The credit taker’s perspective
Put yourself in a potential buyer's shoes. What would be a reasonable return on investment in this business, given the risk of maintaining income and incurring capital loss? If you think 15% is a reasonable figure, this equates to a P/E ratio of 6.6; if you consider 10% to be reasonable, this equates to a P/E ratio of 10; and so on. 5 Getting my money back Another way of looking at this (especially for smaller companies) is to ask: 'How quickly will the investor want to get his money back?' Or, 'How many years of after-tax profit is reasonable to repay the initial investment in this business?'
It could be instructive to look at P/Es on the London Stock Exchange. In March 2005 examples of P/Es were: Basic Industrial 12.0; General Industrial 18.9; Consumer Goods 17.7; Financial 13.9; Insurance 10.4; I.T. 42.4; whilst the average for the FTSE 100 was 15.0. The average P/E ratio on the LSE in your industry sector could be a good reference point in deciding on the appropriate P/E ratio for your business.
Public company P/E ratios are usually about twice to three times those of larger private company P/E ratios and three to four times those of smaller private businesses. One also needs to be aware that there are times when stock exchange P/E ratios mirror the 'irrational exuberance' of the times, whilst private company transactions seldom follow this enthusiastic pricing model. In these circumstances (which pertained prior to 2000), the discount for private companies in relation to public companies would be larger.
Find out the current returns of a payday loan
The next step in establishing the appropriate P/E ratio for your business is to find out the current returns of various alternative investments and to list them in order of type and risk. This will give you a point of reference to help you make your selection. Below we list some types of investment and their P/E ratios to which you could refer, and we then ask you to consider some other issues that could establish an appropriate P/E.
Relatively risk-free investments Consider, for example, an interestbearing cash deposit in a high street bank. Let us assume this pays 6% before tax, or 4.5% after tax. A 4.5% after tax return is equivalent to a P/E ratio of 100 -f 4.5, or 22. (Note this investment has neither capital gain nor the risk of loss, whereas most businesses do.)
Sale prices for comparable private businesses Ask a company broker with knowledge of your industry sector what P/E ratios are currently being applied to business of your type and size and, for sake of interest, in some other sectors of the market. (I expect the answer to be somewhere between 4 and 8.) 3 London Stock Exchange Find out what P/E ratios are applicable for public companies in your industry sector on the LSE. The Financial Times publishes average P/E ratios for the LSE for a range of sectors.
The inflation ratio and how it affects your loan
Before we look at a practical example of a P/E valuation, it might be helpful to examine some of the issues you need to consider to establish the appropriate P/E ratio for your own business. What you are looking for is a capitalisation rate that truly reflects the profits risk and the growth potential of your business.
All investment returns, including official interest rates, are influenced in some way by the rate of inflation. So are P/E ratios. In times of high inflation the return on any investment in percentage terms is expected to be high and, consequently, P/E ratios are low, and in times of low inflation P/E ratios are supposed to be generally higher. However, this correlation does not always apply, particularly on the world's stock exchanges, which are often influenced by other considerations. Thankfully for our purposes, the P/E ratios applicable to private businesses and, hence, their values are much more rational and are usually directly influenced by current inflation rates.
Establishing the FMP for your credit
This involves two distinct steps, namely: a) adjusting the published profits to arrive at real profits; b) deciding what combination of historic real profits and future profits should be used to arrive at the FMP figure.
The process of adjusting published profits in a private business to reach real profits has been discussed above. Deciding on a final FMP figure is more a matter of judgement, but there are some guidelines you can follow:
Although a purchaser is buying the future, he is more likely to believe that last year's profits are a closer proxy for FMP than next year's projected profits.
It is usual to use a combination of historic and projected data to establish FMP and an average of the last three years' real profits and the next two years' projected profits (if available) is a good starting point.
It could be appropriate to weight the figures in favour of the closest historic results.
Developing full credit potential
In spite of this growth and development, it is a fact that small scale sector has not been developed to its fullest potential. This sector is beset with a number of problems, which have impeded the complete development of this sector. The sickness in this sector is widespread and growing at a fast rate, resulting in huge losses of different kinds. It is because of this reason that the units in this sector were operating in a sheltered market and a majority of them paid little attention to technology upgradation, quality improvement, and cost reduction during the last several decades.
Due to the regime of quotas, control and licensing, this policy has given rise to setting-up industrial units with the only aim of making windfall gains, irrespective of the fact that an individual is quality conscious or not. This resulted in a large number of units becoming sick with little scope for any improvement in the future. The Reserve Bank of India has defined a weak unit as one, which has shown accumulated losses equal to or exceeding 50 per cent of its peak net worth for the immediately preceding five years, and suffered a cash loss in the immediate preceding year.
