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Sunday, 29 January 2012

How to save Income Tax?

Section 80C of Income Tax Act 1961 allows every Income Tax payer up to a maximum of Rs.1,00,000 Tax Free Income in a year.If they invest in or buy the following instruments.

1.Premium for Life Insurance(or) ULIP

2.Provident Fund(PF) contribution

3.Public Provident Fund(PPF)

4.Repayment of home loan principal

5.Equity Linked Savings Scheme(ELSS) of Mutual Fund 

6.Infrastructure Bonds

7. National Savings Certificates(NSC)

8. Tax Saving Fixed Deposits with Banks.

Saturday, 28 January 2012

Financial Ratio Analysis: Coverage Ratio

Coverage Ratio is a measure of a company's ability to meet its financial obligations.
The higher the coverage Ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.

Coverage Ratio includes

1.Interest Coverage Ratio
2.Debt Service Coverage Ratio
3.Asset Coverage Ratio

Interest Coverage Ratio:Interest Coverage Ratio measure the ability of a company to pay the interest expense on its debt.
This ratio is used to determine how easily a company can pay interest on outstanding debt.
Interest Coverage Ratio is calculated by dividing a company's earnings before interest and taxes(EBIT) of one period by the company's interest expenses of the same period.

Interest Coverage Ratio =EBIT/Interest Expense

An interest Coverage Ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

2.Debt services Coverage Ratio:It is also known as Debt Coverage Ratio.It is the measure of a company's ability to produce enough cash to cover its debt(including lease) payments.
DCR(Debt Coverage Ratio) is the ratio of cash available for debt servicing to interest,principal and lease payments.

Debt Coverage Ratio=Net Operating Income/Total Debt Services

Debt service Coverage Ratio of less than 1 would mean a negative cash flow.The higher DCR is better.

3.Asset Coverage Ratio:Asset Coverage Ratio determines a company's ability to cover debt obligations with its assets after all liabilities have been satisfied.
This ratio tells us how much of the assets of a company will be required to cover its outstanding debts.

Asset Coverage Ratio=((BV Total Assets-Intangible assets)-(current liabilities-ST Debt obligations))/Total debt outstanding

BV=Book Value
ST=Short Term

Utilities should have an Asset Coverage Ratio of at least 1.5
Industrial Company's should have a ratio of at least 2.

Tuesday, 17 January 2012

Financial Ratio Analysis:Payout Ratios

Pay out ratios provides an idea of how well earnings support the dividend payments and the ability to keep profits and pay to share holders.
There are two types of payout Ratios
1.Dividend Payout Ratio: 
  • Investors who are seeking for high current income and limited capital growth prefer companies with high dividend payout ratio.
  • Investors who are seeking capital growth may prefer companies with lower payout Ratio because capital gains are taxed at a lower rate.
  • Some company's chose stock buy back as an alternative to dividends. In such cases this ratio becomes less meaningful.
  •  Dividend ratio is zero in the case of most high growth firms.
  • A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors. 

Dividend payout ratio=Yearly dividend per share/earnings per share

The dividend payout ratio measures the percentage of a company's net income that is given to share holders in the form of dividends.

2.Earning Retention Ratio: The proportion of net income that is not paid out as dividends.Most earnings retained are re- invested into the company's operations.
Tracking year-on-year earnings retention ratio is important to investigate whether a company is increasing(or)decreasing its rate of re-investment.
A company that retains a large portion of its net income, will anticipate having high growth(or) opportunities to expand its business.
High retention Ratio's are generally seen in growing company's more than established blue chip companies.

Earning retention Ratio= (Net Income-Dividends)/Net Income.

This is the opposite of the dividend payout ratio.

Monday, 16 January 2012

Financial Ratio Analysis:Liquidity Ratios

The company which is having greater liquidity assets is better than the company which is having low liquidity assets.
What is Liquidity:The company's ability to quickly convert an investment portfolio to cash with little or no loss in value.

There are 4 types of liquidity ratios.

1.Current Ratio: This Ratio is used to test a company's liquidity by deriving the proportion of current assets available to cover liabilities.

Current Ratio=Total Current Assets/Current Liabilities

The higher the current ratio,the better.

2.Quick Ratio: This ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there to cover current liabilities.
A higher quick ratio means a more liquid current position.

Quick Ratio=Quick Assets/Current Liabilities.

Quick Assets=Total Current Assets-Inventory.

By excluding inventory, the quick ratio focuses on the more liquid assets of a company.

3.Cash Ratio: The cash Ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash,cash equivalents(or) invested funds are there in current assets to cover current liabilities.

Cash Ratio=Cash Assets/Current Liabilities.

Cash Assets=Total Current Assets-(Inventory+Account Receivables).

