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.
Showing posts with label Market. Show all posts
Showing posts with label Market. Show all posts
Sunday, November 1, 2009
Saturday, October 10, 2009
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 :)
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 :)
Saturday, October 25, 2008
Simple analogy for Bubble Burst of Oct 2008
Recently I recieved this in my in-box. Very interesting narration for bubble burst.
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.”
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar
* the net asset of the country = 3 dollars.
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.”
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar
* the net asset of the country = 3 dollars.
Wednesday, January 23, 2008
Changing gears in Davos
The Annual meeting of World Economic Forum for 2008 is in session at Davos. A lot many distinguised people from finance world, politics, manufacturing, media etc are present there to discuss the issues facing the world right now. In normal circumstances, the meeting would have focused the collaboration that's needed for the peace in Middle East, making use of the latest technologies for fighting against social and environmental issues or to discuss the prospects of Pakistan and Afghanistan. But here comes the thunderball. A lot of energy would now be spent on the US recession and its impact on the economy across the globe.
Till now people have been optimist. Yes, there is a credit crunch due to reckless lending in the subprime mortgage category, and also in property and credit cards - but we will handle it. Another perscpective was that growth is very powerful in India, China and middle east - that will wither the American storm.
But "Decoupling" is not working. The fear has crept in big time. The insatiable desire for cunsumer stuff in US (much of it made in China) is now making the growth charts go southwards. Recession gurus are saying, "we are almost there"!
Till now people have been optimist. Yes, there is a credit crunch due to reckless lending in the subprime mortgage category, and also in property and credit cards - but we will handle it. Another perscpective was that growth is very powerful in India, China and middle east - that will wither the American storm.
But "Decoupling" is not working. The fear has crept in big time. The insatiable desire for cunsumer stuff in US (much of it made in China) is now making the growth charts go southwards. Recession gurus are saying, "we are almost there"!
Wednesday, January 16, 2008
Bulls have been Chained
My wife told me couple of weeks back (even before the whole gamut of things started) that this is a KAAL year! She read it that this year is not that great! Have I started believing that? Oops, let me set the context right, though I'm sure most of you guys must have sensed it by the title of this post. But still for others I'm talking about the finance market in India; in fact the whole world market. Where are markets going from here? Is 2008 really a bad year for Indian economy?
These days as soon as I reach home I switch on my idiot box (which doesn't seem to be as idiot to me as before) to listen to NDTV Profit. And the more I watch it, the more I'm getting perplexed. US market as well as Asian market is taking a bit hit. Yesterday's fearsome declarations by Vikram Pandit (CEO of Citigroup) of the huge losses and mammoth write-off's have left me more shocked. The winds of change have finally arrived and it seems the world market gonna make devastating changes. Is it a sign that India will head its way towards becoming the global power?
But right now I dont see the light at the end of this tunnel. Indian economy itself is weak right now. Prime minister with his financial advisors are meeting to find out a way to resolve the issues or rather finding a way to beat the heat. They are coming up with re-structuring the tax slabs, change in indirect taxes, etc. Mr C Rangarajan is still projecting that the growth rate will be 8.5% this year (quite hopeful). I'm sure these guys are thinking hard to make that happen.
For me, things are too scary. I've been into this market very recently and all this is making me learn a lot (well, i'm trying to hide my fear here). But I'll keep watching the market and make my moves as and when required. And surely I wish my wife makes some more predictions; of course in favor of my portfolio :-)
So whats your game plan??
These days as soon as I reach home I switch on my idiot box (which doesn't seem to be as idiot to me as before) to listen to NDTV Profit. And the more I watch it, the more I'm getting perplexed. US market as well as Asian market is taking a bit hit. Yesterday's fearsome declarations by Vikram Pandit (CEO of Citigroup) of the huge losses and mammoth write-off's have left me more shocked. The winds of change have finally arrived and it seems the world market gonna make devastating changes. Is it a sign that India will head its way towards becoming the global power?
But right now I dont see the light at the end of this tunnel. Indian economy itself is weak right now. Prime minister with his financial advisors are meeting to find out a way to resolve the issues or rather finding a way to beat the heat. They are coming up with re-structuring the tax slabs, change in indirect taxes, etc. Mr C Rangarajan is still projecting that the growth rate will be 8.5% this year (quite hopeful). I'm sure these guys are thinking hard to make that happen.
For me, things are too scary. I've been into this market very recently and all this is making me learn a lot (well, i'm trying to hide my fear here). But I'll keep watching the market and make my moves as and when required. And surely I wish my wife makes some more predictions; of course in favor of my portfolio :-)
So whats your game plan??
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