Ratios:

Inventory Turnover:

• Definition: Measures how many times a company sells and replaces its inventory in a period.
• Formula: Cost of Goods Sold (COGS) / Average Inventory
• Uses: Helps assess inventory management efficiency.
• Impact: Higher is generally better; it indicates quicker inventory turnover.

Receivable Turnover:

• Definition: Measures how often a company collects its accounts receivable.

• Formula: Net Sales / Average Accounts Receivable
• Uses: Assesses the effectiveness of credit and collection policies.
• Impact: Higher is generally better; it shows faster collection of receivables.

Payable Turnover:

• Definition: Measures how quickly a company pays its suppliers.

• Formula: Total Purchases / Average Accounts Payable
• Uses: Evaluates payment efficiency and supplier relationships.
• Impact: Higher is generally better; it suggests efficient payment practices.
Working Capital Turnover:

• Definition: Measures how efficiently working capital is used to generate sales.

• Formula: Net Sales / Average Working Capital
• Uses: Indicates how well a company uses its short-term assets and liabilities.
• Impact: Higher is generally better; it signifies better utilization of working capital.

Asset Turnover:

• Definition: Measures how efficiently a company uses its assets to generate revenue.
• Formula: Net Sales / Average Total Assets
• Uses: Evaluates asset utilization and business efficiency.
• Impact: Higher is generally better; it indicates better asset utilization.

Inventory Days:

• Definition: Shows the average number of days it takes to sell inventory.

• Formula: 365 days / Inventory Turnover Ratio
• Uses: Helps in inventory management and planning.
• Impact: Lower is generally better; it indicates faster inventory turnover.

Receivable Days:

• Definition: Indicates the average number of days it takes to collect receivables.

• Formula: 365 days / Receivable Turnover Ratio
• Uses: Assesses the efficiency of collecting outstanding payments.
• Impact: Lower is generally better; it shows quicker receivables collection.

Payable Days:

• Definition: Represents the average number of days it takes to pay suppliers.

• Formula: 365 days / Payable Turnover Ratio
• Uses: Evaluates the time taken to settle supplier invoices.
• Impact: Higher is generally better; it suggests better cash management.

Solvency Ratio

Debt to Equity Ratio:

• Definition: It measures the proportion of a company's financing that comes from debt compared to equity.
• Formula: Debt to Equity Ratio = Total Debt / Total Equity
• Uses: It helps assess a company's financial risk and solvency. Lower ratios are generally better.
• Impact: A higher ratio indicates higher financial leverage and higher risk.

Debt to Capital Ratio:

• Definition: It shows the percentage of a company's capital structure financed by debt.

• Formula: Debt to Capital Ratio = Total Debt / (Total Debt + Total Equity)
• Uses: It provides insights into capital structure and risk. Lower ratios are usually preferred.
• Impact: A higher ratio implies a higher reliance on debt for funding.

Interest Coverage Ratio:

• Definition: It gauges a company's ability to meet interest payments on its debt.

• Formula: Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
• Uses: It helps assess a company's financial stability. Higher ratios are better.
• Impact: A higher ratio suggests better ability to cover interest costs.

Financial Leverage Ratio:

 • Definition: It reveals the extent to which a company uses debt in its capital structure.
• Formula: Financial Leverage Ratio = Total Assets / Total Equity
• Uses: It shows the degree of financial risk. Lower ratios are safer.
• Impact: A higher ratio indicates higher financial risk and potential for higher returns.

Debt to EBITDA Ratio:

• Definition: It measures a company's ability to repay its debt from its earnings.
• Formula: Debt to EBITDA Ratio = Total Debt / Earnings Before Interest, Taxes, Depreciation, and Amortization
(EBITDA)
• Uses: It assesses debt repayment capacity. Lower ratios are preferred.
• Impact: A higher ratio suggests higher debt relative to earnings, increasing risk.

In summary, lower ratios are generally better for these financial metrics as they indicate lower financial risk and
greater financial stability. Higher ratios can signify increased risk and may make investors and creditors more
cautious.

Liquidity Ratio

Current Ratio:

• Definition: It measures a company's short-term liquidity, indicating its ability to pay short-term debts.
• Formula: Current Assets / Current Liabilities
• Uses: Helps assess a company's short-term financial health.
• Impact: Higher is generally better, indicating better liquidity.

Quick/Acid Test Ratio:

• Definition: Similar to the current ratio but excludes inventory from current assets for a stricter assessment of
liquidity.
• Formula: (Current Assets - Inventory) / Current Liabilities
• Uses: Offers a more conservative measure of short-term liquidity.
• Impact: Higher is better; it reflects stronger short-term financial position.

