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1.Definition of accounting: the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results there of. 2.Book keeping:It is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner. 3. Concepts of accounting: A. separate entity concept B. going concernconcept C. money measurement concept D. cost concept E. dual aspect concept F. accounting period concept G. periodic matching of costs and revenue concept H. realization concept. 4 Conventions of accounting A. conservatism B. full disclosure C. consistency D materiality. 5. Systems of book keeping: A. single entry system B. double entry system 6. Systems of accounting A. cash system accounting B. mercantile system of accounting. 7. Principles of accounting a. personal a/c : debit the receiver Credit the giver b. real a/c c. nominal a/c : debit what comes in credit what goes out : debit all expenses and losses credit all gains and incomes
8. Meaning of journal: journal means chronological record of transactions. 9. Meaning of ledger: ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal, personal. Prepared by:-C.BALAKRISHNA MBA
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33. Suspense account: the suspense account is an account to which the difference in the trial balance has been put temporarily. 34. Depletion: it implies removal of an available but not replaceable source, Such as extracting coal from a coal mine. 35. Amortization: the process of writing of intangible assets is term as amortization. 36. Dilapidations: the term dilapidations to damage done to a building or other property during tenancy. 37. Capital employed: the term capital employed means sum of total long term funds employed in the business. i.e. (share capital+ reserves & surplus +long term loans (non business assets + fictitious assets) 38. Equity shares: those shares which are not having pref. rights are called equity shares. 39. Pref.shares: Those shares which are carrying the pref.rights is called pref. shares Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the even of Company winding up. 40. Leverage: It is a force applied at a particular work to get the desired result. Prepared by:-C.BALAKRISHNA MBA
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42. Financial leverage : it is nothing but a process of using debt capital to increase the rate of return on equity 43. Combine leverage: it is used to measure of the total risk of the firm = operating risk + financial risk. 44. Joint venture: A joint venture is an association of two or more the persons who combined for the execution of a specific transaction and divide the profit or loss their of an agreed ratio. 45. Partnership: partnership is the relation b/w the persons who have agreed to share the profits of business carried on by all or any of them acting for all. 46. Factoring: It is an arrangement under which a firm (called borrower) receives against its receivables, from a financial institutions (called factor) advances
47. Capital reserve: The reserve which transferred from the capital gains is called capital reserve. 48.General reserve: the reserve which is transferred from normal profits of the firm is called general reserve 49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus cash. 50. Minority Interest: minority interest refers to the equity of the minority shareholders in subsidiary company. a
51. Capital receipts: capital receipts may be defined as non-recurring receipts from the owner of the business or lender of the money crating a liability to either of them. 52. Revenue receipts: Revenue receipts may defined as A recurring receipts against sale of goods in the normal course of business and which generally the result of the trading activities. 53. Meaning of Company: A company is an association of many persons who contribute money or moneys worth to common stock and employs it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. 54. Types of a company: 1.Statutory companies 2.government company 3.foreign company 4.Registered companies: Prepared by:-C.BALAKRISHNA MBA
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Internal source: Funds from operations is the only internal sources of funds and some important points add to it they do not result in the outflow of funds Prepared by:-C.BALAKRISHNA MBA
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113.International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining foreign currency. Prepared by:-C.BALAKRISHNA MBA
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212. price earning ratio : it a measure for determining the value of a share. May also be used to Measure the rate of return expected by investors. Formula: Market price of share(MPS) -------------------------------X 100 Earning per share (EPS) 213.Current ratio : it measures short-term debt paying ability. Formula: Current Assets -----------------------Current Liabilities 214. Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings; a measure of the extent of trading on equity. Formula : Total Long-term Debt --------------------------Shareholders funds 215. Fixed Assets ratio: This ratio explains whether the firm has raised adepuate long-term funds to meet its fixed assets requirements. Formula Fixed Assets ------------------Long-term Funds Prepared by:-C.BALAKRISHNA MBA
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217. Stock turnover Ratio : the ratio indicates whether investment in inventory in efficiently used or not. It, therefore explains whether investment in inventory within proper limits or not. Formula: cost of goods sold -----------------------Average stock 218. Debtors Turnover Ratio : the ratio the better it is, since it would indicate that debts are being collected more promptly. The ration helps in cash budgeting since the flow of cash from customers can be worked out on the basis of sales. Formula: Credit sales ---------------------------Average Accounts Receivable
