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Learning outcomes.

After watching this video, you will be able to calculate the G-Score of a firm.

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I will now take you through the G score calculations of a firm.

The firm we are going to analyze is Ajantha Pharma Limited.

You can see the balance sheet and the income statements of the firm.

Now let us jump into the calculation of G-score.

The procedure of that we are going to follow is very simple.

First, you'll be calculating the signals from G1 to G8 and

then you will add them up to get the G-score.

Let me take you to the calculation of G1.

We have defined G1 as the earnings return on assets.

It is defined as net income before extraordinary items upon

average total assets of the firm.

The values required for

calculating this ratio are taken from the financial statements of Ajantha Pharma.

You can see the values on the slides.

The earnings return on assets for 2015 is given as net income for

2015, which is 3,716.8 million Rupees upon the average total assets for

that period which is 8,341.85 million Rupees.

This evaluates to 0.4456.

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Note that the step is slightly different from that

of Petrovskiev score of calculation.

There we looked at the sign of ROA and

here we are comparing the ROA with the other firms in the industry.

ROA means Return On Assets.

The median earnings return on assets for all the firms in the industry is 0.1597.

The return on assets of Ajantha Pharma is greater than the industry median.

So we assign a value of 1 to G1.

Now let us look at the calculation of G2.

G2 is the cash flow return on assets.

It is defined as cash flow from operations upon average total assets of the firm.

We pick the values required to calculate this ratio from the financial

statements, again.

The values are as follows.

The cash flow return on assets for

2015 is given by cash flow from operations for 2015,

which is 2,629.2 million rupees upon the average total assets for

the period, which is 8,341.85 million rupees.

This evaluates to 0.3151.

Now the median value of cash flow return on assets of all the firms in the pharma

industry is 0.0667.

The cash flow return on assets of Ajantha Pharma is greater than the industry

median.

It is favorable to us.

So we assign a value of 1 to G2.

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In case of accruals,

we've compared the firm's cash flow from operations with net income.

We will assign a value of 1 to G3 if the cash

flow from operations is greater than the firm's net income.

Otherwise, we assign a value of 0 to G3.

The cash flow from operations for

the year 2015 is 2,629.2 million Rupees.

The net income for the same year is 3,716.8 million Rupees.

You can see that cash flow from operations is less than the net income.

Hence we give a value of 0 to G3 as this is unfavorable.

And now, for the calculation of G4.

If you remember, G4 is the earnings variability.

Stability of earnings or earnings variability is calculated as the variance

of a firm's quarterly return on assets over the last four years.

In the previous calculations we have seen how to calculate the earnings return on

assets.

In this case we calculate the earnings return on asset for

each quarter for the last four years.

You can see these values on this slide.

Now you'll have to calculate the variance for these values.

For Ajantha Pharma we get the value of variance as 0.00842.

The median earnings growth variability for

all the firms in the pharma industry is 0.01035.

The earnings growth variability for

Ajantha Pharma is less than the industry median.

So we assign it a value of 1.

Now, calculation of G5.

G5 is the sales growth variability.

Sales growth variability is defined as the variants of a firm's

quarter over quarter sales growth.

The slide shows the net sales for all the quarters for the last four years.

By subtracting sales of quarter t minus 1

from the sales of quarter t we get the change in sales growth.

For these values we calculate the sales growth variabilities.

The sales growth variability is the variant of the quarterly sales growth for

the last four years.

The sales growth variability for

Ajantha Pharma is 62,275.35 million rupees.

The median sales growth variability for

the industry is 226,615.3 million.

The sales growth variability for

Ajantha Pharma is again less than the industry median.

So we assign it a value of 1, as it is favorable to us.

Calculation of G 6.

G 6 is the measure of R&D spent by the firm.

Ajantha Pharma has spent 700.7 million on R&D in the year 2015.

The R&D intensity calculated from this is 0.084.

During the same time the median R&D intensity in the industry is 0.080.

Ajantha Pharma has spent a little more compared to the industry median.

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Repairs and maintenance for 2015 are 178.1 million.

The rent and lease for 2015 is 83.7 million.

If you add up all the three you will get the value of the capital expenditure as

772.9 million and the Capex intensity is 0.092.

The median Capex intensity of the pharma industry is 0.069 million.

Capital expenditure boosts future sales and earnings growth.

So if the amount spent on capital expenditure by the firm is higher than

the median amount spent on capital expenditure, it is favorable for the firm.

Hence, we assign a value of 1 to G7.

Calculation of G8.

G8 is the measure of advertising expenditure spent by the firm.

Ajantha Pharma has spent 97.5 million on advertising in the year

2015 which evaluates to an advertising expense intensity of 0.015.

During the same time,

the median advertising expense intensity in the industry was 0.009.

Ajantha Pharma has spent more compared to the industry

median advertising expenditure.

So we assign a value of 1 to G8.

Now if you want to get the composite G score,

we have to add up all the scores from G1 to G8.

In case of Ajanta Pharma the value for only G3 is 0.

Again, if you add up all the values, you get a value of 7.

So the G-score for Ajantha Pharma is 7 out of 8.

This is a high score.

Firms with high G-score earn substantially higher returns than firms with low

G-score.

So we longed this stock.

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