Cash Conversion Cycle:

• Definition: Measures how long it takes for a company to convert cash invested in inventory into cash from
sales.
• Formula: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
• Uses: Evaluates efficiency in managing working capital.
• Impact: Lower is better, as it signifies faster cash conversion.

Cash Ratio:

• Definition: It assesses a company's ability to cover its short-term liabilities with cash and cash equivalents.
• Formula: (Cash + Cash Equivalents) / Current Liabilities
• Uses: Focuses on the most liquid assets available for meeting short-term obligations.
• Impact: Higher is better, indicating a stronger ability to meet short-term debt obligations using cash.

Remember that while higher ratios are generally preferred, what's considered "good" can vary by industry and
company circumstances. It's essential to compare these ratios with industry benchmarks and consider the company's
specific financial situation for a more meaningful analysis.

Profitability & Capital Allocation Ratios

Gross Profit Margin:

• Definition: A measure of a company's profitability, showing the percentage of revenue that exceeds the cost
of goods sold.
 • Formula: (Gross Profit / Revenue) * 100
• Uses: Evaluating a company's pricing strategy and efficiency in producing goods.
• Impact: Higher is better as it indicates efficient production and pricing.

Operating Profit Margin:

• Definition: Reflects the proportion of revenue that remains after covering operating expenses.
• Formula: (Operating Profit / Revenue) * 100
• Uses: Assessing operational efficiency and profitability.
• Impact: Higher is better, indicating effective cost management.

Net Profit Margin:

• Definition: Shows the percentage of revenue that remains as profit after all expenses, including taxes.
• Formula: (Net Profit / Revenue) * 100
• Uses: Evaluating overall profitability after all costs.
• Impact: Higher is better, indicating strong profitability.

Return on Assets (ROA):

• Definition: Measures how efficiently a company uses its assets to generate profit.
• Formula: (Net Profit / Total Assets) * 100
• Uses: Assessing asset utilization and profitability.
• Impact: Higher is better, indicating effective asset management.

Return on Equity (ROE):

• Definition: Measures how well a company generates profit from shareholders' equity.
• Formula: (Net Profit / Shareholders' Equity) * 100
• Uses: Evaluating the return for equity investors.
• Impact: Higher is better, indicating strong returns to shareholders.

Return on Capital Employed (ROCE):

• Definition: Measures how efficiently a company utilizes capital to generate profit.

• Formula: (Operating Profit / Capital Employed) * 100
• Uses: Assessing capital efficiency and overall profitability.
• Impact: Higher is better, indicating effective capital utilization.

In general, higher ratios are preferred because they indicate better financial performance and efficiency. However,
the ideal level can vary by industry and company, so it's important to consider benchmarks and context when
analyzing these ratios.

CFO/EBITDA

CFO/EBITDA reflects whether cash operating profit in converting into real cash or not.

CFO/EBITDA, or Cash Flow from Operations divided by Earnings Before Interest, Taxes, Depreciation, and
Amortization, is a financial ratio used to assess a company's financial health and performance.

CFO/EBITDA tells us how efficiently a company is converting its operating earnings into cash.

A high ratio indicates that the company is good at turning its profits into actual cash, which is essential for meeting
financial obligations and funding growth.

Conversely, a low ratio suggests that the company may be facing challenges in converting earnings into cash, which
could be a sign of financial stress.
Investors and analysts often use this ratio to evaluate a company's liquidity and its ability to generate cash from its
core operations, independent of accounting factors like depreciation and taxes. It provides valuable insights into a
company's financial strength and its capacity to invest in future growth or handle debt.

70% -75% in case of B2C Business

60% - 70% in case of B2B Business

Free Cash Flow

Free Cash Flow (FCF) is a crucial financial concept used in equity research and investment banking. It represents the
amount of cash a company generates from its operations after deducting expenses needed to maintain and expand
its business. In simpler terms, it's the cash left over for a company to use for things like paying dividends, reducing
debt, or investing in new projects.

To calculate FCF, you generally start with a company's net income (profit), then add back non-cash expenses like
depreciation and amortization. Afterward, you subtract capital expenditures (money spent on maintaining and
growing the business) and changes in working capital (like changes in inventory or accounts receivable).