219.Creditors Turnover Ratio : it indicates the speed with which the payments for credit purchases are made to the creditors. Formula: Credit Purchases ----------------------Average Accounts Payable
220. Working capital turnover ratio : it is also known as Working Capital Leverage Ratio. This ratio Indicates whether or not working capital has been effectively utilized in making sales. Formula: Net Sales ---------------------------Working Capital Prepared by:-C.BALAKRISHNA MBA
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226. Debt Service Coverage ratio : This ratio is explained ability of a company to make payment of principal amounts also on time. Formula : Net profit before interest and tax ---------------------------------------- 1-Tax rate Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship between the proprietors funds and the total tangible assets. Formula : Shareholders funds ---------------------------Total tangible assets
228.Difference between joint venture and partner ship : In joint venture the business is carried on without using a firm name, In the partnership, the business is carried on under a firm name. In the joint venture, the business transactions are recorded under cash system In the partnership, the business transactions are recorded under mercantile system. In the joint venture, profit and loss is ascertained on completion of the venture In the partner ship , profit and loss is ascertained at the end of each year. In the joint venture, it is confined to a particular operation and it is temporary. In the partnership, it is confined to a particular operation and it is permanent. 229.Meaning of Working capital : The funds available for conducting day to day operations of an enterprise. Also represented by the excess of current assets over current liabilities. 230.concepts of accounting : 1.Business entity concepts :- According to this concept, the business is treated as a separate entity distinct from its owners and others. 2.Going concern concept :- According to this concept, it is assumed that a business has a reasonable expectation of continuing business at a profit for an indefinite period of time. 3.Money measurement concept :- This concept says that the accounting records only those transactions which can be expressed in terms of money only. Prepared by:-C.BALAKRISHNA MBA
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A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, Prepared by:-C.BALAKRISHNA MBA
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American Stock Exchange Australian Stock Exchange Bermuda Stock Exchange Bolsa Mexicana de Valores Bombay Stock Exchange Budapest Stock Exchange Casablanca Stock Exchange Euronext Amsterdam Euronext Brussels Euronext Lisbon Euronext Paris Frankfurt Stock Exchange Ghana Stock Exchange Helsinki Stock Exchange Hong Kong Stock Exchange Istanbul Stock Exchange Jakarta Stock Exchange JASDAQ Johannesburg Securities Exchange Karachi Stock Exchange Korea Stock Exchange Kuwait Stock Exchange Lahore Stock Exchange London Stock Exchange Madrid Stock Exchange Malaysia Stock Exchange Milan Stock Exchange Nagoya Stock Exchange National Stock Exchange of India NASDAQ New York Stock Exchange Osaka Securities Exchange Philippine Stock Exchange Santiago Stock Exchange So Paulo Stock Exchange Shanghai Stock Exchange Singapore Exchange Stockholm Stock Exchange Taiwan Stock Exchange Tokyo Stock Exchange Toronto Stock Exchange Prepared by:-C.BALAKRISHNA MBA
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A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately. The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. The Open Directory Project (ODP), also known as dmoz (from directory.mozilla.org, its original domain name), is a multilingual open content directory of World Wide Web links owned by Netscape that is constructed and maintained by a community of volunteer editors Stock Market Boom: A stock market bubble is a type of economic bubble taking place in stock markets when price of stocks rise and become overvalued by any measure of stock valuation. The existence of stock market bubbles is at odds with the assumptions of efficient market theory which assumes rational investor behaviour. Behavioral finance theory attribute stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets [1]. In the laboratory, uncertainty is eliminated and calculating the expected returns should be a simple mathematical exercise, because participants are endowed with assets that are defined to have a finite lifespan and a known probability distribution of dividends. Other theoretical explanations of stock market bubbles have suggested that they are rational [2], intrinsic [3], and contagious [4]. Amortization or amortisation is the process of decreasing or accounting for an amount over a period of time Deferred revenue expenditure is that where the benefit the expenditure can be had for more than ONE accounting period and less than FIVE accounting periods. A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.[1] In a mutual fund, the fund manager, who is also known as the Prepared by:-C.BALAKRISHNA MBA
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2. In options, the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid. Also referred to as a "breakeven". Prepared by:-C.BALAKRISHNA MBA
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2. A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile. 1. Typically, a deep-discount bond will have a market price of 20% or more below its face value. These bonds are perceived to be riskier than similar bonds and are thus priced accordingly. 2. These low-coupon bonds are typically long term and issued with call provisions. Investors are attracted to these discounted bonds because of their high return or minimal chance of being called before maturity. Merger: The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Basically, when two companies become one. This decision is usually mutual between both firms. Prepared by:-C.BALAKRISHNA MBA
