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Key Topics
- Requirements
- Question
- Solution Answer
- Introduction:
- Background of the Company:
- 1. Economic Value-added analysis (EVA)Analysis of Reliance Industries:
- 3. A current valuation of the equity in Reliance Industries using Net Asset Value, Comparable Ratios and Discounted Free Cash Flow.
- Conclusion:
- Reference:
Requirements
Question
1- Write a note on Corporate Finance in approx 2000 words with references to APA.
Solution Answer
Introduction:
The report has been prepared to study the financial position of an organization which is listed in the major stock exchange of the world such as the London, New York, Tokyo and Mumbai. For the purpose of this study Reliance Industries Ltd has been taken into consideration which is a listed Mumbai Stock Exchange of India. Reliance Industries is one of the India’s largest company and has grown rapidly over the last few years. The report shall analyze the financial performance of the company and through the analysis the report shall aim to understand the factors which are influencing the growth of the company and the decision making process of the company. In the later part, the report shall study and evaluate the financial ratios and their impact of the financial performance of the company over a period of last five years and shall make a critical analysis regarding the distribution of dividends, issue of bonus and assess other financial factors affecting the company. The study will include EVA Analysis, Shareholder Value Analysis and Equity Analysis of the company for the last five years of its financial operation.
Background of the Company:
The Reliance Group of Companies was founded by Dhirubhai H Ambani which is India’s one of the largest private sector enterprise in India. Reliance Industries Ltd. Is India’s largest private sector conglomerate with an annual turnover of US $ 45.7 billion approximately for the fiscal year,2017 (Economictimes.indiatimes.com. 2018). The company is one of the best performing companies in the Indian Stock Market. The company has a wide range of products from petroleum to communication system. The mission of the company is to a globally preferred business enterprise showing responsible attitude towards the ecology, society and stakeholders value (Ril.com. 2018).
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1. Economic Value-added analysis (EVA)Analysis of Reliance Industries:
Economic Value Added is a method used in the measuring economic profit in financial management. EVA can be defined as deducting the net income after tax from the cost of capital. The financial performance of the company is measured on the basis of its ability to pay the operating costs and the capital costs. EVA is used to assess the financial position of the company and focuses on the creation of value (Jensen 2017). The financial performance of Reliance Industries can be evaluated through the EVA method in the following ways:
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Cost of Debt: The company needs to borrow money and the interest paid on that borrowed money is the cost on the debt or capital of the company. Therefore, the company should pay the interest on the total debt (Jensen 2017).
The table above shows that the cost of debt of the company was at a marginal point for the years 2014 to 2017 with a short increase or decrease in those years but in the year 2018 the cost of debt has highly increased. It was approximately 1.6% for the years 2014 to 2017 but it took a rise up to 3.3% in the year 2018. Therefore, for the year 2018 the company will have to pay higher interest. -
Cost of Equity: The expected rate of return of shareholders can be said as cost of equity. The below table will show the cost of equity of the company for the years 2014 to 2018.
The above table shows that the cost of capital for the company for the year 2014 is 17.39% where as there is an increase in the cost of the capital in the years 2015 and 2016. However, there is a decrease in the cost of capital for the year 2017 with again 17.39% which is similar to the year 2014. In the year 2018 the cost of capital to the company is NIL. -
Weighted Average Cost of Capital (WACC): WACC is the addition of the cost of debt and cost of equity by multiplying the proportion of both. WACC is used to describe the value of the overall funds that are used in the operation of the company(Jensen 2017).
The above figure shows that the optimum capital structure of the company and optimum is achieved when the WACC reaches the minimum. In the year 2018, the company has got its optimum WACC with 0%. However, in the year 2016 the WACC is higher that is 17.93%. The WACC increases with the increase in the interest on debt. -
Net Operating Profit after Tax (NOPAT): The NOPAT is the earnings that has been earned by the company from its operational activities after deducting the tax(Jensen 2017).
From the above table, the NOPAT is INR 224930 for the year 2018. However, the table shows that there is a constant increase in NOPAT on the consecutive years and this has been caused due to the increase in the EBIT and increasing interest of the company. -
Economic Value Added: The amount of EVA during 2014 to 2016 shows negative that is the company has not been able to give any value added to the investors and the creditors of the company. However, in the year 2018 EVA is positive and the amount of EVA will make the company able to give a good value added to its investors and creditors. Therefore, in this situation the company need to use effective strategy so that the company’s financial performance becomes stable. The strategies that can be used are through strengthening the internal financing to reduce the financing form the debt. The company can use its local raw materials in the production process and strengthen its profitable investments.
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Place Your Order2. Total Shareholder’s Return (TSR) Analysis of Reliance Industries:
The Total Shareholder’s return is used to measure both the returns from change in the stock price and the dividends. The investors of the company earns through two ways which are capital gains and the current income.
Capital Gain means the change in the price of the stock in the market of the company and current income is the dividends that are distributed by the company out of its profits or earnings. Therefore, there are two formula’s to calculate the Total Shareholder Revenue of the company. The one is the sum of capital gains and current income of the investors and shareholders of the company divided by the initial stock price (Chandra 2017).
