Finance & Investment Appraisal

Sanjib Kumar Ghosh

27th July, 2022
Table of Content

1. Financial Statements

2. Financial Performance Parameters

3. Break-Even Point

4. Investment Appraisal

5. Business Plan

6. Recent Issues
1 Financial Statements: Basics and Purpose

1
Financial statements provide a snapshot of a corporation's financial
health, giving insight into its performance, operations, and cash flow.
They are a regulatory requirement
Income Cash Flow
Statement Statement

2 Financial
Financial statements are essential since they provide information about a
Statements
company's revenue, expenses, profitability, and debt

Balance Equity
Sheet Statement
3
Financial statements can be forecasted based on financial and business
lever, which then can be used to guide the business in the upcoming
periods
4 Types of Financial Statements
1 Financial Statements: Income Statement

Income Statement

1. Income statement may vary based on

• Company type or
• Maturity Stage

2. 2 major components
• Revenue/Sales (Gross and/or Net)
• Cost (Direct, Operating and Non-Operating)

3. Profitability Measures
• EBITDA
• EBIT
• Profit after Tax (PAT) or Net Income

4. Purpose: Keeping track organization’s earnings, expenses to

facilitate efficient decision making and resource utilization.
1 Financial Statements: Balance Sheet

Asset= Equity + Liability 1. 3 major components

• Asset
• Liability
Balance Sheet • Equity/Capital

2. Asset: An asset is anything under company control that has

current or future economic value to a business. Examples
include patents, machinery, and investments

3. Liability: Meaning the organization owes something to

other parties. Part of asset that is financed through loans,
payables etc.

4. Equity: Asset minus liability equals Equity. It means part of

asset owned or financed by self

5. Purpose: Balance sheets are used on a regular basis to

gauge the general financial health of their organizations.
1 Financial Statements: Cash Flow Statement

Direct Cash Flow Statement

1. 2 types
• Direct
• Indirect

2. Operating Cash flow: Cash flow generated from

daily operations of business (inflow-sales, outflow-
expenses)

3. Investing Cash Flow: Investment made in capex

(equipment, machinery, license) and other income
generating entities (minority stake in other business)

4. Financing Cash Flow: Share offload, dividend

payment, loan drawdown, repayment, interest
payment etc.

5. Purpose: Tracks the cash balance of company to

ensure optimum use of this liquid resource.
1 Financial Statements: Equity Statement

Equity Statement

1. Equity, in the simplest terms, is the money

shareholders have invested in the business
including all accumulated earnings

2. The statement of owner’s equity reports the

changes in company equity, from an
opening balance to and end of period
balance. The changes include the earned
profits, dividends, inflow of equity,
withdrawal of equity, net loss, and so on

3. The equity statement indicates if a business

needs to invest more capital to cover
shortfalls, or if they can draw more profits.
1 Financial Statements: Provisions & Accruals

Provisions Accruals

1. Provisions in accounting are an amount set aside to 1. Accruals refer to the recognition of expenses and
cover a probable future expenses, or reduction in the revenue that have been incurred and not yet paid
value of an asset

2. Provision is made when it is known that an expense 2. Accrual is made when exact amount of expenses or
will arise but the exact amount is not known revenue is known at the time of recording

3. Provision result in the decline in profits as provision is 3. Accruals will not result in increase or decrease in
charged to the income statement earnings
 2 Financial Performance Parameters: EBITDA and EBIT

EBITDA Earnings Before Interest, Taxes, Depreciation, & Amortization

EBIT Earnings Before Interest & Taxes

EBIT & EBITDA are more precise measures of corporate performance than Net Income since they are able to show earnings
before the influence of accounting and financial deductions. Both of these parameters are used to analyze the performance of a
company's core operations without the costs of the capital structure and tax expenses impacting profit. EBITDA, however, can be
misleading because it does not reflect the cost of capital investments like property, plants, and equipment.

Example ->
2 Financial Performance Parameters: EBITDA and EBIT
 2 Financial Performance Parameters: Liquidity Ratios

Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off short-term obligations without raising
external capital.

A good current ratio is between 1.2 to 2, which means that the business
has 2 times more current assets than liabilities to covers its debts. A
current ratio below 1 means that it doesn't have enough liquid assets to
cover its short-term liabilities.

A good quick ratio is any number greater than 1.0. If a business has a
quick ratio of 1.0 or greater, that typically means it is healthy and can pay
its liabilities. The greater the number, the better off a business is.

