Friday, September 16, 2011

Income statement and related ratios for financial performance

The income statement of a company helps in evaluating the financial performance, by providing data pertaining to the revenues, costs and other expenses, involved in day to day business operations.
Whether for comparitive study of several firms or performing the trend analysis, the ratios are an important tool. Whether a company is into profit or loss, can be judged from the P/L a/c or the income statement.
Profit in layman's terms is Revenue- expenditure, It could be PAT or EBIT.
Here's a look at the key ratios that is calculated from the Income statement.

1) Profit Margin/ Net profit margin = Net Profit/ Net sales OR Net Income/ Net sales
Net income is a company's net earnings after deducting the Cost of goods, interest expenses and other expenses. The ratio measures how much a company actually earns from a unit of sales. A higher profit margin is a measure of higher profitability. However, when doing trend analysis, it may happen that Net income and net sales has increased in a given year, but the profit margin is low. This may appear when the costs have increased greater than sales. So by just comparing Net income and sales will be misleading, comparing the ratios and reasoning the underlying cause is important, for which ratio is used.

2) Operating Margin/ Gross profit margin = operating profit/ sales OR EBIT/ sales
Operating profit measures the earnings from the core operating activities of the firm after the variable costs are deducted. It measures what proprtion of earnings is left after paying for variable costs such as raw materials, wages etc. A high operating cost would imply that the company has sufficient margin to pay for fixed costs.

3) Interest coverage ratio = EBIT/ Interest expenses
It measures the ability of the firm to pay its debt obligations i.e the amount of earnings available per unit of Interest liability. The greater the ratio, the better is the ability.

4) P/E ratio or price to earnings ratio = MV of share/ EPS
The ratio measures the price that the investors are willing to pay for unit earning of the firm. The greater the ratio, implies that investors are willing to pay more for every single earning of the company.

5) Return on assets = PAT + interests / Average total assets
The ROA measures the ability of the firm to generate sales from the assets employed.

Saturday, August 27, 2011

Amazing advertisement --1980s

Just happened to stumble upon this advertisement for Pepsi feat. Michael Jackson.
I just wonder the entire line of magic it would have created for the Brand Pepsi ,during those days, when the pop generation was popping up. The appreciation in brand image, the cost , the increase in sales and revenues..
Somehow, today Coca Cola has emerged as the market leader ahead of Pepsi and other soft drinks brands.

Tuesday, August 16, 2011

Blackboard notes: Cost of Debt vs Cost of Equity

A business entity raises capital primarily by two means--putting its own money or by taking loans from the bank or from the creditors. The capital raised through loans is categorized under the debt fund of the capital structure. While it may not be advisable to have all the capital requirements from the debt, for obvious reasons such as repayment of loans and interests within a short period of time , and the risk of losing the credibility in the market.
Owners equity is another source of funds for a company, which includes the money contributed by the founders, as well as the share capital ,which is the capital raised from the public by giving them ownership shares in the company itself.
Thus there are often two sources of Funds ,in the balance sheet : Share capital and debt,loans/ debentures.These are categorized under the liabilities.

One question that often arises is : which is more expensive? Equity or Debt .
Suppose a company wants to raise $ 100 dollars, should it issue 10 shares of $ 10 face value or should it take a loan from the bank at 10% rate of interest ?This is a hypothetical situation. The cost of debt here is the interest rate that the bank charges on $100 .
The cost of Equity on the other hand is the returns + risk premium . CAPM model is used to calculate the returns from a commpn stock.It links the Risk free rate, the risk premium and the beta or the risk factor of investing in a particular stock.
The formula for the cost of equity can be written as:

Cost of Equity = ((Dividend for Next Year + Stock Price Appreciation) / Current Share Price)) + Dividend Growth Rate
There are advantages/disadvantages of having debt financing/ Equity financing.
While equity financing dilutes the ownership rights in a company ,but on the other hand, there is no obligation to repay it in short term. Equity financing is however more expensive qualitatively, because unlike debt, Equity is not tax deductible and while debt is returned along with a fixed rate of interest charges, Equity is returned in proportion to the profits. The more the profit, the more has to be the dividends paid.
Equity holders also claim ownership rights in the company.

The ideal capital structure is evaluated using the WACC model or the weighted average cost of capital.
The model considers the D/E ratio, Interest coverage ratio and EBITDA to compute the ideal capital structure for any company. The default risk spread is used to rate the company on the basis of above parameters to assess the ability of the firm to repay debts. This way a company can decide the ratio of debt and equity in its capital structure.