Very few company's will have enough cash and cash equivalents to fully cover current liabilities , which is not a bad thing , so need not to focus on this ratio being above 1:1.

4.Cash Conversion Cycle: The Cash Conversion Cycle measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payments from its creditors.

The shorter this cycle the more liquid the company's working capital position is.

Cash Conversion Cycle=DIO+DSO-DPO

DIO=Days inventory outstanding 
DSO=Days Sales outstanding
DPO=Days payable s outstanding.

Wednesday, 11 January 2012

Financial Ratio Analysis: Leverage Ratios

Leveraging means taking out a loan so that you can invest the money and hoping your investment makes more money than you will have to pay in interest on the loan.
The leveraging ratio is used to calculate the financial leverage of a company.
There are several different ratios, but the main factors looked at include debt,equity,assets and interest expenses. These ratios are another measure of financial health of a company.These ratios concerned with short-term assets and liabilities.
Debt Ratio:The Debt ratio measures the extent to which a firm has financed its assets with non-owner sources of fund. Debt Ratio depends on the classification of long-term leases.

Debt Ratio=Total debt/total assets

Debt/Equity Ratio: The most important Ratio is the Debt-Equity Ratio compares a company's total liabilities to its total share holders equity. This is the measurement of how much suppliers, lenders, creditors have committed to the company versus what the share holders have committed.

Debt/equity ratio=(Short-term debt+long-term debt)/total equity

Upper acceptable limit of the Debt to Equity is usually 2:1
A Ratio greater than 1 means assets are mainly financed with debt.
A Ratio less than 1 means equity provider a majority of the financing.
If the ratio is high then the company is in a risky position,Especially if interest rates are on the rise.

Interest Coverage:The times interest earned ratio indicates how well the firms earnings can cover the interest payments on its debt. This ratio is also known as the interest coverage.

Interest coverage= EBIT/Interest chanrges

EBIT=Earnings Before Interest and Taxes.

Saturday, 7 January 2012

Financial ratio Analysis:Profitability Ratios

These Ratios gives a good understanding of how well the company utilized its resources in generating profit and share holders value.
Operating margin ratio(EBIT):Operating Margin is the proportion of revenue remaining after paying the costs of operating the business (wages,raw materials,administrative expenses, advertisement .etc)
Operating margin is also known as operating income margin,operating profit margin ,return on sales(ROS) and EBIT(Earning Before Interest and Taxes). This metric is very useful in Fundamental Analysis.This is a measure of overall operating efficiency.

Operating Margin= (Operating Income(Net Profit))/(Revenue(Net Sales))
Operating profit determines the quality of a company. The higher the operating margin, the better.
Gross Profit Margin: Gross profit is what remains from sales after a company pays out the cost of goods sold.
This metric can be used to compare a company with its competitions, more efficient companies will usually see higher profit margin.
COGS=Cost Of Goods Sold
Net Profit Margin:Net Profit Margin measures how much of each dollar earned by the company is translated into profits.
Net Profit Margin=Net Profit (after taxes)/Net Sales
Net profit margin is an indicator of how efficient a company is and how well it controls its costs.
Low profit margin indicates a low margin of safety. The higher the margin is, the more effectively the company is converting revenue into actual profit.
Cash Margins:Cash flow margin expresses the relationship between cash generated from operations and sales.
Cash Margin=cash flow from operating cash flows/net sales
The larger the percentage, the better.
Return On Assets:This measures the efficiency with which the company is managing its investment in assets and using them to generate profit.
ROA= Net Income/ Total Assets
The higher the percentage ,the better because the company is doing a good job using its assets to generate sales.
Return On Equity: It measures the return on the money the investors have put into the company.
ROE=Net Income/Stock holders Equity

Friday, 6 January 2012

Financial ratio Analysis:Per share Ratios

Financial ratio Analysis
1.Per share Ratios: Per share Ratios includes 

1.Earn Per Share(EPS): we already discussed about this in How to read the report card of a company article.

2.Dividend Per Share(DPS):DPS is the total dividends paid out over an entire year(including interim dividends but not including special dividends) divided by the number of out standing ordinary shares issued.

D= Tota dividends paid out over an year
SD=Special Dividends
S=Shares outstanding for the period.

3.Book Value per share(BVPS): Book Value Per Share shows the accounting value of a company against the market value.
For growth stocks or in times of bullish runs in the market, the market values(stock prices) of companies tend to be higher than the book value.
In a bear market, The market value tends towards the book value
For companies where the market value is below the book value it is potential sign of undervaluation.

Thursday, 5 January 2012

Financial Ratio Analysis

The most important element in the fundamental analysis is analyzing financial statement information.
Investor may be confused and frighten to analyze the massive company's financial statement at the same time.
However , through financial ratio analysis, Investor will be able to work in an organized fashion.

There are many types of Ratios.

7.Component Ratios