Finance Primer

Equit-I, The Finance Club of IIM Indore

 About Equit-I

Title / Heading
• Equit-I, the Finance Club of IIM Indore, endeavors to spark interest about finance amongst the 1200 -
strong postgraduate batch on campus by mobilizing a variety of learning opportunities.
• The club actively follows the industry and tries to pitch for live projects related to finance. In the past,
Equit-I has facilitated projects in the field of Equity Research and Corporate Finance.
• Equit-I assists participants in exploring financial career opportunities, by organizing workshops and
interactive sessions on various financial topics and career panels.
• The club also assists participants in preparing for their summer and final placements by publishing special
articles and newsletters.
• Companies are able to increase their brand equity and visibility on campus through various initiatives like
talks, newsletters and different on-campus competitions conducted by the club.

The current senior members of the club are:

Kirti Agrawal Surbhi Gupta Vinayak Singla

Prepared in association with the Placement Preparation Committee

 Events & Publications

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The event featured an allocation problem in the form of House. It was followed by a corporate
Margin Call
raiding game that pitched the participants’ with different risk-return tradeoff perceptions.

It was a national level event to test participants on their financial acumen and current affairs. It
Analysis Paralysis
was followed by presentation and valuation skills in Pitch Book preparation.

Financial Modelling This was a 2 day advanced hands-on workshop to build three statement financial models for
Workshop several real companies. It was conducted in association with BSE and Edurpristine.

It involved a rigorous quiz covering recent events, popular knowledge, and basic concepts of
Finstake
finance followed by a party-game approach to engage with financial concepts for PGP 1s.

It stimulates the creative and analytical thinking in term of portfolio formation and industry
Jackstrat
synergies, and tests macroeconomic knowledge at the same time.

Week That Was: A weekly newsletter, which includes not just business news but also views and critiques of participants
Publications om the recent issues in the field of finance.
Dealscope: A periodical that covers the financial aspects and the rationale behind major M&A deals in the news.

Prepared in association with the Placement Preparation Committee

Title / Heading

Introduction to
basics of

Financial Statements

Prepared in association with the Placement Preparation Committee

 Income Statement

Title / Heading
An Income Statement shows the company’s revenues and expenses during a
particular period.
The main purpose of an income statement is to convey details of
profitability and business activities of the company.

Operating Revenue Cost of Goods Sold (COGS)

Operating revenue is revenue
generated from a company's
primary business activities. For
example, a retailer produces
revenue through merchandise sales
Cost of Materials Consumed
+ Purchases of Stock-in-trade
- Changes in Inventory (Closing
Stock –Opening Stock)

Profit after Tax (PAT)

Operating Profit (EBIT)
PAT are the earnings of a
EBIT is the profit earned from business after all income taxes
normal business operations. have been deducted. It is the
EBIT = Revenues - COGS - final and residual amount of
Operating expenses profit generated by the
organization.

Prepared in association with the Placement Preparation Committee

 Balance Sheet

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A Balance Sheet shows a company’s financial position at a specified point in time. Its components essentially tell an analyst how much the
company owns, and how much it owes. Information on the firm’s capital structure can also be derived from here.

Assets Liabilities and Equity

Assets are economic resources with monetary value that provide future
benefit to the company. These are owned and controlled by the company.
In the balance sheet, these are usually listed in order of the ease with
which they can be converted into liquid cash.
Liabilities are monetary considerations that a company owes to external
entities.
Equity represents the money attributable to the owners of the company.
Equity = Assets - Liabilities

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

Title / Heading
• Financial ratio analysis is the use of relationships among financial statement accounts (Profit & Loss, Balance Sheet) to gauge the
financial condition and performance of a company.
• Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by
comparing information contained in its financial statements.
Note:A few ratios have been calculated basis the financial statements of HUL.

• We can classify ratios based on the type of information the ratio provides into following categories:

Liquidity Ratios Measures the ability to meet short term and immediate needs

Capital Structure
Measures the effectiveness in financing using different sources of funds
Ratios

Profitability Ratios Measures the ability to manage expenses to produce profit from sales

Activity/ Turnover Ratios Measures the effectiveness in putting its asset investment to good use

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

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Liquidity Ratios Capital Structure Ratios
Current Ratio = Current Assets / Current Liabilities Debt/Equity
Current Assets = Inventories + Financial Assets + Other Current 11123 Debt = Long term borrowings + Short term borrowings 0
Assets
Equity = Equity share capital + Other Equity 7075
Current Liabilities = Financial Liabilities + Other Current Liabilities 8075
D/E 0
Current Ratio 1.38
It is a measure of the degree to which a company is financing its operations through debt
Best measure of debtor’s ability to payoff current obligations without raising external versus wholly owned funds.
capital.

Capital Gearing Ratio = (Debt + Preference share capital) / Equity

Quick Ratio = Quick Assets / Current Liabilities
Debt + Preference share capital 0
Quick Assets = Current Assets - Inventories - Prepaid expenses 8764
Capital Gearing Ratio 0
Quick Ratio 1.09
Used to measure company’s financial leverage. Stricter version of D/E ratio, treats
Stricter version of current ratio, as it only takes assets which are readily convertible into preference share capital as part of debt.
cash i.e inventory and prepaid expenses are excluded.

