Business Analysis of

Water Utilities
IIT Kharagpur
26 Feb 6 March 2016

Business Analysis
Financial Analysis
Stakeholder Analysis

Financial Analysis
Balance Sheet
Profit & Loss Statement
Financial Ratios
Cash Flow Statement

Balance Sheet
Asset

Liability

Physical assets Producing

assets

Equity
Debt

Capital works in Progress

Retained Profit

Inventories

Payables

Cash and Bank Balance

Receivables
Investments

Profit & Loss Statement

Revenues
Costs
Raw Material Cost
Manpower Cost
Conversion Cost
Depreciation (non cash item)
Financial cost (interest and other payments)
Statutory taxes
5

BS and P&L dynamics

Demystifying through quick run through

Day 0
Company raises $ 50 in debt
and $ 50 in equity and keeps
it in bank

Liabilities:

It has zero cost of

operations for the day,
(assumption)

Equity

50

Debt

50

Retained Earnings

00

Assets
Producing Assets:

00

Capital Work in Progress

00

Inventory

00

Cash

100

Day 1
Revenues

00

Costs

Equity:

50

Debt :

50

Retained earnings :

-02

Raw Material Cost 00

Manpower cost

02

Conversion cost

00

Assets

02

Productive assets:

00

-02

Capital Work in Progress:

50

Inventory:

Total Costs

Liabilities

Earnings

Raw Material

Finished Goods

Cash :

Company buys Physical assets for $ 50 and pays $40 for raw materials. $ 2 is paid
for salaries on daily basis. Cash with the8company is $8. There are no revenues as
assets are not productive yet

40
08

Day 2

Revenues

Costs

16

Liabilities

Equity:

50
50

Raw Material Cost

10

Debt :

Manpower cost

02

Retained earnings :

Conversion cost

02

-02+02

Assets

Total Costs

14

Productive assets:

52

Earnings

02

Capital Work in Progress:

00

Inventory:

Raw Material

Finished Goods

Cash :

30
02+16

9
Company spends $ 2 to make capital work
in progress as productive assets (in
installation etc.) It also spends $ 2 as conversion cost. Its daily employee cost is $ 2.

Day 3

Revenues

Costs

16

Liabilities

Equity:

50
50

Raw Material Cost

10

Debt :

Manpower cost

02

Retained earnings :
-02+02+02

Conversion cost

02

Total Costs

14

Earnings

02

Assets

Productive assets:

52

Capital Work in Progress:

00

Inventory:

Raw Material

Finished Goods

20

Receivable

16

Cash :

14

10
Day 3 is exactly like Day 2 BUT for one difference.
The finished goods are sold but the
buyer says it will pay cash 3 days later.thus it becomes receivable on company BS

Day 4

Revenues

Costs

16

Liabilities

Equity:

50
50

Raw Material Cost

10

Debt :

Manpower cost

02

Retained earnings :
-02+02+02+02

Conversion cost

02

Total Costs

14

Earnings

02

Day 4 is exactly like Day 3

11

Assets

Productive assets:

52

Capital Work in Progress:

00

Inventory:

Raw Material

Finished Goods

10

Receivable

16+16

Cash :

10

Day 5

Revenues

Costs

16

Liabilities

Equity:

50
50

Raw Material Cost

10

Debt :

Manpower cost

02

Retained earnings :
-02+02+02+02 +02

Conversion cost

02

Payable

Total Costs

14

Earnings

02

40

Assets

Productive assets:

52

Capital Work in Progress:

00

Inventory:

Raw Material

Finished Goods

Receivable

Cash :

00+40
16+16+16
06

Day 4 is like Day 4 except Raw Material of12$40 bought (which is minimum lot size you
can buy) but this time you dont have enough cash to pay for RM. You buy it on credit
from the supplier which is payable after 2 days .

Day 6

Revenues

Costs

16

Liabilities

Equity:

50
50

Raw Material Cost

10

Debt :

Manpower cost

02

Retained earnings :
-02+02+02+02 +02+02

Conversion cost

02

Payable

Total Costs

14

Earnings

02

40

Assets

Productive assets:

52

Capital Work in Progress:

00

Inventory:

Raw Material

Finished Goods

Receivable

Cash :

00+30
16+16+16+16
02+16

13
Day 6 is like Day 5 except Receivable of $16
turn into cash at end of its 3 day period.

Day 7

Revenues

Costs

16

Raw Material Cost

10

Manpower cost

02

Conversion cost

02

Total Costs

14

Earnings

02

Liabilities

Equity:

50

Debt :

50

Retained earnings :
+02+02+02=10

Payable

00

Working Capital Loan

20

-02+02+02+02

Assets

Productive assets:

Capital Work in Progress:

Inventory:

Raw Material

Finished Goods

Receivable

Cash :
02+16-4+16-20=10

52
00

00+20

16+16+16+16=48

14
Day 6 is like Day but payable of 40 is due on
Day 7. It pays the $ 40 payable through $
20 from its cash balance and takes Working capital loan of $ 20

Balance Sheet

Liabilities

Liabilities

Equity:

50

Equity:

50

Debt :

50

Debt :