Here's the formula:

FCF = Net Income + Depreciation & Amortization - Capital Expenditures - Change in Working Capital

Positive FCF is a good sign because it indicates the company has enough cash to cover its expenses, invest in growth,
and reward shareholders. Negative FCF, on the other hand, might suggest financial difficulties or excessive spending.
So, FCF helps investors and analysts assess a company's financial health and its ability to generate cash.

Free cash flow means the cash that is left over after a company pays for its operating expenses and capital
expenditures (Capex) like purchasing new machinery, equipment, land & Building, etc. and satisfying all its working
capital needs.

Whatever cash that is left with you after you spend your salary or income is know as free cash flow that you can use
for different purposes.

The more FCF a company has, the better it is. Business which generates higher FCF can:

Give higher Dividends.

Build funds for acquisitions or capex.

Do share Buybacks

Reinvest in the business when opportunity arises with lesser dependence on debt.

TC and other Indian companies use this to calculate free cash flow

Two types of free cash flow

Free Cash flow to firm: This measures the cash available to all investors in a company, including both debt and equity
holders. It's like the total pie of cash available to everyone. FCFF means the ability of the business to produce cash
after deducting all its capital expenditures which is calculated as CFO – Capex.

Free cash flow to Equity: This focuses only on the cash available to the company's equity shareholders (the owners).
It's like a slice of the pie that belongs specifically to the stockholders.

Free Cash flow to Equity is the amount of cash a business generates that is available to be distributed to the
company’s equity shareholders as dividends or stock buybacks after all expenses, reinvestment and debt repayments.

It is also know as Levered Free Cash Flow.

It is calculated as follows:
FCFE = Cash from operating activities- capital expenditures + Net debt issued (proceeds from borrowings –
repayment of borrowings).

Which firms have high free cash flow?

• Companies generating high ROCE

• Asset light Businesses
• e.g – FMCG, Platforms and IT services
• Companies with less capex needs

Which companies will have low free cash flow?

• Companies doing high capex

• Manufacturing businesses
• Companies with very high working capital needs.
• B2G business or infra companies.

ACTIVITY RATIOS

An activity ratio is a financial metric that shows how efficiently a company is leveraging the assets on its balance
sheet, to generate revenues and cash.

Activity ratios are also known as efficiency ratios which allow the analysts to get an overview of how well the
company handles inventory management.

Activity ratios can be used to do a comparison between two different businesses within the same sector/industry, or
they may be used to monitor a single company's fiscal health over time.

Activity ratios, also known as turnover ratios, provide insights into how efficiently a company is managing its assets to
generate sales and revenue.

Types of Activity Ratios:

1) Inventory Turnover

This measures how quickly a company sells its inventory. It's calculated by dividing the cost of goods sold by the
average inventory value. A higher ratio indicates faster inventory turnover.

Inventory turnover indicates the rate at which a company sells and replaces its stock of goods during a particular
period. Inventory turnover helps businesses make better pricing, manufacturing, marketing, and purchasing
decisions. Inventory turnover indicates how efficiently the company is utilising its inventory to generate sales.

This ratio tells us how many times a company sells its inventory in a year. A higher turnover is generally better, as it
means inventory is selling quickly.

Cost of Goods Sold / Average Inventory or Sales / Average Inventory

2) Inventory Days:

Inventory days indicates the duration of time a company’s cash is tied up in its inventory. This ratio shows how many
days, on average, it takes for a company to sell its entire inventory. Lower days are usually preferred, indicating faster
sales.

365 days / Inventory Turnover

3) Receivable Turnover

The receivables turnover ratio is used to quantify a company's effectiveness in collecting its accounts receivable or
the money owed by customers or clients. Receivable turnover ratio measures how well a company uses and manages
the credit it extends to customers and how quickly it is collected or is paid.
It reveals how many times a company collects payments from customers in a year. A higher turnover means faster
collection.

Net Sales / Average Accounts Receivable

4) Receivable Days:

Receivables days is a measure of the average number of days that it takes a company to collect payment for a sale.

By quickly turning sales into cash, a company has a chance to put the cash to use again more quickly.

This ratio shows the average number of days it takes to collect payments from customers. Lower days are better.

365 days / Receivable Turnover

5) Payable Turnover

The payable turnover ratio is a measure used to quantify the rate at which a company pays off its suppliers.

The payable turnover ratio shows how efficient a company is at paying its suppliers and short-term debts.

It measures how quickly a company pays its suppliers. A higher turnover suggests efficient payment management.

COGS / Average Accounts Payable

6) Payable Days

Payable day is a measure of the average number of days that it takes a company to pay for a Credit Purchase.