Different industries have different D/E requirements and standards. A newly launched company might consider having more of equity financing,since it is unsure of its performance.


Friday, July 15, 2011

Indian Advertisement --Then and Now

I wonder where has all the creativity gone from the advertising industry. Or is it just for the heck of creating an ad,that the ad agencies are taking inspiration from the bollywood songs of the 1970's and 80s era, so that there is not much of resources used( which in this case is the intellectual and creative domain of the mind) and an ad is created in minimal cost.
I dont usually like to be watching commercials in between the movies or TV serials, but it sometimes happen that i am too busy to switch channels between the commercial breaks, which otherwise has given me a chance to analyse and critically acclaim the ad works being made these days.
I really miss those days of intelligent, logical and innovative ads, which have left the imprints in the minds of people belonging to my generation.
There was a time,during the late 80s and 90s, when the advertisements were able to connect the brand with the audience emotionally. The typical household shown in the advertisements portrayed the middle class sentiments of a price conscious and value for money individuals. Like the famous Surf Ad, featuring a lady who lists out the benefits of Surf, emphasizing on the price which doesn't burn a hole in the monthly budget, and is thus an intelligent bargain for a middle class family.

The Hamara Bajaj campaign, connected to the dream of every middle class Indian, when a scooter was considered to be the elite possession by any middle class family. The Rasna ad tagline,which still lingers on the minds of people my age, who grew up watching it.The Liril ad, depicting the chirpiness of a young girl and connecting it to freshness. Every ad was unique in itself and delivered what an advertisement is supposed to deliver-- CLARITY,  IDEA, CREATIVITY, BRAND VALUE ,the success of which can be measured by high brand recall measurement.

And what do we get to see today is a complete mosaic of mismatched ideas, which not just fail to deliver the brand proposition but also have low brand recall value.Even brands like Pepsi, has failed to get an impressive TV advertisement or a catchy tagline.Most of the ads these days are getting inspiration from the bollywood songs remixed versions.It all started with Coca Cola ad featuring Imran Khan, which was like a breath of cool air, but many similar ads followed the same route. The more recent being the TVS ad featuring Virat Kohli, and almost negligible script,just a remixed version of an old song in the playback.There are many more in the league such as Safolla, TVS scooty pep,etc. And some ads dont even have the logical coherence between what is shown and what the brand actually entails, such as an 5 second,ad by some cement company in which a damsel walks out of sea in a swimwear.
The advertisement industry seems to be run by over commercialization and consumerism, without any due consideration given to the creativity aspect.And i wonder, are we really short of creativity in the ad world,that majority of ads are created on the same platform

Monday, May 30, 2011

Job titles that i hate the most

I just happened to receive an email alert from one of the national job sites here in India. My keyword for job search is Analyst / Research, and guess what, despite of several updations, i keep receiving irrelevant job postings on my email.This one which i received today was even more funny -- Business development analyst. What the heck? I dont need a "business development analyst" job, and by the way who calls this profile as that of an analyst? What sort of analysis does it require? Number crunching? graphs? statsistics? or is it just Number dialing on the telephone to potential customers?

This reminds me of one more thing-- how the companies, supposedly, small scale and non paying non-reputed companies try to lure the job seekers with cheesy flashy job titles-- Relationship manager / Business development manager / Customer services analyst/ Phone banking officer/ Sales manager / Area sales Manager and many more. When the truth is that these profiles do not have anything to do with analysis or managing. And the only person who reports to you is yourself. There are no sub ordinates, which otherwise the designation of manager implies.At the end of the day, you find yourself reporting to the MD about how many leads you have generated, how much sales and profit you bought to the company, and all that nonsense.

All these jobs just involve calling the clients,selling and bringing business. Thats it.

What irks me even more is that, the job sites keep sending such irrelevant jobs to me. I mean " Analyst" and not a marketing job, even if they think that it involves a lot of analysis, i am sorry, i am under qualified in that case. So please...stop sending me such jobs..its better to see no jobs, than seeing such jobs which i don't consider even a quarter of an actual analyst profile.

Tuesday, April 12, 2011

Childhood Memories Flashback

 Not very often do i remember my child hood days .But ,when i do ,i reach to another world ,which belonged to me,and yes ,it will always belong to me .
Although ,the memories are getting fainter with passing years ,but they begin to recur when i see a young girl playing ,or walking by her parents side .I relate myself to every little girl who looks innocent and shy ,because that she is the reflection of my childhood.

