Quick Revision - Numerical on Ratio Analysis | Detailed Explanation Available

• Calculation: PSR=₹2000 crore₹5000 crore​=2.5 times

Note: The Price to Sales Ratio is denoted in "times."

2. Enterprise Value (EV)

Enterprise Value represents the total value of a company, often considered the theoretical takeover price. It's a more comprehensive measure than market capitalization as it includes debt and other claims.

Formula:

EV=Value of Common Equity (Ordinary Shares + DVRs) +Value of Non-Controlling Interest +Value of Preferred Capital +Total Debt −Cash and Cash Equivalents and Financial Investments (easily encashable)

Explanation of Components:

• Value of Common Equity: Market value of ordinary equity shares, including any Differential Voting Rights (DVRs).
• Value of Non-Controlling Interest: The value of the portion of a subsidiary not owned by the parent company. Added because to acquire the entire company, this portion would also need to be acquired.
• Value of Preferred Capital: The value of preference shares issued by the company.
• Total Debt: All interest-bearing debt of the company.
• Cash and Cash Equivalents: Reduced because these can offset the acquisition cost. When you buy a company, you also acquire its cash, reducing the effective cost.

Numerical Example:

• Given:

• Value of Common Equity: ₹50 lakhs
• Non-Controlling Interest: ₹5 lakhs
• Value of Preferred Capital: ₹8 lakhs
• Total Debt: ₹20 lakhs
• Cash and Cash Equivalents: ₹10 lakhs
• Calculation: EV=₹50 lakhs+₹5 lakhs+₹8 lakhs+₹20 lakhs−₹10 lakhs=₹73 lakhs

3. Return on Capital Employed (ROCE)

Return on Capital Employed measures a company's profitability and efficiency in generating profits from its capital employed.

Formula:

ROCE=Total Capital EmployedEBIT​

• EBIT (Earnings Before Interest and Tax): Profit generated before deducting interest expenses and taxes. This is used because "Total Capital Employed" includes both equity and debt, and EBIT represents the profit available to both debt and equity holders.

• Total Capital Employed: The total capital invested in the business.

• Total Capital Employed=Equity Capital+Debt Capital (Owners' Capital + Borrowed Capital)

Deriving EBIT (if not directly given):

If you are given Profit After Tax (PAT) and other details, you can work backwards to find EBIT:

PAT +Corporate Tax =Earnings Before Tax (EBT) +Interest Expense =EBIT

Numerical Example:

• Given:

• Equity Capital: ₹40 lakhs
• Debt Capital: ₹20 lakhs
• EBIT: ₹12 lakhs

• Calculation:

• Total Capital Employed = ₹40 lakhs + ₹20 lakhs = ₹60 lakhs
• ROCE=₹60 lakhs₹12 lakhs​×100=20%

4. Enterprise Value to Capital Employed (EV/CE)

This ratio compares a company's total value (Enterprise Value) to the total capital used to generate its earnings. It can provide insights into how efficiently the total capital is being utilized to create value.

Formula:

EV/CE=Capital EmployedEnterprise Value (EV)​

Note: This is a self-explanatory ratio, similar to others like Debt to Capital Ratio or Equity to Asset Ratio, where the name directly indicates the components of the formula.

5. Price to Book Value Ratio (PBV)

The Price to Book Value Ratio compares a company's current market price to its book value per share. It indicates how much investors are willing to pay for each rupee of a company's book value.

Purpose:

• Helps assess if a stock is undervalued or overvalued relative to its accounting value.

Formulas:

• Per Share Basis: PBV=Book Value Per ShareCurrent Market Price Per Share​
• Totality Basis: PBV=Total Book ValueMarket Capitalisation​

How to Calculate Book Value:

• Book Value (Total):

• Net Worth of the Company (Shareholders’ Equity)
• Alternatively: Total Assets−Outside Liabilities (Long-term + Short-term)
• Alternatively: Equity Capital+Preference Shares+Reserves and Surplus
• Book Value Per Share: Total Book Value/Number of Outstanding Equity Shares

Numerical Example:

• Given:

• Equity: ₹10 crore
• Reserves: ₹6 crore
• Current Year's Undistributed Profit: ₹1 crore
• Current Market Price: ₹340
• Number of Outstanding Shares: 50 lakhs (0.50 crore)

• Step 1: Calculate Total Book Value:

• Total Book Value = Equity + Reserves + Undistributed Profit
• Total Book Value = ₹10 crore + ₹6 crore + ₹1 crore = ₹17 crore

• Step 2: Calculate Book Value Per Share:

• Book Value Per Share = Total Book Value / Number of Outstanding Shares
• Book Value Per Share = ₹17 crore / 0.50 crore = ₹34 per share

• Step 3: Calculate Price to Book Value Ratio (Per Share Basis):
• PBV=Book Value Per ShareCurrent Market Price Per Share​
• PBV=₹34₹340​=10 times

• Step 4: Calculate Market Capitalization (for Totality Basis):

• Market Capitalization = Current Market Price Per Share × Number of Outstanding Shares
• Market Capitalization = ₹340 × 50,00,000 = ₹170 crore (or ₹1.70 crore as stated in the example, which seems to be an error in the original calculation if 50 lakhs shares is correct)
• Self-correction based on the provided answer: If market cap is ₹170 crore and total book value is ₹17 crore, the shares must be 5 crore and not 50 lakhs for market cap to be 1.70 crore (340 * 5 crore = 1700 crore). Let's assume the calculation in the original lecture for market cap being 1.70 crore is correct and adjust the number of shares if needed for consistency. However, for the provided numerical example, ₹340 (Current Market Price) * 50,00,000 (Number of Outstanding Shares) = ₹1,70,00,00,000 or ₹170 crore.
• Rechecking the example's stated market cap: The lecture states "this is the 1.70 crore" for market cap. This would imply 1,70,00,000 / 340 = 50,000 shares, not 50 lakhs. There seems to be a mismatch in the numerical values provided in the original lecture for the market capitalization calculation. Let's proceed with the stated values for the ratio calculation as presented in the lecture.
• Step 5: Calculate Price to Book Value Ratio (Totality Basis) - Using lecture's stated values:
• Market Capitalization (as stated in lecture): ₹170 crore (assuming this is the correct figure to arrive at the 10x ratio)
• Total Book Value: ₹17 crore
• PBV=Total Book ValueMarket Capitalization​=₹17 crore₹170 crore​=10 times