Understanding Financial Numbers

Result season is here with lot of data. Market enthusiasts are keeping an eye on the numbers, vying to get the best of the deals. This season has seen a lot of variation with companies like ITC booking more than expected profits, L&T meeting expectations and then some like TISCO with a disappointing show.

Some good parameters to assess Company’s financial health other than PE are:
1. Quick ratio: Quick Ratio is often used as a better test of a company's liquidity position. That is why it is some times called a Liquidity Ratio or Acid Test Ratio.

The Quick Ratio is obtained by subtracting inventories from the Current Assets figure, before dividing by the Current Liabilities.

Quick ratio = (Current assets – Inventories) / Current Liabilities

A ratio of 1.0 is considered good enough. It can be higher for certain industries, but too high a ratio may indicate management inefficiency.

2. Current Ratio: The Current Ratio indicates whether the company will be able to meet its payment obligations that become due within the year. It can do this by using the cash, or by collecting payments from its debtors, or by quickly turning over inventory to generate cash.

This ratio is obtained by dividing the Current Assets figure in the Balance Sheet by the Current Liabilities. A good ratio is between 1.5 and 2. A ratio of 3 or more may not necessarily be better.

Current Ratio = Current assets / Current Liabilities

Current Assets typically comprise: inventories, cash and cash equivalents, accounts receivables (debtors), loans and advances.

Current Liabilities include: interest payments, accounts payables (creditors), provisions for payments of taxes, dividends, retirement and other benefits.

3. Debt/Equity ratio: This ratio measures how much money a company can borrow over the long term without running into payment problems. When a company keeps borrowing, its fixed costs keep increasing due to the interest payments.

Debt/Equity ratio = Total debt / Shareholder's equity

Total debt includes both short term and long term debt, such as, secured and unsecured loans, mortgage payments. Shareholder's equity includes equity shares and reserves.

Ideally Debt/Equity ratio should be less than 1, and the lower the better. But this is a thumb-rule. For certain industries like auto manufacturing, the ratio can be 2 or more. One needs to make peer comparison in a sector or industry to arrive at typical ratios. Given a choice, I'd prefer a company with high equity than one with high debt. Why? There are no fixed costs involved with equity shares. If business is good, more dividend payout may be involved. If business is bad, dividend payment can be slashed. Interest payments due to high debt will need to be paid regardless.

RIL Declares 1:1 Bonus issue - Is it good for me?

RIL's declaration of 1:1 bonus issue came as a good surprise. People are treatting it as a Diwali gift from none other than Reliance. Bonus shares are considered to be highly beneficial to the shareholders. But in reality, I think, though these bonus shares are free gift on which dividends will be paid in future, but won't the share prices be adjusted downwards? So wont' shareholder's wealth remain the same?
But other view is that since its Reliance, in long term this will surely be friutful! Reliance has always been outperformer, so i hope this bonus will be beneficial to me...

Comments welocme :)

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Turn NOTEPAD into a dairy!

Turn Notepad into a Diary!
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I'm sad!

Today I'm sad for the biggest show-man is no more with us. The one and only one who showed the world what break dancing is and what it takes to fight against all odds to become world's greatest entertainer, has left for heavenly aboard. Yes I'm talking about none other than Michael Jackson.
This guy is the one who inspired me (and million others) and made me go on stage! I cant forget my freshers' in college where i danced to the tune of Billie Jeans which everyone enjoyed. That was my best performance ever and today I dedicate it to MJ.
May his soul rest in peace.

Real Heroes

Just finished watching CNN IBN's Real Heroes. This annual award function in colaboration with Reliance Industries brings into lime-light the people who have outlived life and are in turn working for the life and happiness of others. These ordinary people working in an extra-ordinary capacity to make this world a better place for one and all.
I was watching it for the first time; this year being the second year of felicitation. When I heard about the work these people have done, be it education, healthcare, community, sports, environment, its out of this world. One feels inspired and thankful to the emmense work these people are doing with no external support. Most of them are self funded people, trying to meet their ends. Surely, this felicitation and financial help from Reliance Industries will equip them better to carry on their noble work. It was great to see that people have left the corporate world after getting education from IIT to help their society. Also there was a gentleman who refused IAS job and rather started working for the uplift of the rural.

Personally I want to thank CNN IBN and Reliance Industries for bringing these people to the front. Many will be motivated and inspired to live for others! Salute to these men and women.

A Small new family in our backyard!!!

Family that sleeps together, stays together!!


New born in our backyard!