I have always been a quiet girl ,who lived in her own world ,and was happy in her own musings .Those summer days ,summer holidays ,which were invested in cutting and pasting work . i had my notebook full of pictures of animals, flowers ,paper cuttings of foods such as cakes .Then turning the pages of the notebook ,to get the smell of that fevicol ,is something i don't miss much today,but definitely feels like ages have gone by  .
Stealing sketch pens from my sister's shelf and writing headers with it ,after all ,we had just one sketch pen box to be shared .And once the session got over,i would re check my own notebook with the red pen ,pretending to be a school teacher. 
Using the same course books ,that were passed on from generations ,from first sister ,to the second and finally to me.
School used to get over by 12 pm and back home ,i would sit in front of the tv ,to watch the afternoon transmission for kids .And ,every Sunday ,there was the cartoon series Wizard of Oz .I don't remember the characters now ...there was this Dorothy ,scare crow , a lion  ..forgotten the other names though . 
Around 4 o clock ,i would wander around the backside gardens to pluck flowers or play with a few selected friends..but did not have much friends of my age .I dont know ,why ,i have always enjoyed more in my own company ,than with others .Probably ,that gave me the freedom to explore the nature around .
Going to the vegetable market with dad / mum ,and amused by the variety of vegetables that were there ...little did i know, that once i grow up,there would be nothing special in those veggies to look at.Waking up late in the morning at 11 am ,when it was almost time for lunch .
Playing with dolls ,adorning them with jewelry's and having the first teddy bear 'gobu' made by sister ,from an old piece of winter cap .Those free flowing frilly frocks ,which always got shorter by the start of the next summers ,and i wondered ...that why the clothes are getting shorter .
That dependency on parents was good enough ,because ,it never gave the thought  ,that one day we will have to earn for ourselves ,and we would not be required to seek parents permission to buy a new thing .Today , i wish for same kind of bondage .i wish ,i were not so independent ,and still had to give explanation to my parents ,about where i am spending money ,what i am buying,where i am going...because that way..i would not have to bear the brunt of the wrong decisions that i took in my life ..

Studies were always good ,since i always scored the highest ,and never realized ,that a day would come,when i would be complaining why my hard work doesn't pay .Worry and stress were non existent in my dictionary .That mental maths book ,that i always tried to keep at the bottommost of the stack of books .
The 5th class mathematics book ,which was based on the space theme ,and word problems had aliens and UFO characters from a different planet .One name i still remember --Mandy moon bought pens at a Cost price of .....Dad teaching the maths sums ,and scolding,when i didnt get them right ...miss those days..

Today ,i feel that the young girl is lost somewhere. That girl is not me ,but someone else who is lost in those Childhood days ..and i m searching for her ...the image disappearing in the smoke of time...with silent footprints ,it keeps walking away .And i search for her if she is my baby ...when the reality is ..that she is me ,in the time that went by ...

Sunday, April 10, 2011

Random Clicks -- Delhi ,On a drive

Boddhi Stupa

Old Fort

Old Fort Walls

Old fort Entrance

Monkeys Near central Delhi 

Rasthrapati Bhavan
Add caption
Rashtrapati Bhavan
Akshardham Temple

Thursday, April 7, 2011

Cricket World Cup 2011 finals- management , strategy and Human Factor

2nd April 2011 was an eventful day,when the entire nation ran into high fever.The students took a day off from their studies,the office goers with no saturdays off ,drove to their homes quickly,the others kept their eyes glued to the large projector screens , the ladies,for once ,sacrificed their daily dose of melodramatic soaps ,and the young adults gathered in their fav bars and clubs ,with face painted ,waving the tricolor ,blowing trumpets , to enjoy the World cup finals ,which has managed to create a history again ,after a drought period of 28 years.

It was a day ,when the entire nation united,irrespective of caste,language or occupation .Even the newbies in cricket ,exclaimed in joy with every Indian Shot on field ,and the hearts that almost skipped a beat ,with every catch that was missed by the Sri lankan Fielders .

