Description
The PPT explaining the financial ratios of IPCA and CIPLA and through explains leverages
OPERATING AND FINANCIAL LEVERAGE
V/S
RATIOS
CURRENT RATIO ACID TEST RATIO DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO RECEIVABLE TO TURNOVER RATIO RECEIVABLE TURNOVER IN DAYS PAYABLE TUROVER RATIO PAYABLE TURNOVER IN DAYS INVENTORY TURNOVER RATIO INVENTORY TURNOVER IN DAYS OPERATING CYCLE CASH CYCLE TOTAL ASSET TURNOVER RATIO GROSS PROFIT MARGIN PRE-TAX MARGIN NET PROFIT MARGIN RETURN ON ASSETS RETURN ON EQUITY OPERATING LEVERAGE FINANCIAL LEVERAGE COMBINED LEVERAGE
IPCA
3.42 2.02 0.7 0.33 0.4 4.11 3.81 95.8 12.59 29 days 2.31 158 days 253.8 days 224.8 0.96 12% 9.50% 7.80% 7.41% 15.88% 1.24 7.43 9.21
CIPLA
3.15 2.15 0.22 0.14 0.18 26.36 2.73 133.5 6.78 54 days 3.16 115 days 248.83 days 195.03 0.72 11% 18.17% 15.67% 11.32% 17.86% 1.04 4.74 4.93
Secured & Unsecured Loans
IPCA
Secured loans Amount
Working Capital Loans 12.75% Secured Redeemable NonConvertible Debentures Loans from banks Total
100.25
50 181.37
unsecured loans Short term loans from banks Deposits from dealers sales Tax loan
118.5 1 0.53 0.09 119.1 3
331.62
Total
CIPLA
Secured loans Amounts drawn against Cash and Export Credit Accounts with Banks Amount 2.79 Unsecured loans Fixed deposit Short term loans from banks sales tax deferral 68.29 863.9 7 5.19 937.4 5
Total
2.79
Leverages : What is it?
• Leverage is the ratio of the net rate of return on shareholder’s equity and net rate of return on total capitalization.
RATIOS
DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS
LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO
IPCA
CIPLA
0.7 0.33
0.4 4.11
0.22 0.14
0.18 26.36
Explanation
• If you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash. • If you sell the property for more than you borrowed, the profit is entirely yours. The reverse is also true. If you sell at a loss, the amount you borrowed is still due and the entire loss is yours.
Types of Leverages
• There are three types of Leverages
– Financial Leverage – Operating Leverage – Composite leverage
Operating leverage
• Associated with employment of fixed cost assets. It is calculated to know income of the company on different levels of sales. • It is measure of effect on operating profit of the concern on change in sales. Solomon Ezra: Operating leverage is the tendency of the operating profits to vary disproportionately with sales”
How to calculate Operating Leverage
• OL = Contribution ------------------EBIT or OP
Contribution = sales – variable cost Operating profit = contribution – fixed cost
Degree of Operating Leverage
• DOL = % change in OP or EBIT -------------------------------% change in sales
Cipla Vs IPAC
IPCA OPERATING LEVERAGE:OL =
1150.92 154.98
= 7.43
CIPLA OPERATING LEVERAGE:-
OL =
4425.46 934.25
= 4.74
Conclusion
1. IPCA Labs Ltd. has high operating leverage as compared to CIPLA Ltd. 2. Operating income (OI or EBIT) will become very sensitive to changes in sales volume. Just a small percentage (%) chance in sales can yield (produce) a large percentage change in Operating Income. 3. Whereas, Cipla Ltd. with low operating leverage as compared to IPAC Labs Ltd. Thus, operating income will not be very sensitive to the change in sales volume.
FINANCIAL LEVERAGE
RATIOS
DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS
LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO
IPCA
CIPLA
0.7 0.33
0.4 4.11
0.22 0.14
0.18 26.36
• The use of fixed financing costs by the firm. • Financial leverage is the extent to which debt (liability) is used in the Capital Structure (financing) of the firm. • We can say that, financial leverage involves use of funds obtained at fixed cost in hope of increasing the return to shareholders • The more debt a firm has relative to equity the greater the financial leverage.
