EBIT EPS ANALYSISSandeep Kulshrestha

CAPITAL STRUCTURE - FINANCING DECISIONS

One of the most important decisions in Financial Management

To understand how much capital should be raised to expand a business

To understand various sources of capital, the costs involved in raising those sources

To understand how those sources will effect the earnings available for the company’s crucial investors, the shareholders

WHAT IS A CAPITAL STRUCTURE

Capital Structure refers to the mix of various sources of capital in a company’s financing

Every company needs capital to either expand the business or the acquire another business.

For example if a company needs to expand its market to other regions, it would need additional capital to create office, hire people, start a new factory etc. Now, which sources of capital should a company tap is a decision which needs to be taken (example: Debt/Equity or Bank Loan)

DIFFERENT SOURCES OF CAPITAL

Equity Shares (also called Stock, Common Stock and Ordinary Shares)

Preference shares (Also called Preferred Stock and Preferred Shares

Debentures and Bonds (Individually and Together known as “Debt”

Some rules

Interest on Debt is paid first after the profits are declared

Interest on Debt is a tax-deductible expense (tax is calculated on income after debenture interest is paid off)

Shareholders have the last right over a company’s income

Shareholders are paid dividend (a part of profit as a gratitude)

Preference shareholders are paid the dividend before the equity shareholders are paid

What is EPS

EPS refers to Earnings per ShareThe portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

Calculated as:

Profit After Tax – Preference Dividend/Number of outstanding shares

Some key terms

EBIT refers to “Earnings before Interest and Tax”, also known as operating profit

EBT refers to “Earnings before tax” EAT refers to “Earnings after Tax)Net income also refers to “Residual money for shareholders”

An example

Delphi Limited has equity share capital of 5,000 (500 shares of 10 each) and preference share capital of 5,000 (500 shares of 10 each). The dividend paid to preference shareholders is 5%. The capital raised through 10% debentures is Rupees 5000. Its current operating profit is 7000 and given tax rate is 30%. Calculate EPS

Solution

EBIT: 7000Less: Interest @5% 500EBT 6500Less: Tax @30%1950EAT 4550Less: Preference Div 5% 250Net Income 4300

EPS= Net Income/Number of equity shares = 4300/500 = 8.6

Try the earlier example, assuming that the company raised additional capital of 3000 through equity shares of Rs 10 each

Comparison of different sources of Capital

When a company wishes to expand its operations and need to raise additional capital, the finance professional compares the costs and benefits of such sources, also measuring impact on EPS

End of the presentation