A cash ratio equal to or greater than 1 indicates a company has enough

cash and cash equivalents to entirely pay off all short-term debts. A ratio
above 1 is generally favored, while a ratio under 0.5 is considered risky
as the entity has twice as much short-term debt compared to cash.
2 Financial Performance Parameters: Working Capital
 2 Financial Performance Parameters: Gearing Ratios

Gearing ratios are a group of financial metrics that compare shareholders' equity to company debt in various ways to assess the company's amount
of leverage and financial stability.

Standard Value Standard Value

Tota l De bt Equity
De bt to Equity Ra tio= 2 to 2.5 Equity Ra tio= ~0.5
Tota l Equity As s e ts

EBIT De bt
Inte re s t Cove ra ge Ra tio= 3 or a bove De bt Ra tio= ~0.5
Tota l Inte re s t As s e ts

A high gearing ratio typically indicates a high degree of leverage, although this does not always indicate a company is in poor financial
condition. Instead, a company with a high gearing ratio has a riskier financing structure than a company with a lower gearing ratio.
Regulated entities typically have higher gearing ratios as they can operate with higher levels of debt. In addition, companies
in monopolistic situations often operate with higher gearing ratios as their strategic marketing position puts them at a lower risk of default. Finally,
industries that use expensive fixed assets typically have higher gearing ratios, as these fixed assets are often financed with debt.
 2 Financial Performance Parameters: Earning Per Share (EPS)

Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding. EPS indicates how much money a
company makes for each share of its stock and is a widely used metric for estimating corporate value.

A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to
its share price. Like other financial metrics, earnings per share is most valuable when compared against competitor metrics, companies of the same
industry, or across a period of time.
3 Break-Even Point: Impacting Decisions

Components of Break-Even Point

Fixed Variable Gross

Revenue
Cost Cost Profit

The upfront cost needed Cost per unit for each Selling price per unit for Revenue per unit minus
to set up the business additional unit sold each additional unit sold cost per unit

 Break even point (BEP) is usually measured in units sold

 From selling a single unit gross profit is calculated by deducting the cost of the
Formula: Break-Even Point in Units = Fixed Costs / (Price
single unit from the revenue of that unit
of Product - Variable Costs Per Unit
 The fixed cost or upfront cost is then gradually recovered from the gross profit.
The bigger the gross profit per unit, the faster recovery of fixed cost as lesser Example: Suppose, Fixed cost for a business is= $20,000
units need to be sold Variable cost/unit= $1.50
 Once, break-even point is reached, the company can generate net profit from Sales Price of Product/unit= $2.00
each additional item sold Break-even point (Units)= $20,000/($2.00-$1.50)= 40,000
4 Investment Appraisal: Business Case

Business Case: An overall plan (financial, non financial) for a standalone investment project (opex/capex)

The financial appraisal of a project is similar to an income statement, but stand-alone

Entails: Revenue projection, direct and operating costs, capital investments to gauge the predicted cash flows

Positive future cashflows from a project enhances the value of a business

1. Net Present Value (NPV)

2. Internal Rate of Return
(IRR)
3. Payback Period (PBP)
4. Sensitivity and Scenario
Analysis

Business Case Template Different Tools

4 Investment Appraisal: Basic Tools- NPV, IRR and Payback

NPV IRR Calculation

1. Decide project lifetime

2. Capex will be outflow in period 1

3. Calculate periodical cashflows (revenue minus costs)

4. Discount the cashflows by WACC

5. Summation of all the discounted cashflows is NPV

6. Payback Period (PBP) is the year where summation of cashflows

reaches ‘0’

7. IRR is the discount rate which makes ‘NPV=0’

When IRR > WACC, NPV is positive

4 Investment Appraisal: Basic Tools- Scenario & Sensitivity

Sample
Sensitivity and scenario analyses mean understanding the impacts
(positive and negative) of different factors on financial parameters
such as revenue, costs, capex etc.

Scenario:
Sensitivity:
Impact of multiple factors
Impact of 1 factor
simultaneously
4 Investment Appraisal: Some Other Valuation Tools (Multiples)

Multiples
Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different
companies more comparable. Multiples are the proportion of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings
per Share).

