Debt to Equity Ratio (D/E):
It calculates the load of total debt with respect to the shareholders equity. The formula of D/E ratio is shown below. D/E ratio highlights if a company is financial its total capital more out of debt or equity. A higher D/E ratio (>1) means the company’s capital structure is debt dependent. A lower D/E ratio (<1) means the company’s capital structure is relying more on equity.
D/E Ratio = Total Debt / Shareholders Equity
Interest Coverage Ratio (ICR):
ICR is a margin of safety which a company enjoys for paying the interest expenses. In other words, ICR is a representation of how easily a company can pay its interest expenses. How it is determined? It is done by dividing EBIT by the total interest payment due in a year for the company. The higher is the ICR the better.
ICR = EBIT / Interest Expense
GAAP
Generally Accepted Accounting Principles (GAAP) is a collection of commonly-followed accounting rules and standards for financial reporting. GAAP’s format is used for reporting in company’s Balance Sheet, Profit & Loss Accounts, and cash flow statements. It is a standard which is followed by almost all companies across the world.
Working Capital (WC)
WC is that extra liquid cash which is available in the hands of company. This is free money which can remain idle in the company’s bank account after payment of all current liability.
Working Capital (WC) = CA – CL
- Current Asset (CA): Total liquid assets which can be converted into cash in next one year. Example of such assets is account receivables, raw material, work in progress, finished good inventory, pre-paid liability (advance), cash etc.
- Current Liability (CL): Total liability that must be paid in next one year. Example of such liability is account payables, interest dues, income tax dues, short term debts etc.
Current Account
Current account is a bank account. Like we open savings account, companies open current account. Current account is used by companies to handle their day-to-day cash needs.
Like savings account, money can be withdrawn from current account at any time of the day using an ATM. Generally companies use either cheque or online payment mode to pay money from current account.
Banks do not pay any interest on deposits in current account. Apart from this all facilities of savings account is available for current account holder.
Why banks do not pay interest on current a/c? Because deposits in current account vary too much. Hence, bank’s are not able to deploy this money for onward use (like for loan issuance, short term investment etc).
Weighted Average Cost of Capital (WACC)
Company’s needs funds to run its operations. The sourced fund is called “capital”. A company can source funds in two ways: equity and debt. But to get these funds, the company must also compensated the borrower with a suitable returns.
For equity: Returns are in the form of dividend and price appreciation. For debt : return is in the form of interest payment. So for an company borrowing money dividend, price appreciation, interest payment is a “cost”.
WACC is the process of calculating this cost.
How to use WACC? Suppose that a company’s calculated WACC is say 8% per annum. In the past the return generated by this company is say 12% per annum. As WACC is less than return, it can be considered a profitable company. Check WACC calculation here.
Broker
A broker can be a person or a company who assists people to make an investment. They charges a fee (or commission) to executing buy and sell orders of their clients (investors). These days brokers also provides market research, investment ideas etc to their clients which ultimately assists in taking sound investment decisions.
Custodians
They are financial institution which holds customers’ securities (like bonds, shares etc). They function like a bank for financial securities. The idea behind establishing custodians to minimise the risk of their theft or loss. In this internet age, custodian holds shares, bonds etc in demat form. Generally speaking, a custodian is a bank or a financial institution that holds financial securities such as stocks, bonds, gold, e-gold etc. Example, ICICI Bank, HDFC Bank etc. They are not a legal owner of securities.
Depositories
They transfer ownership of shares from one investor to other upon execution of a buy/sell trade. It is with the depositors with whom the securities are actually deposited. They are the legal owners of securities. Example: NSDL and CDSL.
Depository Participant (DPs)
They are basically agents of the depository (like NSDL and CDSL). You can check here the list of DPs of NSDL. Similarly, here is a list of DPs of CDSL. They work as an intermediary between the depository and the investors.
Effective Tax Rate
The effective tax rate for a company is the average rate at which its PBT is taxed, after accounting for all allowable deductions as per tax rules. It is shown as a percentage of PBT (Profit Before Tax).
Current Account Deficit (CAD)
A country’s “Current Account” maintains a record of its transactions with other nations, in terms of net remittance (money sent vs money received). Majority of remittances (in India) occur in USD or Euro.
Current account is in deficit when USD received (say from exports) is less than the USD paid (say for imports). The imports and exports can happen for both goods and services.
- Trade gap = Exports – Imports
- Current Account = Trade gap + Net current transfers + Net income from abroad
In a nutshell, when a country is importing more (in value) than it is exporting, its current account will be in deficit. In long term, a sustained current account deficit will cause a devaluation of its native currency.
Free Float Exchange Rate
A free floating exchange rate is a flexible exchange rate system solely determined by market forces of demand and supply of foreign (USD) and domestic currency (INR), and where government intervention is totally inexistent. See INR/USD exchange rate in last 10 years.
Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) is a minimum amount of deposit that Indian banks must hold as reserves with the RBI. At present the CRR mandate for all Indian commercial banks id 4%. What does it mean?
Suppose a person deposits Rs 100 in a bank. If the CRR is 4%, then the bank will have to deposit Rs.4 with RBI. Hence the net amount that banks can use is only Rs.96. Banks can use only Rs.96 for onward lending or credit purpose.
Repo Rate
Repo rate is the rate at which the central bank of a country (Reserve Bank of India-RBI) lends money to commercial banks in the event of any shortfall of funds. Currently the Repo rate is at 5.15%.
Foreign Exchange Reserves
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities. Most foreign exchange reserves are held in USD, with China being the largest foreign currency reserve holder in the world. Top 10 countries with highest forex reserves.
Stock Beta
Beta is a measure of a stock’s price volatility as compared to the market. Here market shall be a broader index like Nifty 500. The index so considered has a beta of 1. A stock whose price is ver volatile will have a beta more than 1. A stocks which is less volatile, like blue chips will have beta less than one.
Fiat Money
Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, Euro, INR etc.
Piotroski F-Score
Here are the nine parameters based on which a company is analyzed and given the F Score:
- Net Profit (PAT): The company gets one point when its positive net income in the current year
- Operating Cash Flow: The company gets one point when its operating cash flow is positive in the current year.
- Increased ROA (1Y): The company gets one point when its return on assets (ROA) in the current year is higher than compared to last year.
- Quality of Cash Flow from Operations: If cash flow from operations is greater than the net income, the company gets one point.
- Deb to Equity (D/E) Ratio: The company gets one point when its D/E of this current is lower than that of last year.
- Current Ratio: If current ratio in the current year is higher than that of previous year, the company gets one point.
- Share Outstanding: The company will get one point it has issued no new shares in last 12 months.
- Gross Margin: Higher gross margin as compared to the previous year fetches the company one point.
- Asset Turnover Ratio: A higher asset turnover ratio as compared to the previous year also fetches the company one point.
Sortino Ratio
The Sortino ratio is an advanced form of the Sharpe ratio. Total volatility considers both upside and downside movement (standard deviation). But the Sortino ratio considers only downside movement in its calculation. The formula for the Sortino ratio is this (Ra – Rf)/Sd. Ra = Actual returns (downside risk), Rf = Risk free rate, Sd = Standard deviation.
Bonds Vs Debentures
Debentures are a type of bond. Generally, all bonds are secured by collateral. The collateral can be cash, cash equivalents, or physical assets. Such bonds are called secured bonds. Debentures can also be called unsecured bonds. All bonds which are not secured by collateral are called debentures. Private companies can issue debentures to raise funds from the public.