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Price Earning Ratio: A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as:
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. Also sometimes known as "price multiple" or "earnings multiple". In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number. Return on Investments: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Prepared by:-C.BALAKRISHNA MBA
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Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Keep in mind that the calculation for return on investment can be modified to suit the situation -it all depends on what you include as returns and costs. The term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the revenue that each product has generated by its respective expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used. Debt to Equity Ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
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Market Capitalization: A measure of a company's total value. It is estimated by determining the cost of buying an entire business in its current state. Often referred to as "market cap", it is the total dollar value of all outstanding shares. It is calculated by multiplying the number of shares outstanding by the current market price of one share. Brokerages vary on their exact definitions, but the current approximate classes of market capitalization are: Mega Big/Large Mid Small Micro Nano Cap:Marketcapof Cap: $10 Cap: $2 Cap: $300 Cap: $50 Cap: $200 billion billion million million Under billion to to to to $50 and $200 $10 $2 $300 greater billion billion billion million million
If a business has 50 shares, each with a market value of $10, the business's market capitalization is $500 (50 shares x $10/ share). Derivatives: In finance, a security whose price is dependent upon or derived assets. The derivative itself is merely a contract between two determined by fluctuations in the underlying asset. The most include stocks, bonds, commodities, currencies, interest rates derivatives are characterized by high leverage. from one or more underlying or more parties. Its value is common underlying assets and market indexes. Most
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros. Zero based budget: Prepared by:-C.BALAKRISHNA MBA
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ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment. Return On Capital Employed (ROCE) A ratio that indicates the efficiency and profitability of a company's capital investments. Calculated as:
ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings. A variation of this ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period. Return On Equity (ROE) A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. Calculated as:
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1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income preferred dividends / common equity. 2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two. 3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period. Revenue Per Occupied Room (RevPOR An industry metric used to evaluate companies in the hotel and lodging industries. RevPOR is used in conjunction with, or in place of, the more standard revenue per available room (RevPAR) statistic. RevPAR is calculated by taking the RevPOR value and multiplying it by the occupancy rate. RevPOR may also be expressed as "total RevPOR", which includes not only the room rate itself, but also any extra services such as room service, laundry services and in-room movie viewing, among others. For many hotel operators, the total revenue received per room can be much more than the per-day "boilerplate" rate, and is a more full expression of how much the company is receiving per customer. RevPOR is used by analysts to determine the total revenue and profit potential of a company; occupancy rates will rise and fall with the general and local economy, but RevPOR is a metric that stands independent of how full the hotel is at any point in time. Capital Expenditure (CAPEX) Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory. The amount of capital expenditures a company is likely to have depends on the industry it occupies. Some of the most capital intensive industries include oil, telecom and utilities. Prepared by:-C.BALAKRISHNA MBA
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Capital Reserve A type of account on a municipality's or company's balance sheet that is reserved for longterm capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the company or municipality has adequate funding to at least partially finance the project. Contributions to the capital reserve account can be made from government subsidies, donated funds, or can be set aside from the firm's or municipalities regular revenuegenerating operations. Once recorded on the reporting entity's balance sheet, these funds are only to be spent on the capital expenditure projects for which they were initially intended, excluding any unforeseen circumstances Reserve Fund An account set aside by an individual or business to meet any unexpected costs that may arise in the future as well as the future costs of upkeep. In most cases, the fund is simply a savings account or another highly liquid asset, as it is impossible to predict when an unexpected cost may arise. However, if the fund is set up to meet the costs of scheduled upgrades, less liquid assets may be used. An individual, for example, may put money into a reserve account to save money in case of unexpected unemployment. A business, such as one dealing with rental properties, will put some rental income into a fund used to pay for any unexpected repairs to the properties. Condominiums often will set up reserve funds in which condo owners pay a set monthly amount to maintain the quality of the condominium Enterprise Value (EV) A measure of a company's value, often used as an alternative to straightforward market capitalization. EV is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, and thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation. Prepared by:-C.BALAKRISHNA MBA