The match which started with the Sri Lanka team opting to bat first ,but progressed slowly ,with two wickets already down before the first hundredth run .Everything looked in the favour of Indian team when Sri lanka lost 6 wickets with just 187 runs in the kitty ,until the last 10 overs which fetched more than 60 runs and and gave India a formidable target of 275 runs. 
The nerve wrecking excitement started with the Indian Innings and when the most powerful wickets of Sehwag and Sachin fell,the whole nation sank into despair and hopelessness.
The real test of courage,determination and self belief started thereon ,when the target of 275 runs,which looked like a dream impossible ,was chased ball by ball.Slow and steady wins the race ,is an idiom that we learnt in primary school ,but was witnessed in the finals ,when Gautam Gambhir and Virat Kohli ,batted with poise and patience ,despite of mounting pressure.
With the Indian Captain taking the charge ,the game which initially looked out of our hands ,fell right into the lap ,and there by making the Indian Win almost close to reality ,and the rest is all history .

Although ,World Cup 2011 ,has been one of the most prestigious tournament ,the bigger picture is that ,Determination and self belief always lead to success.From management point of view ,it was a game of well planned strategy like (keeping it low ,when the markets are sluggish equivalent to Gautam and Virat not taking chance from Malinga's balling ) ,it was a game of superior leadership under Dhoni ,it showed that risks are to be taken in every sphere ,if you have the courage to strike big (Dhoni took the risk to take Sreesnath in the team ,and come in fourth batting position ),it was a game of complete teamwork (where each player performed for some personal motive but at the same time played for the country).Every player had a dream which translated into reality .It also shows that never underestimate your competitor (Sangakarra ,never realized that small runs from Gambhir ,could turn the game other way round ).
And what a moment it was when the final sixer ,took India to fame and glory,the World cup that filled the players with tears .That happiness that showed on every Indian's Face ,which made them forget all enmities and  dance and rejoice together.It was a moment of emotional high ,as the Indians took on to the road to celebrate .
What made the world cup 2011 so special ? The fact that it created a series of world records. India became the first team to win the world cup in its home land .India became third team to win world cup for the second time,and the win is almost a generational leap for the all .It also fulfilled Sachin's dream of winning the world cup (2011 is supposedly the last world cup he played for) .

This is India ..Which can do great wonders,given the Challenge .
Here's Salute to all the Indians ,because we can do it as long as we are united and determined . 

Saturday, March 26, 2011

Sparrow the Wings

The tiny little sparrow,perched upon the tree,
She sat ,her eyes waitng for the beloved,
Who has set her free .
He,the one who gave her wings to fly ,
Sparrow the wings ,is the name
She wants to be known by.

Sunday, March 20, 2011

Corporate Restructuring strategies

The recent global business environment has seen a monumental change ,especially in terms of Mergers and Acquisitions.Every other day ,there is news about another company buying stakes or acquiring a big brand from the parent company.Such moves are not sudden,but are often followed by an indepth analysis and involve a strategic masterplan ,and an intricate string of calculations by the investment bankers for valuation of the firm / business .
Such actions are categorized under Corporate Restructuring strategies ,as they involve decision making on the part of management ,regarding which business to divest and where to invest,without jeopardizing the shareholders' interest .
Some of the very basic yet complex business restructuring strategies are :

Mergers : When two companies agree to combine and work as a single entity with a single identity.Eg Warner and AOL .To find the value of the merged firm ,swap ratio is calculated,which is the ratio of the stock price that the shareholders of the individual entities receive after the firms are merged.

Acquisitions : When one firm takes over the business / control over the management of the other firm .This can be either forceful acquisitions ,without the consent of the acquired company,or it could be when one company wants to sell its business arm to another ,for a price.Eg TATA acquisition of Corus .
The valuation of the target company is based on P/E ratio and DCF techniques.

Reverse Merger : When an unlisted / small company acquires a listed company which may be under poor profit situation or limited assets.This way ,the private company gets an opportunity to raise funds publicly.

A common trend seen these days is that instead of buying the entire company ,the acquirer buys stake / management control ,only in a brand or business arm .The latest to be seen is Henkel India acquired by Jyothy laboratories , acquisition of Marico's Sweekar brand by US based Cargill .
The deal may be an all cash deal or all stocks deal ,depending upon the strength and decision of the management .
Sometimes ,an ailing company or a debt ridden company may also look out for a corporate bailout ,without getting acquired or merged with another company .
The underlying objective for acquisition is Profitability ,Market expansion ,establishing a strong footlold in a given product category ,geographical expansion and economies of scale.
The target company may also benefit out of it ,as it may decide to divest its loss making business or product and focus on core competency or stronger brand ,by investing the price received from the acquirer .
The key to establishing a successful association is Synergy,that is the shortcoming of one company covered by the other in such a way that 1+1 is 3.