• Financial Leverage measures the sensitivity of a firm’s earning per share to a ? in operating income • Substantial use of debt will place a great burden on the firm at low levels of profitability (low EBIT, since interest must be paid). • However, it will also help to magnify (enlarge) increase in earning per share (EPS) as the EBIT or operating income increases.
Earnings before Interest and taxes (EBIT)
EPS Plan A (Leveraged)
EPS Plan B (Conservative)
$0 $12,000 $16,000 $36,000 $60,000
($0.75) $0.00 $0.25 $1.50 $3.00
($0.08) $0.17 $0.25 $0.67 $1.17
IMPLICATIONS
• Financial leverage can be very useful to a firm if properly used under the right conditions. • For firms in industries that have a degree of stability and/or show growth, the use of debt is recommended because of the positive aspects of financial leverage. • Maximization of EPS and market value of shares. ? As a firm increases the use of debt in its capital structure, creditors (lenders) will perceive a greater financial risk in lending money to the firm and therefore may charge a higher interest rate which may lower earning before tax (EBT). These lenders will perhaps place other restrictions on the firm. Stockholders may become concerned with the risk to EPS and sell the stock (which will force the market price down).
Degree of Financial Leverage
• Degree of financial leverage (DFL) may be defined as the percentage change in earnings (earnings per share) that occurs as a result of a percentage change in earnings before interest and taxes. Percent Change in Earnings Per Share Degree of Financial Leverage= Percent Change in Operating Income or Earnings Before Interest and Taxes Degree of Financial Leverage= Earnings Before Interest and Taxes ? Interest
IPCA
Degree of Financial Leverage=
154.98 124.65
= 1.24
CIPLA
Degree of Financial Leverage= 934..25 = 1.04 901 31
CONCLUSION
• From the above results we could conclude that the FL of IPCA is higher as compared to CIPLA; a diff of 0.2. • Cipla is not able to use its debts as appropriately as IPCA, as Cipla has a degree of financial ratio of 1.04 and IPCA 1.24. • The debts of Cipla has lead to increase in interest costs of the company by 2.61 crores in comparison to IPCA and thus has lead to decreasing the value of EBIT, resulting in lower value of degree of financial leverage of Cipla as compared to IPCA. • Both the companies don’t have a very high financial leverage, thus don’t have much risk of higher fluctuations in the earnings per share(EPS).
COMBINED LEVERAGE
• When financial leverage is combined with operating leverage the effect of a change in output (sales) is magnified in the change in earning per share (EPS). • Operating leverage gives us the change in EBIT with a change in sales and financial leverage gives us the change in EPS with a change in EBIT. • We can then see the change in EPS for a change in sales (volume of output).
Combining of concepts
• Operating Leverage is:
Change in sales leads to a change in EBIT
• Financial Leverage is:
Change in EBIT leads to a change in EPS
• Therefore, Combined Leverage is: Change in sales leads to a change in EPS.
• In this way, we can better depict the relative influence of the two types of leverage for the firm. • We can determine and examine the effect of adding financial leverage on top of operating leverage. • Degree of Combined Leverage = Degree of Operating Leverage x Degree of Financial Leverage
IPCA
Degree of Combined Leverage= 7.43 × 1.24 = 9.21
CIPLA
Degree of Combined Leverage=4.74 × 1.04= 4.93
CONCLUSION
• From the above results obtained we can say that, IPCA has a comparably high degree of combined leverage as compared to CIPLA, a difference of around 4.28. • The combined leverage is high of IPCA due to higher operating leverage of the company as compared to CIPLA. • The higher the combined leverage of the company the worse it is. • Thus IPCA is at a much worse situation as compared to CIPLA in case of the combined leverage.