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Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill from its calculation of a company's worth. Goodwill includes intangible assets that increase the value of a company beyond its assets minus liabilities, such as strong management, good location and a happy workforce. Furthermore, to add to its conservatism, the EV calculation of a firm does not allow for any increase in future business. Net Asset Value (NAV) . A mutual fund's price per share or exchange-traded fund's per-share value. In both cases, the per-share dollar amount of the fund is derived by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. 2. In terms of corporate valuations, the value of assets less liabilities equals net asset value, or "book value". 1. In the context of mutual funds, net asset value per share is computed once a day based on the closing market prices of the securities in the fund's portfolio. All mutual fund buy and sell orders are processed at the NAV of the trade date; however, investors must wait until the until the following day to get the trade price. Mutual funds pay out (distribute) virtually all of their income and capital gains. As a result, changes NAV are not the best gauge of mutual fund performance, which is best measured by their annual total return. Because exchange-traded funds and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) their net asset values. Book Value 1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. Prepared by:-C.BALAKRISHNA MBA
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1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. 2. By being compared to the company's market value, the book value can indicate whether a stock is underor overpriced. 3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment. Initial Public Offering (IPO) The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. Also referred to as a "public offering". IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value Leverage Ratio 1. Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. 2. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. Prepared by:-C.BALAKRISHNA MBA
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A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk. Debt/Equity Ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. Prepared by:-C.BALAKRISHNA MBA
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Companies can finance their operations through either debt or equity. The debt-tocapital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. A company with high debtto-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk. Because this is a non-GAAP measure, in practice, there are many variations of this ratio. Therefore, it is important to pay close attention when reading what is or isn't included in the ratio on a company's financial statements. Operating Ratio A ratio that shows the efficiency of management by comparing operating expense to net sales:
The smaller the ratio, the greater the organization's ability to generate profit if revenues decrease. When using this ratio, however, investors should be aware that it doesn't take into account debt repayment or expansion. Net Sales The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions. This measure gives a more accurate picture of the actual sales generated by the company, or the money that they expect to receive. A company will book its revenue once the good or service is delivered or performed for the customer. However, in the case of returns, even after a good has been sold it can often be returned under a company's return policy. If the good is returned by the customer it is not considered a sale, as the customer will receive a credit or money back, so it needs to be deducted from the gross sales. The allowances for damage or Prepared by:-C.BALAKRISHNA MBA 57
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Asset Turnover The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Formula: Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Fundamental Analysis A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short). This method of security analysis is considered to be the opposite of technical analysis. Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of a the company being evaluated. One of the most famous and successful users of fundamental analysis is the Oracle of Prepared by:-C.BALAKRISHNA MBA
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While the math may be simple, there are many varieties of EPS being used these days, and investors must understand what each one represents if they're to make informed investment decisions. For example, the EPS announced by the company may differ significantly from what is reported in the financial statements and in the headlines. As a result, a stock may appear over- or undervalued depending on the EPS being used. This article will define some of the varieties of EPS and discuss their pros and cons. By definition, EPS is net income divided by the number of shares outstanding; however, both the numerator and denominator can change depending on how you define "earnings" and "shares outstanding". Because there are so many ways to define earnings, we will first tackle shares outstanding.
