EBIT EPS ANALYSIS

Sandeep Kulshrestha

 One of the most important decisions in Financial Management

CAPITAL STRUCTURE FINANCING DECISIONS

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 companys crucial investors, the shareholders

 Capital Structure refers to the mix of various sources of capital in a companys financing

WHAT IS A CAPITAL STRUCTURE

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

 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)

Some rules

Shareholders have the last right over a companys income Shareholders are paid dividend (a part of profit as a gratitude) Preference shareholders are paid the dividend before the equity shareholders are paid

 EPS refers to Earnings per Share

The 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

What is EPS

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

Some key terms

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

EBIT: Less: Interest @5% EBT Less: Tax @30% EAT

7000 500 6500 1950 4550

Solution

Less: Preference Div 5%

Net Income

250
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