TSR = Capital Gains + Current Income / Initial Price of the Shares
The other way is through the sum of change in the market price of the share and dividends paid by the company divided by the initial share price of the shares of the company (Lee et al 2015).
TSR = Change in the market price of the shares + Amount of Dividends Paid by the company / Initial Price of the Shares.
The TSR of Reliance Industries Ltd. can be calculated on the basis of the sum of changes in the market price of the shares and the dividends paid by the company divided by the initial price of the shares.
The TSR is the method through which the shareholders can easily understand the figure of the overall financial benefits that is generated by the company for its shareholders. This also evaluate the company financial performance in the market over a period of time. From the above figure it can be understood that the TSR of the company is not constant. There has been an increase and decrease all through the period. In the year 2014 the company has a TSR of 30.20% whereas it decreases at 4.10% in the year 2015. Again it increase in the year 2017 at 39.13% which is the highest percentage of TSR with 39.13% within the evaluation period of 2014 to 2018. However, from the analysis it can be said that though there is no consistency in percentage of return but the company has a positive percentage of TSR over a period of five years.From the figure it can be found that both the Market price of the share and the percentage of dividend has increased on every year starting from 2014 to 2017. However, in 2018 though there is an increase in the market price of the share but the percentage on dividend has reduced. Moreover, the amount of increase in the market price of share from 2014 to 2015 and 2015 to 2016 is less as compared to the other financial years. Therefore, the TSR over the period of years is not constant.
3. A current valuation of the equity in Reliance Industries using Net Asset Value, Comparable Ratios and Discounted Free Cash Flow.
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Net Asset value Method: The Net Asset value of a company states the net value of the company and is calculated on the basis deducting total value of liabilities from total value of assets. This shows the company’s ability to pay off its debt as well as the position of the company in terms of solvency or liquidation. The formula followed in calculating the Net Asset value = Assets –Liabilities / Total Number of Outstanding Shares. The NAV is used to measure the financial performance of the company by the investors. The investors use this method to assess the performance of the company based on the NAV, if the NAV is high that the value of assets is more than that of its liabilities then the investors invest more on the shares of the company to get better returns. On the other hand, if the NAV of the company is low then the investors move to other sectors or other company who has a higher NAV for investment (Pinto et al 2015).
The above table shows the values of fixed assets, current assets, current liabilities and long term loans and gives us the value of Net Assets. As per the table shown above, it is analyzed that the Net Asset Value of the company is positive and has relatively increased over the years. The NAV for the year 2014 is INR 3112910, 2015 is INR 3446550. However, NAV for the year 2016 has decreased to INR 2783440 but has again increased in the next two years. This shows that the value of the assets of the company is higher than its liabilities and therefore investors can earn higher return on investment. The reason behind the constant increase in the Net Asset Value of the company is due to the increase in the sum of fixed and current assets of the company with an decrease in the current liabilities and long term loan of the company. -
Discounted Free Cash Flow: Discounted Free cash flow is a method of valuation which is used to estimate the value of investment on the basis of future cash flow. The analysis of the DCF helps in finding the value of future cash flow without using a discount rate. The value of future cash flow is used to evaluate the potential investment. The man purpose of analyzing the DCF is to estimate the amount an investor will receive from investment in the company (Dechow et al 2014).
From the above figure it has been analyzed that the cash flow of the company is negative which means that the value of investment is less on the basis of the future cash flow. However, the figure shows that the negative amount is decreasing over the years and in future it may become positive and can give better investment return to the investors.The reason behind the negative cash flow is due to the increase in the capital expenditure over the operating cash flow.
Conclusion:
Therefore, after analyzing all the methods of evaluating the financial performance of Reliance Industries it has been found that the EVA or the Economic Value Added method or the Net Asset Value are the best method to evaluate the company’s financial performance and return on investment of the investor.
Reference:
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Bhama, M., 2018. Financial Performance of Reliance Industry. International Journal for Research in Applied Science and Engineering Technology, 6(3), pp.3221-3227.
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Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
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Dechow, P.M., Sloan, R.G. and Zha, J., 2014. Stock prices and earnings: A history of research. Annu. Rev. Financ. Econ., 6(1), pp.343-363.
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Economictimes.indiatimes.com. 2018. Reliance Industries Balance Sheets, Financial Statements - The Economic Times. [Online] Available at: [Accessed 29 December 2018].
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Jensen, M.C., 2017. Value maximization, stakeholder theory and the corporate objective function. In Unfolding stakeholder thinking (pp. 65-84). Rutledge.
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Lee, Y.K., Kim, S.H., Seo, M.K. and Hight, S.K., 2015. Market orientation and business performance: Evidence from franchising industry. International Journal of Hospitality Management, 44, pp.28-37.
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Pinto, J.E., Robinson, T.R. and Stowe, J.D., 2015. Equity valuation: a survey of professional practice. Review of Financial Economics.
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Ril.com. 2018. Reliance Financial Reporting | Annual Report | Revenue - Reliance Industries Limited. [online] Available at: [Accessed 29 December 2018].
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