Debt to Total Assets Ratio

Cash Ratio = Cash & cash equivalents / Current Liabilities
Debt 0
Cash & cash equivalents = cash + cash in bank + marketable securities 3373
Total Assets 17149
Cash Ratio 0.42
Debt to Total Assets Ratio 0
This ratio is useful in situations where current liabilities are coming due for payment in
the very short term. This ratio indicates the proportion of debt used in financing the total assets of a firm.

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

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Profitability Ratios Turnover Ratios
Net Profit Margin = Net Profit / Total Revenue Stock Turnover Ratio = COGS / Average Inventory
Net Profit 5237 Average Inventory(Finished Goods) = (Opening Inventory + Closing 2360.5
Total Revenue 35787 Inventory) /2

Net Profit Margin 14.63% COGS 16374

This ratio provides the final picture of how profitable a company is after all expenses Stock Turnover Ratio 6.94
including interest and taxes have been taken into account
Explains how many times a company’s inventory is sold and replaced over a period

Return on Equity = Profit after tax / Capital Employed

PAT = Profit for the year 5237 Debtor Turnover Ratio = Net Credit Sales / Average
Debtors(Trade Receivables)
ROE 74.02%
Net Credit Sales(Since credit sales are not specifies separately, take 35218
It measures the total return on equity capital and shows the firm’s ability to turn assets complete sales)
into profits.
Average Debtors (average trade receivables) 1037.5

Debtor Turnover Ratio 33.95

Return on capital employed = Total earnings/ Capital Employed
Shows effectiveness in extending credit and collecting debts
Total Earnings = Profit before exceptional items and tax + Finance Costs 7367
Capital Employed = Equity share capital + Reserves & surplus 7075
ROCE 104.13% Creditors Turnover Ratio = Net Credit Purchases / Average Similar to Debtor
Creditors(Trade Payable) Turnover Ratio
It measures a company's profitability and the efficiency with which its capital is used. In
other words, how well a company is generating profits from its capital. Measures the rate at which company pays off its creditors

Prepared in association with the Placement Preparation Committee

 Mergers and Acquisitions

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In an acquisition, the acquiring company obtains a majority stake in the acquired firm, which does not change its name or legal structure.
Company X + Company Y = Company X (where X acquires Y)

In a simple merger with consolidation, a new entity is created and the old entities cease to exist.
Company X + Company Y = Company Z

Why Mergers & Acquisitions Dealscope

• For greater market share and access to customers • A periodical by Equit-I that covers the financial
• Vertical Integration aspects and the rationale behind major M&A deals
• Horizontal Integration • It includes financial information, deal points and deal
• For technology and intellectual property rationale.
• Financial reasons like tax savings, and dear policy • Deal Points: It refers to the agreed upon terms and
• Diversification the timeline of the deal execution.
• Eliminate competition • Deal Rationale: It explains to us why both parties
• Increasing bargaining power agreed to the deal and the benefits to them therein.

Prepared in association with the Placement Preparation Committee

 Sample Dealscope – Coca Cola and Costa Coffee

Date of Announcement
31st August, 2018 Target
Acquirer
Deal Consideration
$ 5.1bn

Deal Rationale Deal Points

• Coca Cola Company will now not only be the UK’s biggest coffee shop
• The deal values Costa Coffee at $5.1bn which is 16.4x its FY18 EBITDA.
player but will also get a strong, global coffee platform, with a footprint
This value is significantly higher than what is reflected in Whitbread’s market
in more than 30 countries.
value. Coca Cola will acquire all issued and outstanding shares of Costa
• Costa provides Coca-Cola with expertise in the coffee supply chain,
Limited.
including sourcing, vending and distribution.
• The deal is expected to close in the first half of 2019.
• Coca Cola Company will get a greater market share in this highly
• The deal is subject to customary closing conditions, including antitrust
fragmented and steadily growing beverage market.
approvals in the European Union and China.
• Costa has 8,237 Costa Express machines worldwide, in places like
• Coca-Cola expects the transaction to be slightly accretive in the first full
cinemas & offices making it easier for Coca Cola to expand its offerings.
year, without accounting for impact from purchase accounting.
• China is being looked at for driving long term growth, with plans in
• Whitbread plans to return most of the proceeds from this transaction to its
place for expanding the store count there from 449 to 1200, by 2022.
shareholders.
• Whitbread can now focus on attractive structural growth opportunities
• Whitbread will bear transaction and separation costs worth £100 million.
for Premier Inn in the UK and Germany.

Prepared in association with the Placement Preparation Committee

 Assignments

Title / Heading Assignment 1

• You are required to download the consolidated Financial Statements of Nestle India for the year ended 31 March 2018 and
calculate all the ratios which have been mentioned in the primer for the year 2018 and 2017.
Few pointers:
• Make the calculation in an excel sheet.Word document or pdf containing the calculation will not be evaluated.
• In case you differ from the ratio formula used in the primer, kindly write down the formula that you have used.
• Do attach the copy of the financial statements used by you for calculation of ratios.
• Naming Convention for the excel sheet: - Full Name_PGP2019-21.xls

Assignment 2
• Design a sample Dealscope for Oil and Natural Gas Corporation Limited’s (ONGC) acquisition of a 51% stake in Hindustan
Petroleum Corporation Limited (HPCL).
• Follow the format given in the primer, and submit the slide in pdf format.
• Naming Convention for the PDF: - Full Name_PGP2019-21.pdf

Prepared in association with the Placement Preparation Committee