1. Investment decisions make use of 1. Assumes that enterprise value is a

equity multiples (P/E, P/B) multiple of company financial
2. P/E Ratio: Price per share to metric (such as EV/EBITDA,
Earning per share (EPS) EV/Sales)

Equity Multiples EV Multiples

1. Analyzes public companies that are 1. Analyzes past mergers and

similar to the company being acquisitions (M&A) for companies
valued for reference. An analyst in the same industry for reference
will gather data on a public
company
Comparable Analysis Precedent
Analysis
5 Business Plan: Guiding The Organization

Business Plan
(BP)

BP guides, facilitates and clarifies

Business goals & Market Strategy Stakeholder

Personnel KPI Positioning Implementation Comfort
setting
5 Business Plan: Standard Process

Group &
Board Bottom up BP buildup by users and BP team

aspiration and Group Business Direction

Market Dynamics, internal growth
Robi MC review and feedbacks shared

Multiple iterations
Major
Participants
Feedback accommodation and revise

Divisional Users Local MC

Communicate to group and subseq. approval
and Finance BP
5 Business Plan: LRP, BP, QOP

LRP BP QOP
(Long Range Plan) (Business Plan) (Quarterly Operations Plan)

 Horizon: 3-5 years  Horizon: 1 year (next year)  Horizon: 3 months

 Frequency: Yearly  Frequency: Yearly  Frequency: Quarterly
 View: Yearly view  View: Monthly view  View: Monthly view
 Detailing: Firmed up P&L covering  Detailing: Firmed up P&L covering  Detailing: Firmed up P&L covering
major items and drivers but in lesser detailed items and granular level of detailed items and granular level of
details than BP driver planning driver planning
 Time: September of running year  Time: September of running year  Time: Before start of each quarter
 Correspondence with Axiata group:  Correspondence with Axiata group:  Correspondence with Axiata group:
Yes Yes No
5 Business Plan: Performance Monitoring

Business Plan Performance Monitoring

vs BP vs QOP MoM/QoQ YoY vs Comp.

Revenue Plan Operating
Expense Plan Variance (%) Variance (%)
BDT (Mn) Apr 22A May 22A YTD 22A Apr 22A May 22Q May 22BP YTD 21A YTD 22BP

Revenue 24,646 26,830 126,176 8.9% 0.1% -2.1% 2.7% -5.8%

Mobile Revenue 22,222 24,400 114,237 9.8% 0.3% -1.7% 3.3% -5.7%

Device 66 82 521 23.6% 22.1% -76.5% -26.6% -71.9%

Other Revenue 2,357 2,348 11,418 -0.4% -2.9% 4.6% -1.3% 4.5%

Service revenue 24,579 26,748 125,655 8.8% 0.0% -1.2% 2.8% -4.9%

Direct cost 12,393 8,882 58,206 -28.3% -33.0% -33.6% -1.5% -11.5%
Investment Personnel & Opex 2,600 2,311 11,188 -11.1% -17.9% -14.1% -9.5% -16.9%

Plan Others Plan EBITDA 9,653 15,637 56,782 62.0% 45.7% 37.7% 10.3% 3.8%

UEBITDA 9,893 11,601 52,871 17.3% 8.1% 2.1% 0.6% -3.3%

EBIT 2,697 6,092 18,028 +>100% 94.5% 61.2% 13.1% 3.1%

PBT 1,198 2,358 8,478 96.9% 38.1% 3.0% -11.2% -18.0%

PAT 144 889 2,506 +>100% +>100% 36.0% 1.3% -4.2%

Geographical and Segment Split

 6 Recent Issues

Volatility in FX Rate

Fueled by a brutal combination of:

1. Prolonged impact of the pandemic on global supply chains
2. Sanctions resulting from the war in Ukraine

Leading to:
3. Pricier import and other foreign payment settlement rates
4. Higher foreign loan repayment rates

Resulting in:
5. Loss of profit due to higher operating and interest expense
 6 Recent Issues

Rising Interest Rate

Fueled by growing cost of commodities due to:

Rate of Inflation
1. Prolonged impact of the pandemic on global supply chains (as measured by CPI, May 2022 May 2021
2. Sanctions resulting from the war in Ukraine base 2005-06)

Leading to:
3. Policies from central banks around the world to control the inflation
through the increase of interest rates (aimed at reducing consumption) Point to point 7.42% 5.26%

Resulting in:
4. Higher interest expenses, which in turn makes businesses less
profitable
Monthly Average(Twelve
5.99% 5.59%
Month)
 6 Recent Issues

Possible Mitigation

Rising FX Rates:
1. Reduce imports or expenses for which payments have to be made in foreign currency
2. Defer foreign payments allowing time for the market to stabilize
3. Early settlement of foreign expenses to reduce exposure when own currency in continuously and rapidly depreciating
4. Hedging through Currency Futures or Options

Rising Interest Rates:

5. Hedging through Interest Rate Futures, Options or Swaps
6. Reduce exposure by converting of STLs to LTLs, and implementation of Interest Rate Ceiling, Floor and Collar
THANK YOU
?