|Name of Company||Country of Origin/ Exchange Traded||Sector||Stock Price|
|RELIANCE POWER LTD||India/
|Utilities – Utilities – Independent Power Producers – Utilities – Independent Power Producers||INR30.80|
|@ 24 Jul 2018|
|COMPANY PROFILE||Reliance Power Ltd together with its subsidiaries is engaged in the business of generation of power. The projects under development include coal, gas, hydro, wind and solar based energy projects. The portfolio also includes ultra mega power projects.
Reliance Power Ltd is an electric utility company that develops, constructs, and operates power generation projects. The company segments its activities into a Power Generation division and a Resources division. The first of these includes Reliance Power facilities throughout India that generate electricity using thermal fuel sources and renewable sources, including hydro, solar, and wind. The vast majority of the energy produced is thermal, coal-based power. Reliance Power’s Resources division houses a large coal resource portfolio that includes sizable coal reserves located in central India and Indonesia. The company’s primary sources of revenue are the sale of energy, the sale of coal, and the performance of support services.
|Financial Condition Analysis Below|
|It is important to analyze the financial condition of the company you want to invest in because if a company goes bankrupt, the chances are high that you will lose all your investment. Even if the company does not go bankrupt, the deterioration in financial condition will cause more and more investors to avoid the company and valuation will drop. Weak financial condition also limits the opportunities that a company has to grow its business.|
|In order to determine the financial condition of the company, we usually use the Z score, which was introduced by Edward Altman, a Professor of Finance at New York University. This score is a composite measure of a firm’s financial condition and has been proven to be able to predict with high accuracy whether a firm will go into bankruptcy within the next two years.|
|Z-score has been deteriorating since 2009. The main reasons for this are:
* lower working capital
* higher level of borrowingsThe latest Z-Score of the company as at Mar 2017 was 0.7, which is in the distressed zone.
|The various components that go into the Z-Score are shown below:|
|This is the Revenue Turnover ratio and it reflects the amount of revenue the company is able to generate from the use of its assets. Companies that have difficulty generating revenue cannot generate consistent cash flow to pay its bills.
The amount of revenue generated from assets has been on an uptrend since 2009.
|The more profits are retained within the firm, the greater the buffer of reserves for the company to weather difficult times.
The level of retained earnings relative to assets has been on an uptrend since 2012. Currently, retained earnings are at 12.8% of total assets.
|This measures the ability of the company to generate EBIT (earnings before interest and taxes) from its assets.
EBIT as a % of assets has been on an uptrend since 2012. Currently, EBIT is at 6.4% of total assets.
|This is an indication of the level of borrowings of the firm. A high level of borrowings will affect survivability as it may not have enough cash flows to meet its debt obligations.
The level of borrowings has been on an uptrend since 2009.
|Working capital is essential to the operations of the company and a low level of working capital may result in liquidity problems. Working capital relative to total assets has been on a downtrend since 2011.|
|Financial condition analysis is an important part of stock analysis because an investor will make a loss on a stock if it goes bankrupt. The financial condition of a company is also important because investors will attribute a discount to the theoretical fair valuation of the company depending on how bad the financial condition is. ProThinker uses multiple valuation indicators to value a stock and then attribute a discount when necessary depending on the financial condition.|
|The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.|
|While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.|
|To find out more about our valuation methodology, click here.|
|Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.|
|Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.|