The challenges of credit taking
In India, the small scale sector has been constantly out-performing the large-scale sector on the crucial parameters of growth in production and growth in employment. The basic accent of India’s policy for the small scale sector has been defensive, aiming to protect the small scale sector from the dynamics of the competitive growth. The changing economic and liberalized scenario has removed this protection. In this process (Raje, 2000), the liberalized policy has posed certain challenges and provided opportunities to the small scale sector. The challenges are in the form of increased competition and reduced protection due to lowering of tariffs and market determined rates of interest. On the other hand, opportunities have come in the form of access to better technology, availability of variety of raw materials and components, impetus to quality, efficiency and opportunity to restructure and diversify.
Systematic planning in credit management
Under the changed circumstances, the ability to generate and utilize knowledge is the only way to sustain oneself. Technological innovation is a key to survival and growth for small scale enterprises in India (Wani et al., 2002b). Technical entrepreneurship plays a pivotal role in the process of industrialization. It can make a contribution to industrial development through innovations in product development, improvements in productivity, production process and systems. Therefore, the technical education integrated with the systematically-planned entrepreneurial input can be useful in developing an engineer as an entrepreneur. This education can play a vital role in the development of technical entrepreneurship for a sustainable growth of the SSI sector in India. The engineer as an entrepreneur can make a signifi cant contribution to industrial development through innovations in product/process development, increased productivity, production process, and systems (Wani et al., 2004a), with the application of the knowledge he gained.
Forces that drive the loans market
When discussing the driving forces of prosperity and employment generation, entrepreneurship comes out as a prominent and strategically important issue. In combination with the ideas about new regional economies and new information and communication technologies, entrepreneurship serves as a universal key that provides within itself fruitful paths into the future. Different approaches coexist and an academic discussion on entrepreneurship is trying to develop typologies of different concepts (Martinelli, 1994). Listening to many recent talks about entrepreneurship, we notice that references are made in turn to the sector of small- and medium-sized enterprises, to venture creation and to selfemployment.
In this sense, the rising self-employment is regarded as a stimulus towards fresh social and economic blood in the economy and, of course, innovation and the restructuring of actors and organizations are always needed (Acs and Audretsch, 1990a, 1990b). Rao and Pareek (1982), describe entrepreneurship as a creative and innovative response to the environment. Such responses can take place in any fi eld of social endeavour—business, industry, agriculture, education, social work and the like. Doing new things or doing things that are already being done in a new way is therefore a simple defi nition of entrepreneurship.
Exploring new credit opportunities
In recent years, the development of entrepreneurship programs for engineering students has gained considerable momentum. Through entrepreneurship, an engineer can bring a technical revolution that can meet the challenges. Simultaneously, the mushroom growth of engineering institutions will be producing thousands of engineers per annum. The addition of thousands of engineers per year will increase the unemployment problem for the students. This increasing unemployment problem has forced the policy makers in India to explore new avenues in the small scale sector and take necessary steps to encourage engineering students towards self-employment/entrepreneurship in their early career.
Engineering has undergone signifi cant changes in the recent past. The lead-time in education, in general, and in the course of engineering in particular, is long and unless we plan ahead reasonably and accurately, we would be unable to fulfi l our obligations effectively. In the changing environment where the world is becoming a global village, the study of engineering must not only teach the fundamentals of engineering theory, experimentation, and practice, but also be relevant, attractive, and connected. It should cover the essential ingredients conducive to preparing students for a broad range of careers and life-long learning. The essential ingredients include the willingness to take calculated risks—in terms of time, equity, or career, the ability to formulate an effective venture team, the creative skill to marshal needed resources; and fundamental skills of building a solid business plan; and fi nally the vision to recognize opportunity where others see chaos, contradiction, and confusion (Kuratko and Hodgetts, 2004).
Strategic approach to debt management
On the other hand, the opportunities have come in the form of access to a better technology, availability of a variety of raw materials and components, impetus to quality, effi ciency, and opportunities to restructure and diversify. To face these challenges and grab the opportunities, an entrepreneur has to adopt innovative product process, productivity improvement techniques and effective technology management for sustainability of the unit. In this context, the paper examines the factors responsible for growth and sickness to small scale industrial units. It also proposes the model with a strategic approach for developing entrepreneurial capabilities among engineers. The objectives are to foster an increasingly entrepreneurial culture that helps the students and the faculty to understand the fundamentals and feasibility of forming technology enterprise to help them establish and manage sustainable ventures and to accelerate the commercialization of technologies developed.