This ratio indicates the average time it takes to pay suppliers. Longer days can be beneficial for cash flow.

365 days / Payable Turnover

7) Working Capital Turnover

Measures how efficiently a company is using its working capital to support sales and growth. Relationship between
the funds used to finance a company's operations and the revenues a company generates to continue operations and
turn a profit.

It assesses how effectively a company uses its working capital to generate sales. A higher ratio implies better
utilization.

Net Sales / Average Working Capital

Working Capital = Current Assets – Current Liabilities

CASH CONVERSION CYCLE

The cash conversion cycle is a metric that expresses the time (measured in days) it takes for a company to convert its
investments in inventory and other resources into cash flows from sales.

The cash conversion cycle is a metric that expresses the length of time (in days) that it takes for a company to convert
its investments in inventory and other resources into cash flows from sales.

CASH CONVERSION CYCLE =INVENTORY DAYS + RECEIVABLE DAYS - PAYABLES DAYS

8) Asset Turnover

Measures the value of a company's sales or revenues relative to the value of its assets. Indicator of the efficiency
with which a company is using its total assets to generate revenue.

This ratio shows how efficiently a company uses its assets to generate sales. A higher turnover indicates more
efficient asset utilization.

Net Sales / Average Total Assets

FIXED ASSETS TURNOVER

Measure operating performance. It compares net sales (income statement) to fixed assets (balance sheet) and
measures a company's ability to generate net sales from its fixed-asset investments, namely property, plant, and
equipment (PP&E). The fixed asset turnover ratio reveals how efficient a company is at generating sales from its
existing fixed assets.

FIXED ASSET TURNOVER = SALES/AVERAGE FIXED ASSETS

GROSS BLOCK TURNOVER

How much sales per unit of gross fixed assets is the business generating?

The gross block is the value of an asset at cost. The depreciation accrued on the asset is not accounted for in the
Gross Block. The asset value on reducing the Gross Block with the accrued depreciation is called the Net Block.

GROSS BLOCK = Sales/TURNOVER GROSS BLOCK

The types of Capex (Capital Expenditures) explained simply:

Growth Capex: (brown field and green field)

Purpose: Invested to expand and grow the business.

Examples: Opening new stores, launching new products, or entering new markets.

Goal: Increase revenue and market share.

Maintenance Capex:

Purpose: Spent to keep existing assets in working condition.

Examples: Repairing machinery, maintaining buildings, or replacing worn-out equipment.

Goal: Ensure operational efficiency and asset longevity.

Backward Integration Capex:

Purpose: Invested to acquire or build facilities/resources upstream in the supply chain.

Examples: Buying a supplier or producing raw materials in-house.

Goal: Gain control over supplies and reduce dependence on external sources.

Forward Integration Capex:

Purpose: Invested to acquire or build facilities/resources downstream in the supply chain.

Examples: Acquiring distribution channels or opening retail outlets.

Goal: Enhance control over distribution and increase customer reach.

In summary, Capex can be categorized into growth, maintenance, backward integration, and forward integration
based on their purposes and objectives in a company's strategic planning.

Capital Allocation

Return on Assets

Return on Assets is an indicator of how well a company utilizes its assets in terms of profitability.

ROA gives an investor an idea as to how efficient a company’s management is at using its assets to generate earnings.

Return on Assets (ROA) is a key financial ratio that measures how efficiently a company generates profit from its
assets. It's a crucial metric for investors and analysts.
ROA tells us what percentage of profit a company earns for every dollar of assets it has. A higher ROA means the
company is using its assets effectively to generate profit. It's a measure of overall business efficiency.

Net Income / Total Assets

Return on Assets DU PONT

Net Profit Margin * Asset Turnover

Net Profit/ Sales * Sales/Avg Assets

Return on Equity

Return on Equity (ROE) measures a company’s profitability in relation to shareholders equity. A good rule of thumb is
to target an ROE that is equivalent to or just above the average for the peer group.

Return on Equity = Net Profit/Avg Equity

Return on Equity (ROE) is a crucial financial metric that measures a company's profitability and efficiency.

ROE is a percentage that tells us how well a company is using its shareholders' equity to generate profit.

Return on Assets DU PONT

Net profit margin * Asset turnover (Operating leverage) * financial leverage

Net Profit/ Sales * Sales/ Assets * Assets / Equity

Return on Capital Employed

It is used in assessing a company’s profitability and capital efficiency. Help to understand how well a company is
generating profits from its capital as it put to use. Hygiene of ROCE gets reflected much more vividly in balance sheet
rather than profit & loss statement. To large extent, balance sheet is a greater reality than what a profit & loss
statement would imply. While ROCE is a derivative of both the profits (P&L Statement) and the capital employed
(Balance sheet) Clearly the hygiene of ROCE would more likely be evident from the balance sheet & its quality.

