Finance & Investments Terminologies

  1. CAGR: Compound Annual Growth Rate
    It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. CAGR% = (((Ending Value / Beginning Value) ^ (1 / Number of Years)) - 1) * 100. Typically, 10% CAGR is good for growth of Indian companies.
  2. Convertible Preferential Warrants
    PREFERENTIAL ==> Other than promotersExample Sunil Hitech Engineers - Chairman's message Nov 2012:
    38,00,000 convertible preferential warrants were allotted to the promoters and other strategic investors at a conversion price of Rs. 146 per share.Analysis:
    At the time of allotment, the market price was Rs 65. How much was paid by the purchaser is not known. It could be as low as 10% of the total price consideration 146 * 38,00,000.
    If/when the warrants are exercised, an additional 38,00,000 shares will be added to the already existing 1,22,75,160, thus diluting the equity by 30.95% and possible reduction in EPS by 23.64% (at current earning).
  3. D/E Ratio: Debt/Equity
    Debt/Equity = (Secured Loans + Unsecured Loans) / (Equity Share Capital + Reserves)
    D/E >2 is bad.
  4. Dividend Yield% = Dividend * 100 / Market Price
    For a good company, it's like tax-free interest earned on a one-year fixed deposit of the amount invested in the stock.
    1. Net Worth      = Total Assets - Total Liabilities
    2. Gross Block  = Total value (cost) of all of the assets that a company owns
    3. Net Block      = Gross Block - Depreciation on assets.
    4. Net Current Assets  = Current Assets - Current Liabilities. (= Current Capital = Capital Employed)
  5. OFS: Offer For Sale. Promoters fix "Floor Price" of the stock.
  6. PCAS: BSE Periodic Call Auction Session
    Stock considered illiquid if all the following conditions are met:
    The average daily trading volume of a scrip in a quarter is less than 10000;
    The average daily number of trades is less than 50 in a quarter;
    The scrip is classified as illiquid at all exchanges where it is traded
    Order Entry Period: First 45 minutes of every 60 minutes starting from 9:30. (9:30-10:15; 10:30-11:15, ..)
    Order matching and Trade Confirmation Period including Buffer period (up to 7 minutes): Last 15mins (10:15-10:30, 11:15-11:30, ..)There will be no continuous trading session for the illiquid stocks. Illiquid stocks will only be available for trading in Periodic Call Auction Session.
    Only limit & market order types are allowed for illiquid stocks in Periodic Call Auction Session. Stop loss orders and basket order entry facility will not be allowed.
  7. P/E ratio: Price per Share / Earnings Per Share
    <5: Not yet appreciated by market
    ~10: Being appreciated by market
    >20: Market loves company (possibly ignoring performance?)
  8. Efficiency Indicators
  • Return On Capital Employed = EBIT / Capital Employed = (Earnings Before Interest and Tax) / (Total Assets – Current Liabilities) [High percentage indicates efficient deployment of capital]. ROCE is better indicator than ROE (Return on Equity), which only shows profitability related to company's common equity.
  • Fixed Asset Turnover Ratio = Sales / Net Fixed Assets [High value indicates efficient use of fixed assets, like plant and equipment, to generate sales].
  • Debtors Turnover Ratio =  Net Credit Sale / Average Accounts Receivable [High value indicates efficiency by frequently collecting its average accounts receivable during the year].
  • Number of Days In Working Capital = Average Working Capital x 365 / Annual Sales Revenue [Low value indicates efficiency to quickly convert working capital into revenue].
  • Earning Retention Ratio = (Net Profit - Dividend) / Net Profit [High retention is justified for growing business faster, rather than being paid out as dividends].
  • Debt Coverage Service Ratio = EBIT / (Interest + Principal Repayment) [Below 1: Not enough cash flow to cover loan payments]
  • Interest Coverage Service Ratio = EBIT / Interest Expense [Below 1: Not even generating sufficient revenues to satisfy interest expenses]
  • Quick Ratio = (Cash + Investments + Accounts Receivable) / Current Liabilities [High value indicates most liquid (quickest) current assets available to cover current liabilities. Liquidity indicator made more conservative than Current Ratio by excluding Inventory.]

    Net Present Value (NPV), Internal Rate of Return (IRR), Discounted Cash Flow (DCF)
    1. Present Value (PV): Present Value: Also known as present discounted value, is the current worth of "the future sum of money", as if it existed today. That is, what is the value of Rs 10000 that will be received (may be, as pension) after 25 years?
    2. Net Present Value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. That is, the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Positive difference indicates that the investment is profitable.
    3. Internal Rate of Return (IRR) of an investment is the discount rate at which the present value of all future cash flow (both inflow and outflow) is equal to the initial investment or in other words the rate at which an investment breaks even. If funds are borrowed from one place and invested into another then, IRR indicates the minimum the rate at which the investment should yield returns just to cover the loan interest EMI payments.
    4. Discounted Cash Flow (DCF): Wikipedia: Discounted cash flow
      Investing $100,000 today to buy a house that is expected to value $150,000 after 3 years (14.5% annual "INTERNAL rate of return"), is same as investing $129,576 today in Treasury-Notes (5% yield) to earn $150,000 after 3 years.
      The value of $150,000 received in three years actually has a "present value" of $129,576.
      Subtracting the purchase price of the house ($100,000) from the "present value" results in the "Net Present Value of the whole transaction", which would be $29,576 or a little more than 29% of the purchase price. It'll a good investment!
      Even if the transaction involves 5% annual risk ==> (114.5 - 105)/(100 + 5) or approximately 9.0% return, still it's OK (against 5% safe Treasury-Notes)!

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