Problems on Fundamental Analysis Problem No: 1 The following are the Income Statement and the Balance Sheet (artial! of "#s$ AB% &imited for the accounting year '): IN%*"+ STAT+"+NT *erating rofit (+BIT! ,s$)-./- &ess: Interest charges 1-0/- Profit before ta (PBT! /-/- &ess: Pro2isions for ta (.3! 1-4)- Net Profit (PAT! 5-/'- &ess: Preference 6i2idend '- +arnings for +7uity Shareholders 5-5'- &ess: 6i2idend aid 1-4/- ,etained +arnings '-5/- BA&AN%+ S8++T *F AB% &I"IT+6 93 Preference Share %aital (of ,s$1 each! +7uity Share %aital (.)-' shares of ,s$1 each! Total Share %aital Add: Share Premium A#c Profit &oss A#c Shareholders Fund Add: &ong;term &oans %aital +mloyed
,s$5-- .-)'- 0-)'- )-9/- ''-0- .4-)- '-5/- 94-95-
Additional Information: i ii
"ar
=ou are re7uired to analy>e the rofitability from the oint of 2iew of a rosecti2e in2estor$
Solution P,*FITAB&IT= ,ATI*S 1
,eturn on In2estment (,*I! ? *erating rofit (+BIT! ? )-./-#94-95- ? $15 Total %aital emloyed
'
+arnings er share ? +AIT P6# No$ of e7uity shares ? 5-5'-#.)-. ? 11$90
.
Price earnings ratio ? "PS # +PS ? ) # 11$90 ? /$41 times
5
6i2idend er share ? Total 6i2idend # No$ of e7uity shares ? 1-4/- # .)-' ? 9$1.
9
6i2idend ayout ratio ? 6PS # +PS ? 9$1. # 11$90 ? $55 or 553
/
,etained earnings ratio ? 1 @ 6i2idend ayout ratio ? 1 @ $55 ? $9/ or 9/3
0
6i2idend yield ? 6PS # "PS ? 9$1. # ) ? $/51 or /$513
)
rowth in +BIT ? ,etention rate ,*I ? $9/ $15 ? $0)5 or 0$)53
Problem No: '
The financial details of the &ight %omany are gi2en in the following table$ Find out the secific reason for the rices to stagnate between 1440 and 44$ 6etails 6PS Payout rate +PS Boo< alue ,ate of return on e7uity +ffecti2e Ta rate ,ate of return on assets
Profit "argin on sales ross Profit "argin Total Assets Turno2er Financial &e2erage +ffecti2e interest rate "ar
1444 ,s$1$/' 9.$)3 ,s$.$1 ,s$14$1) 19$43 /03 1.$'3
144) ,s$1$9) /9$)3 ,s$'$5 ,s$10$/) 1.$/3 93 15$43
1440 ,s$1$5' .4$.3 ,s$.$/1 ,s$10$41 '$.3 /13 10$'3
144/ ,s$1$'/ .4$53 ,s$.$' ,s$19$/9 '$53 943 1)$13
0$03 90$93 1$0 1$94 /$93 ,s$91
)$.3 9/$13 1$04 1$95 /$)3 ,s$9
4$43 9.$43 1$0. 1$50 /$.3 ,s$9
1$.3 9'$/3 1$09 1$.4 /$.3 ,s$./
Solution ANA&=SIS In the gi2en table- the di2idend er share has increased o2er the years The di2idend ayout has increased The earnings er share fluctuates- it has declined from 1440 and showed slight imro2ement in the year 1444 In site of the di2idends aid- the share rices languished around ,s$9 ,+AS*NS The rate of return on assets has declined from 1)$13 in 144/ to 1.$'3 in 1444 N*T+ [The return on assets is the end result of the mixture of events that take place within the firm. The greater the return on assets, the higher the market value for the firm’s share, other things remaining constant. Every firm tries to maximize the return on the assets, because funds are employed in the form of assets . The return on assets depends on the turnover of assets into sales or intensity of utilization of assets in creating sales. urther, the return on assets indicates the productivity of funds.!
The margin on sales has declined o2er the years$ This may be due to the cometition in the mar
Problem No:. Following are data for Anand Products (,s$ In la
b
,s$ In &a
Find out the following ratios: i Asset turno2er ii +ffecti2e interest rate iii +ffecti2e ta rate i2 6ebt#e7uity ratio 2 6i2idend ay;out ratio Dhat growth rate of +BIT can be eectedE
Solution I
,ATI*S
1
Asset turno2er ratio ? Turno2er # assets ? // # / ? 1$1 TI"+S
'
+ffecti2e interest rate ? Interest # Total 6ebt (short term liab$ 6eb$ Bonds!
? G()3 on 1-'9! (13 on 9!H # G59 1-'9 9H ? 19 # '-' ? $0 or 03 .
+ffecti2e ta rate ? Ta aid # +BT ? ' # 9 ? $5 or 53
5
6ebt;+7uity ratio ? Total 6ebt # +7uity ? '-' # .-9 ? $/.
9
6i2idend ayout ratio ? 6PS # +PS ? $15 # $)/ ? $1/ or 1/3 P,**F 6PS ? 6i2idend aid # No$ of e7uity shares ? 9 # .9 ? $15 (i$e$- .-9#1!
+PS ? +AIT # No$ of e7uity shares ? . # .9 ? $)/ II
,*DT8 ,AT+ rowth in +BIT ? ,etention rate ,eturn on assets ? $)5 $11 ? $4'5 or 4$'53
P,**F ,etention rate ? 1 @ 6i2idend ay;out ratio ? 1 @ $1/ ? $)5 ,eturn on assets (,*A! ? +BIT # Total Assets ? /9 # /- ? $11 or 113
Problem No: 5 A nai2e in2estor wants to analy>e the caital structure of a comany$ 8e has the following information of AB% %omany &imited: Particulars &ong term debt (113! Preferred Stoc< (13! %ommon stoc< (,S$1! %aital surlus ,etained earnings 6i2idend aid
144 1'$'0 $1. $1 9$/0 ..$4. .$9
1449 4$5/ $1. $15 /$.9 /$.1 .$/)5
144) 11$14 $1' 1'$/ /$14 1'9$' 1$)
The resent rice of the share in "umbai Stoc< +change is ,s$59$ There is a rumor in the mare the gi2en data and ad2ise him$
Solution
The table abo2e gi2es how AB% %omany has raised its long;term funds rearation of common si>e statement will ro2ide a clear answer to the 7uestion of the in2estor (Figures in ercentage! Particulars
144
1449
144)
&ong term debt (113!
'.$94
1'$.)
0$'1
Preferred stoc< (13!
$'9
$10
$)
%ommon stoc< (ar at ,s$1!
$'
$1)
)$11
%aital Surlus
1$4
)$.'
.$44
,etained earnings
/9$'5
0)$49
)$/1
1$
1$
1$
Total a
The retained earnings ha2e increased from 9)$93 in 144 to )$/13 in 144)$ The bulging retained earnings ro2ide ground for the rumour for bonus share$ The rumour may come true- if the comany li
b
The actual figures gi2e a icture that the debt ortion has increased in 144) comared to 1449$ 6ebt has increased- but the amount of debt was modest- and the comany was able to double its caital structure in a short eriod of time$ There is no ecessi2e debt in the caital structure$
c
The P#+ ratio of the ratio can be comared: +PS ? ,etained earnings 6i2idend ? (1'9$' 1$)! ? 1.9$') ? ,s$10$.9 Number of e7uity shares (1'$/ # 1! 1$'/ Price;+arnings ratio ? "ar