Indifference Point
• The EBIT levels at which the EPS is the same for two alternative financial plans. • It may be defined as the level of EBIT beyond which the benefits of financial leverage begin to operate w.r.t. EPS. • If EBIT > indifference point • If EBIT < indifference point
doc_277382594.pptx
The PPT explaining the financial ratios of IPCA and CIPLA and through explains leverages
OPERATING AND FINANCIAL LEVERAGE
V/S
RATIOS
CURRENT RATIO ACID TEST RATIO DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO RECEIVABLE TO TURNOVER RATIO RECEIVABLE TURNOVER IN DAYS PAYABLE TUROVER RATIO PAYABLE TURNOVER IN DAYS INVENTORY TURNOVER RATIO INVENTORY TURNOVER IN DAYS OPERATING CYCLE CASH CYCLE TOTAL ASSET TURNOVER RATIO GROSS PROFIT MARGIN PRE-TAX MARGIN NET PROFIT MARGIN RETURN ON ASSETS RETURN ON EQUITY OPERATING LEVERAGE FINANCIAL LEVERAGE COMBINED LEVERAGE
IPCA
3.42 2.02 0.7 0.33 0.4 4.11 3.81 95.8 12.59 29 days 2.31 158 days 253.8 days 224.8 0.96 12% 9.50% 7.80% 7.41% 15.88% 1.24 7.43 9.21
CIPLA
3.15 2.15 0.22 0.14 0.18 26.36 2.73 133.5 6.78 54 days 3.16 115 days 248.83 days 195.03 0.72 11% 18.17% 15.67% 11.32% 17.86% 1.04 4.74 4.93
Secured & Unsecured Loans
IPCA
Secured loans Amount
Working Capital Loans 12.75% Secured Redeemable NonConvertible Debentures Loans from banks Total
100.25
50 181.37
unsecured loans Short term loans from banks Deposits from dealers sales Tax loan
118.5 1 0.53 0.09 119.1 3
331.62
Total
CIPLA
Secured loans Amounts drawn against Cash and Export Credit Accounts with Banks Amount 2.79 Unsecured loans Fixed deposit Short term loans from banks sales tax deferral 68.29 863.9 7 5.19 937.4 5
Total
2.79
Leverages : What is it?
• Leverage is the ratio of the net rate of return on shareholder’s equity and net rate of return on total capitalization.
RATIOS
DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS
LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO
IPCA
CIPLA
0.7 0.33
0.4 4.11
0.22 0.14
0.18 26.36
Explanation
• If you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash. • If you sell the property for more than you borrowed, the profit is entirely yours. The reverse is also true. If you sell at a loss, the amount you borrowed is still due and the entire loss is yours.
Types of Leverages
• There are three types of Leverages
– Financial Leverage – Operating Leverage – Composite leverage
Operating leverage
• Associated with employment of fixed cost assets. It is calculated to know income of the company on different levels of sales. • It is measure of effect on operating profit of the concern on change in sales. Solomon Ezra: Operating leverage is the tendency of the operating profits to vary disproportionately with sales”
How to calculate Operating Leverage
• OL = Contribution ------------------EBIT or OP
Contribution = sales – variable cost Operating profit = contribution – fixed cost
Degree of Operating Leverage
• DOL = % change in OP or EBIT -------------------------------% change in sales
Cipla Vs IPAC
IPCA OPERATING LEVERAGE:OL =
1150.92 154.98
= 7.43
CIPLA OPERATING LEVERAGE:-
OL =
4425.46 934.25
= 4.74
Conclusion
1. IPCA Labs Ltd. has high operating leverage as compared to CIPLA Ltd. 2. Operating income (OI or EBIT) will become very sensitive to changes in sales volume. Just a small percentage (%) chance in sales can yield (produce) a large percentage change in Operating Income. 3. Whereas, Cipla Ltd. with low operating leverage as compared to IPAC Labs Ltd. Thus, operating income will not be very sensitive to the change in sales volume.
FINANCIAL LEVERAGE
RATIOS
DEBT TO EQUITY RATIO DEBT TO TOTAL ASSETS
LONG TERM DEBT TO TOTAL CAPITALIZATION INTEREST COVERAGE RATIO
IPCA
CIPLA
0.7 0.33
0.4 4.11
0.22 0.14
0.18 26.36
• The use of fixed financing costs by the firm. • Financial leverage is the extent to which debt (liability) is used in the Capital Structure (financing) of the firm. • We can say that, financial leverage involves use of funds obtained at fixed cost in hope of increasing the return to shareholders • The more debt a firm has relative to equity the greater the financial leverage.
