IPM phase 2

Research Methodology
In this research paper we are going to find reasons of three situations. First is why
some of the share price fall stiffly. Some of these often survives and bounced back
so the second is why and how these share prices had gone up. While some shares
have survived, some of them are still at the bottom so third we would find the
factors behind it.
Following factors, we are going to study to find out the dilemma.
Daily Share price data of a share: It is always important to study daily price
fluctuation to understand the nature of a share. If it is fluctuating more compared to
its INDEX price to find the volatility of the share.
Financial Ratios: Financial ratios are always important to study to know financial
situation of a company. D/E Ratio, P/E ratio, EPS, DuPont analysis, Profit margin,
Interest turnover Ratio etc.
Debt Equity Ratio:
Debt to Equity ratio is used to measure what proportion of the companys assets
that are financed through debt. It is a long term solvency ratio that indicates the
soundness of long term financial policy of the company. The ratio can be calculated
as follows:
1) Debt / Shareholders Equity
2) Long-term Debt / Shareholders Equity
3) Total Liabilities / Shareholders Equity
Significance:
High Debt to Equity ratio means that the company is majorly financed by funds of
shareholders than by its own funds. This means company is aggressive in financing
its growth with debt. It includes high risk and earnings become volatile because of
additional interest expense. But if high debt increases the -earnings in comparison
to debt cost (interest) then it is a benefit to shareholders. However, if this is vice-aversa, i.e. cost is more than earnings from debt, it can lead to bankruptcy. So
optimal debt-equity ratio is 1, i.e. liabilities = equity.
Price-Earnings Ratio
This ratio is used to find the value of the company by measuring its current share
price relative to its per-share earnings. It can be calculated as follows:
Share Price / earnings per share
Significance

This ratio shows us how much investors are ready to pay per rupee of earnings. If
the ratio is high it means investors are expecting higher earnings growth in future
whereas in lower ratio, it suggests that company may be undervalued or it is
performing good in comparison to its past trends. Average P/E ratio is 20-25 times
earnings.
Earnings per Share
It is the portion of companys distributable profit allocated to each outstanding
share of common stock. It is an indicator of companys profitability. This ratio helps
to compare the earning power of various companies. Investors get attracted to
companies with steadily increasing earnings per share.
Earnings per share = (Net Profit after Taxes Preference Dividends) / Number of
Equity Shares
DuPont Analysis
DuPont analysis is a method to measure performance wherein assets are measured
at its gross value instead of measuring it at net book value so as to produce higher
return on equity. ROE is affected by operating efficiency, assets use efficiency, and
financial leverage.
ROE = Profit Margin X Asset Turnover Ratio X Equity Multiplier.
Interest Coverage Ratio
Determining how easily a company can pay interest on outstanding on debt. It is
determined by debt ratio and profitability ratio.
Interest coverage ratio = EBIT / Interest Expense
It shows how many times the company will be able to pay its current interest
expense using its available earnings. This becomes an important factor for
determining return to shareholders. Ratio of 2.5 is considered as a red flag. The
ratio should not be less than 1.5.
Government policies and actions: Government policies and actions are definitely
going to affect the share price. IF Government is supporting the industry, share
price of a company belonging to that industry will go up. However, if government
choose to make certain policies that is not favoring that industry it might look no
good on share price.
Economy condition: How economic factors are in place and condition also matters.
Management

Jai Prakash Associates

JPA
300
250
200
150
100
50
0

GVK Power and Infrastructure

GVK
60
40
20
0

Bhushan Steel Limited

Bhushan Steel
3000
2000
1000
0

Aptech Limited

Aptech
300
200
100
0

Welspun Corp

Welspun
300
200
100
0

Wockhardt Pharmaceuticals

Wockhaardt
3000
2000
1000
0