Shares Outstanding Shares outstanding can be classified as either primary (primary EPS) or fully diluted (diluted EPS). Primary EPS is calculated using the number of shares that have been issued and held by investors. These are the shares that are currently in the market and can be traded. Diluted EPS entails a complex calculation that determines how many shares would be outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time, generally the end of a quarter. We prefer diluted EPS because it is a more conservative number that calculates EPS as if all possible shares were issued and outstanding. The number of diluted shares can change as share prices fluctuate (as options fall into/out of the money), but generally the Street assumes the number is fixed as stated in the 10-Q or 10-K. Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but investors should not assume this is always the case. Sometimes, diluted and primary EPS are the same because the company does not have any "in-the-money" options, warrants or convertible bonds outstanding. Companies can discuss either, so investors need to be sure which is being used. Earnings Prepared by:-C.BALAKRISHNA MBA
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We will focus on five types of EPS and define them in the context of the type of "earnings" being used. Reported EPS (or GAAP EPS) We define reported EPS as the number derived from generally accepted accounting principles (GAAP), which are reported in SEC filings. The company derives these earnings according to the accounting guidelines used. (Note: A discussion of how a company can manipulate EPS under GAAP is beyond the scope of this article, but investors should remember that it is possible. Our focus is on how earnings can be distorted even if there is no intent to manipulate results.) A company's reported earnings can be distorted by GAAP. For example, a one-time gain from the sale of machinery or a subsidiary could be considered as operating income under GAAP and cause EPS to spike. Also, a company could classify a large lump of normal operating expenses as an "unusual charge" which can boost EPS because the "unusual charge" is excluded from calculations. Investors need to read the footnotes in order to decide what factors should be included in "normal" earnings and make adjustments in their own calculations. Ongoing EPS This EPS is calculated based upon normalized or ongoing net income and excludes anything that is an unusual one-time event. The goal is to find the stream of earnings from core operations which can be used to forecast future EPS. This can mean excluding a large onetime gain from the sale of equipment as well as an unusual expense. Attempts to determine an EPS using this methodology is also called "pro forma" EPS. Pro Forma EPS The words "pro forma" indicate that assumptions were used to derive whatever number is being discussed. Different from reported EPS, pro forma EPS generally excludes some expenses/income that were used in calculating reported earnings. For example, if a company sold a large division, it could, in reporting historical results, exclude the expenses and revenues associated with that unit. This allows for more of an "apples-to-apples" comparison. Another example of pro forma is a company choosing to exclude some expenses because management feels that the expenses are non-recurring and distort the company's "true" earnings. Non-recurring expenses, however, seem to appear with increasing regularity these Prepared by:-C.BALAKRISHNA MBA
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Calculated by:
Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business. The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity. Current Ratio A liquidity ratio that measures a company's ability to pay short-term obligations. Calculated as:
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry. Prepared by:-C.BALAKRISHNA MBA
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2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright. Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense. Prepared by:-C.BALAKRISHNA MBA
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the processes by which all companies are directed and controlled. a field in economics, which studies the many issues arising from the separation of ownership and control.[1]
Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board, regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority. The corporate governance structure specifies the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Corporate governance is the mechanism by which individuals are motivated to align their actual behaviors with the overall participants. In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'. O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centred on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.'[2] It is a system of structuring , operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, Prepared by:-C.BALAKRISHNA MBA
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