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Learning outcomes.

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

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

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

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

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

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

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

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

Â Let me take you to the calculation of G1.

Â We have defined G1 as the earnings return on assets.

Â It is defined as net income before extraordinary items upon

Â average total assets of the firm.

Â The values required for

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

Â You can see the values on the slides.

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

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

Â that period which is 8,341.85 million Rupees.

Â This evaluates to 0.4456.

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Note that the step is slightly different from that

Â of Petrovskiev score of calculation.

Â There we looked at the sign of ROA and

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

Â ROA means Return On Assets.

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

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

Â So we assign a value of 1 to G1.

Â Now let us look at the calculation of G2.

Â G2 is the cash flow return on assets.

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

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

Â statements, again.

Â The values are as follows.

Â The cash flow return on assets for

Â 2015 is given by cash flow from operations for 2015,

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

Â the period, which is 8,341.85 million rupees.

Â This evaluates to 0.3151.

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

Â industry is 0.0667.

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

Â median.

Â It is favorable to us.

Â So we assign a value of 1 to G2.

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In case of accruals,

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

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

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

Â Otherwise, we assign a value of 0 to G3.

Â The cash flow from operations for

Â the year 2015 is 2,629.2 million Rupees.

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

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

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

Â And now, for the calculation of G4.

Â If you remember, G4 is the earnings variability.

Â Stability of earnings or earnings variability is calculated as the variance

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

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

Â assets.

Â In this case we calculate the earnings return on asset for

Â each quarter for the last four years.

Â You can see these values on this slide.

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

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

Â The median earnings growth variability for

Â all the firms in the pharma industry is 0.01035.

Â The earnings growth variability for

Â Ajantha Pharma is less than the industry median.

Â So we assign it a value of 1.

Â Now, calculation of G5.

Â G5 is the sales growth variability.

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

Â quarter over quarter sales growth.

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

Â By subtracting sales of quarter t minus 1

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

Â For these values we calculate the sales growth variabilities.

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

Â the last four years.

Â The sales growth variability for

Â Ajantha Pharma is 62,275.35 million rupees.

Â The median sales growth variability for

Â the industry is 226,615.3 million.

Â The sales growth variability for

Â Ajantha Pharma is again less than the industry median.

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

Â Calculation of G 6.

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

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

Â The R&D intensity calculated from this is 0.084.

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

Â 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.

Â The rent and lease for 2015 is 83.7 million.

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

Â 772.9 million and the Capex intensity is 0.092.

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

Â Capital expenditure boosts future sales and earnings growth.

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

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

Â Hence, we assign a value of 1 to G7.

Â Calculation of G8.

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

Â Ajantha Pharma has spent 97.5 million on advertising in the year

Â 2015 which evaluates to an advertising expense intensity of 0.015.

Â During the same time,

Â the median advertising expense intensity in the industry was 0.009.

Â Ajantha Pharma has spent more compared to the industry

Â median advertising expenditure.

Â So we assign a value of 1 to G8.

Â Now if you want to get the composite G score,

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

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

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

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

Â This is a high score.

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

Â G-score.

Â So we longed this stock.

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