Return on Capital Employed (ROCE) is a financial ratio that measures the profitability and efficiency of a company's
capital investments. It's a crucial metric for both investors and analysts in evaluating a company's performance.

EBIT (1-TAX)/Capital Employed

ROCE DUPONT

EBIT (1-TAX)/SALES x Sales/ Capital Employed = EBIT (1-Tax)/Capital Employed

Sources of fund = Equity and debt

Application of fund = fixed assets and working capital

Type of Moats

EBIT/SALES

Demand Side

• Pricing power
• Brand
• Network effects
• Learning Curve
• Technical Know -how
• Niche industries
• Switching cost
Sales/ Capital Employed

Supply side

• Critical Application
• Distribution
• Lowest Cost Producer
• Principal Agent

Return on Incremental Invested Capital

ROIC, its usually only tells us the rate of return the company is generating on capital that has already been invested
(sometimes many years ago).

A company that produces high returns on capital is a good business, but what we want to know is how much money
the company can generate going forward on future capital investments. The First steps in determining this is to look
at the rate of return the company has generated on incremental investment recently.

Return on Incremental Invested Capital is a financial metric that helps us evaluate the profitability of new
investments made by a company. It measures how effectively a company is using its additional capital to generate
more profit.

In simple terms, it tells us how much profit a company is earning for each dollar of new capital it puts into a project
or expansion. A higher Return on Incremental Invested Capital indicates that the company is making efficient and
profitable use of its investment in new opportunities. This is important for investors and analysts to assess whether a
company's growth initiatives are adding value to the business.

(Current year Net profit – Previous year net profit)/ (Current year Invested Capital – Previous year Invested Capital)

Nature of the Industry: Interacting with financial Ratios

Retail Industry

• Higher Inventory Turnover

• Lower Receivable days
• Low Margin

Specialty Chemicals

• High Margin
• NFAT lesser than 2x
• High Operating Leverage

Commodity Businesses

• Fluctuating Margins
• Fluctuating Inventory
• Turns Debtor Days Also Fluctuate with the cycle

FMCG Business

• Mid-teens to early 20s margins

• High ROCE
• Distribution reach is the key variable to look out for.

Internet/ Platform Business

• Very high margins if profitable. Very High ROCE

• Reinvestment Rates to be
• Low, as Network keeps Growing.
 • Negligible Receivable Days
• No Inventory

CDMO/CRAMS

• High margins if doing innovator synthesis

• High working capital, export – oriented
• Low net fixed assets turns in pharma (1-1.5x), high in agro (2-3x)
• High ROCE (20%+)
• High Capex requirements

Red Flag Analysis

• High and Uptrending Receivables

This means that the amount of money the company is owed by its customers (accounts receivable) is increasing
significantly.
Red Flag: A rapid increase in receivables can indicate that customers are taking longer to pay, which may suggest
financial difficulties or problems with sales.

• Incentives for the Promoters reside in the topline growth

This suggests that the company's management or promoters are primarily focused on increasing revenue
(topline) rather than profitability.
Red Flag: Overemphasis on revenue growth without considering profitability can be risky, as it may lead to
unsustainable business practices or financial instability.

• A whole lot of related party transactions.

Related party transactions are deals between the company and entities or individuals with a close relationship to
the company, such as its owners, executives, or affiliates.
Red Flag: A high volume of related party transactions can raise concerns about transparency and potential
conflicts of interest, as they may not always be conducted at arm's length and could harm the interests of other
shareholders.

• Goodwill Impairment
Goodwill is an intangible asset on a company's balance sheet. Goodwill impairment means that the value of this
asset has decreased. It can be a red flag because it might indicate that the company overpaid for an acquisition
or that the acquired assets are not performing as expected.

• Employee Compensation
This refers to how much employees are paid, including salaries, bonuses, and benefits. High or unusual employee
compensation can be a concern if it's disproportionate to the company's performance. It might suggest that
management is taking too much of the company's profits or that there's a lack of alignment between employee
rewards and company success.

Reminder

• Always has a close eye on the number of days in business gets cash.
• For EPC(Engineering, Procurement, construction) and infrastructure company – have a close watch on retention
money
• Always analyse EBITDA or PAT with CFO