• Financial Leverage measures the sensitivity of a firm’s earning per share to a ? in operating income • Substantial use of debt will place a great burden on the firm at low levels of profitability (low EBIT, since interest must be paid). • However, it will also help to magnify (enlarge) increase in earning per share (EPS) as the EBIT or operating income increases.
Earnings before Interest and taxes (EBIT)
EPS Plan A (Leveraged)
EPS Plan B (Conservative)
$0 $12,000 $16,000 $36,000 $60,000
($0.75) $0.00 $0.25 $1.50 $3.00
($0.08) $0.17 $0.25 $0.67 $1.17
IMPLICATIONS
• Financial leverage can be very useful to a firm if properly used under the right conditions. • For firms in industries that have a degree of stability and/or show growth, the use of debt is recommended because of the positive aspects of financial leverage. • Maximization of EPS and market value of shares. ? As a firm increases the use of debt in its capital structure, creditors (lenders) will perceive a greater financial risk in lending money to the firm and therefore may charge a higher interest rate which may lower earning before tax (EBT). These lenders will perhaps place other restrictions on the firm. Stockholders may become concerned with the risk to EPS and sell the stock (which will force the market price down).
Degree of Financial Leverage
• Degree of financial leverage (DFL) may be defined as the percentage change in earnings (earnings per share) that occurs as a result of a percentage change in earnings before interest and taxes. Percent Change in Earnings Per Share Degree of Financial Leverage= Percent Change in Operating Income or Earnings Before Interest and Taxes Degree of Financial Leverage= Earnings Before Interest and Taxes ? Interest
IPCA
Degree of Financial Leverage=
154.98 124.65
= 1.24
CIPLA
Degree of Financial Leverage= 934..25 = 1.04 901 31
CONCLUSION
• From the above results we could conclude that the FL of IPCA is higher as compared to CIPLA; a diff of 0.2. • Cipla is not able to use its debts as appropriately as IPCA, as Cipla has a degree of financial ratio of 1.04 and IPCA 1.24. • The debts of Cipla has lead to increase in interest costs of the company by 2.61 crores in comparison to IPCA and thus has lead to decreasing the value of EBIT, resulting in lower value of degree of financial leverage of Cipla as compared to IPCA. • Both the companies don’t have a very high financial leverage, thus don’t have much risk of higher fluctuations in the earnings per share(EPS).
COMBINED LEVERAGE
• When financial leverage is combined with operating leverage the effect of a change in output (sales) is magnified in the change in earning per share (EPS). • Operating leverage gives us the change in EBIT with a change in sales and financial leverage gives us the change in EPS with a change in EBIT. • We can then see the change in EPS for a change in sales (volume of output).
Combining of concepts
• Operating Leverage is:
Change in sales leads to a change in EBIT
• Financial Leverage is:
Change in EBIT leads to a change in EPS
• Therefore, Combined Leverage is: Change in sales leads to a change in EPS.
• In this way, we can better depict the relative influence of the two types of leverage for the firm. • We can determine and examine the effect of adding financial leverage on top of operating leverage. • Degree of Combined Leverage = Degree of Operating Leverage x Degree of Financial Leverage
IPCA
Degree of Combined Leverage= 7.43 × 1.24 = 9.21
CIPLA
Degree of Combined Leverage=4.74 × 1.04= 4.93
CONCLUSION
• From the above results obtained we can say that, IPCA has a comparably high degree of combined leverage as compared to CIPLA, a difference of around 4.28. • The combined leverage is high of IPCA due to higher operating leverage of the company as compared to CIPLA. • The higher the combined leverage of the company the worse it is. • Thus IPCA is at a much worse situation as compared to CIPLA in case of the combined leverage.
Indifference Point
• The EBIT levels at which the EPS is the same for two alternative financial plans. • It may be defined as the level of EBIT beyond which the benefits of financial leverage begin to operate w.r.t. EPS. • If EBIT > indifference point • If EBIT < indifference point
doc_277382594.pptx