Return on equity -Net profit ( net earnings)*100/Total outstanding equity
This gives the return from a shareholder's perspective and does not reflect how well the accumulted shareholder's money ( reflected in Reserves and surplus ) is utilised.
Better parameter would be Return on networth
This is Net profit after taxes *100/ Networth of the company constituting Equity and reserves & surplus.
This again does not reflect how well the total funds of the company( including borrowed funds are deployed. For that one has to take int o consideration the net ptofit before interest /total capital deployed
More in the next
Wednesday, July 9, 2008
Tuesday, July 8, 2008
Current ratio - Importance in Financial evaluation specifc reference to the Indian context
Current ratio which is nothing but current assets /current liabilities is quite a critical part of the overall financial evaluation. This is one of the critical parameters not only in evaluating the efficient use of resources but also is a test of the credibility of the financials. In quite a few Companies, one finds that most of the net profit for the year sits in the form of an Inventory or Debtors. This could be a clear indication that eithet the stocks are overvalued or the receivables may not be fully receivable. While this may not be true in all the cases, quite a few of the Indian companies have thgis problem. They keep reporting profits year after year , but you will see the burgeoning size of the Debtors and Inventory. Operational cashflow over the years is negative.
Clearsign that one should avoid such shares. There can be the odd Comapny where there could be geneuine reasons.But in general such Companies should be
Clearsign that one should avoid such shares. There can be the odd Comapny where there could be geneuine reasons.But in general such Companies should be
Monday, July 7, 2008
Meaning of EPS and PE ratio in the share market
EPS is Earnings per share and PE is Price Earnings. These are two oft repeated expressions in the stocks evaluation and discussions
Earnings per share is the total net earnings ( net profit) of the Company divided by the number of shares of the Company
It is nothing but the earnings ( net profit ) per unit share held by the investor.
Example, if net profit of the Company is Rs 25 Crs, the Company has a total share of Rs 10 Crs and a total of 10 Cr shares, each share being of Rs 1 , then the EPS is Rs 25 Crs/ 10 Crs =Rs 2.5 per share.
Price earnings ratio or the PE multiple as they call it is the Price divided by the earnings per share. This will give the number of time , price is in relation to the EPS. Lower the multiple , more attractive is the price of the share.
Reverse of this is the return on equity shares, that is EPS divided by price of the share multiplied by 100 gives the return % on equity
Let us assume that the share price is Rs 50, the PE ratio is Rs 50/ 2.5 = 20
Return is Rs 2.5*100/50=5%
Earnings per share is the total net earnings ( net profit) of the Company divided by the number of shares of the Company
It is nothing but the earnings ( net profit ) per unit share held by the investor.
Example, if net profit of the Company is Rs 25 Crs, the Company has a total share of Rs 10 Crs and a total of 10 Cr shares, each share being of Rs 1 , then the EPS is Rs 25 Crs/ 10 Crs =Rs 2.5 per share.
Price earnings ratio or the PE multiple as they call it is the Price divided by the earnings per share. This will give the number of time , price is in relation to the EPS. Lower the multiple , more attractive is the price of the share.
Reverse of this is the return on equity shares, that is EPS divided by price of the share multiplied by 100 gives the return % on equity
Let us assume that the share price is Rs 50, the PE ratio is Rs 50/ 2.5 = 20
Return is Rs 2.5*100/50=5%
Definition of repo and reverse repo
Repo in normal financial parlance means repurchase agreement
The person who supplies Govt. the security and borrows and agrees to later sell and repay the money. Reverese repo is the other side of the transaction.
A financing arrangement used primarily in the government securities markets whereby a dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price which will provide the lender with an extremely low risk return. Such a transaction is called a repo when viewed from the perspective of the supplier of the securities (the party acquiring funds) and a reverse repo or matched sale-purchase agreement when described from the point of view of the supplier of funds. There will be an underlying interest component in this.
Repo in the Indian banking context means the rate at which RBI does short term lending to the banks or the Banks borrowing from RBI
Reverse repo is the opposit where RBI borrows from Banks or the Banks lend to RBI
Repo rate for obvious reasons will be more than the reverse repo in this banking context. RBI makes the spread between repo ( lending rate )and reverse repo( borrowing rate), that is the rate at which lends to banks and rate at which it borrows from banks.
In a situation where repo rate is raised without any increase in reverse repo RBI will have a greater spread atthe cost of the Banks
Example
Current repo rate say 7%
Reverse repo rate is 6.5%
When RBI increase Repo rate , say by 50 basis points, the newrepo rate at 7.5% with no change in reverse repo , will increase the spread that RBI makes to 1.00%
The person who supplies Govt. the security and borrows and agrees to later sell and repay the money. Reverese repo is the other side of the transaction.
A financing arrangement used primarily in the government securities markets whereby a dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price which will provide the lender with an extremely low risk return. Such a transaction is called a repo when viewed from the perspective of the supplier of the securities (the party acquiring funds) and a reverse repo or matched sale-purchase agreement when described from the point of view of the supplier of funds. There will be an underlying interest component in this.
Repo in the Indian banking context means the rate at which RBI does short term lending to the banks or the Banks borrowing from RBI
Reverse repo is the opposit where RBI borrows from Banks or the Banks lend to RBI
Repo rate for obvious reasons will be more than the reverse repo in this banking context. RBI makes the spread between repo ( lending rate )and reverse repo( borrowing rate), that is the rate at which lends to banks and rate at which it borrows from banks.
In a situation where repo rate is raised without any increase in reverse repo RBI will have a greater spread atthe cost of the Banks
Example
Current repo rate say 7%
Reverse repo rate is 6.5%
When RBI increase Repo rate , say by 50 basis points, the newrepo rate at 7.5% with no change in reverse repo , will increase the spread that RBI makes to 1.00%
Subscribe to:
Posts (Atom)
Posts