50

Retained Earnings

00

Retained Earnings

10

Payables

00

Payables

00

Working Capital Loans

00

Working Capital Loans

20

Assets

Assets

Producing Assets

50

Producing Assets

52

Capital Work in Progress

00

Capital Work in Progress

00

Inventory

Inventory

Raw Material

00

Raw Material

20

Finished Goods

00

Finished Goods

00

Receivable

00

Receivable

48

Cash

100

Cash

10

Total

100

Total

130

Day 0

15

Day 7

Typical P&L Statement

2015
Revenues

100

Expenses
Manpower Cost

20

Material Cost

40

Conversion Cost

10

Sales and Marketing cost

05

Overheads

02

Total Expenses

78

Earnings before Depreciation, Interest and Tax (EBITDA)

22

Depreciation

05

Earnings before Interest and Tax

17

Interest

05

Profit Before Tax

12

Tax
Profit after Tax

16

04
08

Financial Ratios from P&L

2015
Revenues

100

Expenses
Manpower Cost
Material Cost

20
EBITDA % = 22/100=22%

40

Conversion Cost

10

Sales and Marketing cost

05

Overheads

02

Total Expenses

78

Earnings before Depreciation, Interest and Tax (EBITDA)

22

Depreciation

05

Earnings before Interest and Tax (EBIT)

17

Interest

05

EBIT %= 17/100=17%

Profit Before Tax

Tax
Profit after Tax

12
17

04
08

PAT %= 08/100

Financial Ratios

Revenues

Networth:
Equity+Retained Earnings

Equity

EBITDA

Retained Earnings

EBIT

Long Term Debt

PBT

Current Liabilities

PAT

Asset Turnover Ratio:

Revenue / Assets

Return on Total Assets= EBIT * (1-Tax Rate)/

(Networth + Long Term Debt)

18

Payables / Short term debt

Assets (Producing)

Capital Works in Progress

Current Assets

Inventories

Receivables

Return on Networth= PAT/ Networth

Company 1, Ratios
Revenues: 100

Equity

15

EBITDA : 15

Debt

00

EBIT

: 01

Total Liabilities

15

PBT

: 01

PAT

: 01

Assets (Producing)

05

Inventories

05

Cash

05

Total Assets

15

PAT/ Revenue= 1/100

Revenue / Total Assets = 100/ 15
PAT / Total Assets = (1/ 100)* (100/15)= (1/15)

19

Company 2, Ratios
Revenues: 15

Equity

75

EBITDA : 10

Debt

00

EBIT

: 05

Total Liabilities

75

PBT

: 05

PAT

: 05

Assets (Producing)

50

Inventories

20

Cash

05

Total Assets

75

PAT/ Revenue= 5 /15

Revenue / Total Assets = 15/ 75
PAT / Total Assets = (5/ 15)* (15/45)= (1/15)

20

Which Company is better

Company 1 or Company 2?

Company 1
PAT / Revenue =

Company 2
1 / 100

PAT / Revenue =

5/15

Revenue / Total Assets = 100/15

Revenue /Total Assets = 15 / 75

PAT / Total Assets =

PAT / Total Assets

1/100 * 100/15 =

1/15

5/15 * 15/75 =

Ultimately return on total assets matter !

21

1/15

Cash Flows
Operating Cash Flows
Cash flow from operations less tax paid

Investment Cash Flows

Capital expenditure
Change in investments

Financial Cash Flows

Debt or Equity raised / (paid back)
Dividend payout etc.
22

Company A
2012

2013

2014

2015

Revenues

00

10

10

10

PAT

00

02

02

02

Equity

50

50

50

50

Debt

50

50

50

50

Working Cap
Loan

00

00

00

00

Retained Earnings

00

02

04

06

Assets

80

80

80

80

Inventories

00

00

00

00

Receivables

00

00

00

00

Cash

20

20-8+10=22

22-8+10=24

24-8+10=26

23

Company B
2012

2013

2014

2015

Revenues

00

10

10

10

PAT

00

02

02

02

Equity

50

50

50

50

Debt

50

50

50

50

Working Cap
Loan

00

00

00

04 =(04-08)

Retained Earnings

00

02

04

06

Assets

80

80

80

80

Inventories

00

00

00

00

Receivables

00

10

20

30

Cash

20

20-8=12

12-8=4

00

24

Cash Flows: Company A

2012

2013

2014

2015

PAT

00

02

02

02

Less : Change
in receivables

00

00

00

00

Cash Flow

00

02

02

02

Operating
cash flows

25

Cash Flows: Company B

2012

2013

2014

2015

PAT

00

02

02

02

Less : Change
in receivables

00

-10

-10

-10

Cash Flow

00

-08

-08

-08

Operating
cash flows

26

Cash Flow

Company A versus Company B

Company A

Company B

Cash in Balance sheet increases

from $20 in 2012 by $ 6 to $ 26
in 2015
The increase in cash of $6 is
equal to increase in retained
earnings.
The increase in cash can be
used for capital expenditure or
dividend payout or debt
reduction.
27

Cash in Balance Sheet decreases

by $24 in 2012 to $2015. This
wipes out $ 20 cash on the
Balance sheet and adds $ 4 in
working capital loans

Decrease in cash balance ($ 20) +

increase in working capital loan
($4) + Increase in retained
earnings ($6) = Increase in
receivables ($30) from 2012 to
2015

Clearly company does not have

own resources for capital
expenditure or dividend payout.

Both Company A and B have similar P&L statement but different business strengths

Annexures
Background of my interest in water.

28

Water: A marketing tool

29 Bangalore (India)
December 2015,

Active Water Management

December, 2015 30
Bangalore (India)