Golden Box

For all beginners I am recapitulating the basics of Balance Sheet. Just a refresher.

Balance Sheet is the snap shot of financial strength of any company at any point of time. It gives the details of the assets and the liabilities of the company. Understanding balance sheet is very important because it gives an idea of the financial strength of the company at any given point of time. Following is the balance sheet of Global Telesystems for the year ending on 31st Mar' 2000:

As on 31-3-00

Assets

Gross Block 3978.55
Net Block 2790.57
Capital WIP 66.72
Investments 454.33
Inventory 610.81
Receivables 1546.81
Other Current Assets 3673.67
Balance Sheet Total 9142.92

Liabilities

Equity Share Capital 434.12
Reserves 5815.65
Total Debt 2096.69
Creditors and Acceptances 393.91
Other current liab/prov. 402.55
Balance Sheet Total 9142.92

Let us take a look at each of its components.

Assets

Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset. Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset are worth to the company.

Capital work in progress, sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

If the company has made some investments out of its free cash, it is recorded under the head investments. Inventory is the stock of goods that a company has at any point of time. Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company. Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital is the owner's equity. It is the most permanent source of finance for the company. Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

Creditors are those entities to which the company owes money. Other liabilities and provisions include all the liabilities that do not fall under any of the above heads and various provisions made.

Role of Balance Sheet in Investment Decision making

After analyzing the income statement, move on to the balance sheet and continue your analysis. While the income statement recaps three months' worth of operations, the balance sheet is a snapshot of what the company's finances look like only on the last day of the quarter. (It's much like if you took every statement you received from every financial institution you have dealings with — banks, brokerages, credit card issuers, mortgage banks, etc. — and listed the closing balances of each account.)

When reviewing the balance sheet, keep an eye on inventories and accounts receivable. If inventories are growing too quickly, perhaps some of it is outdated or obsolete. If the accounts receivable are growing faster than sales, then it might indicate a problem, such as lax credit policies or poor internal controls. Finally, take a look at the liability side of the balance sheet. Look at both long-term and short-term debt. Have they increased? If so, why? How about accounts payable?

After you've done the numerical analysis, read the comments made by management. They should have addressed anything that looked unusual, such as a large increase in inventory. Management will also usually make some statements about the future prospects of business. These comments are only the opinion of management, so use them as such.

When all is said and done, you'll probably have some new thoughts and ideas on your investments. By all means, write them down. Use your new benchmark as a basis for analyzing your portfolio next time. Spending a few minutes like this each quarter reviewing your holdings can help you stay on track with your investment goals.

Educative. Nice one. Thanks.

Company Valuation

Whenever people talk about equity investments, one must have come across the word "Valuation". In financial parlance, Valuation means how much a company is worth of. Talking about equity investments, one should have an understanding of valuation.

Valuation means the intrinsic worth of the company. There are various methods through which one can measure the intrinsic worth of a company. This section is aimed at providing a basic understanding of these methods of valuation. They are mentioned below:

Net Asset Value (NAV)

NAV or Book value is one of the most commonly used methods of valuation. As the name suggests, it is the net value of all the assets of the company. If you divide it by the number of outstanding shares, you get the NAV per share.

One way to calculate NAV is to divide the net worth of the company by the total number of oooutstanding shares. Say, a company’s share capital is Rs. 100 crores (10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs. 100 crores. Net worth of the company would be Rs. 200 crores (equity and reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10 crores outstanding shares).

NAV can also be calculated by adding all the assets and subtracting all the outside liabilities from them. This will again boil down to net worth only. One can use any of the two methods to find out NAV.

One can compare the NAV with the going market price while taking investment decisions.

Discounted Cash Flows Method (DCF)

DCF is the most widely used technique to value a company. It takes into consideration the cash flows arising to the company and also the time value of money. That’s why, it is so popular. What actually happens in this is, the cash flows are calculated for a particular period of time (the time period is fixed taking into consideration various factors). These cash flows are discounted to the present at the cost of capital of the company. These discounted cash flows are then divided by the total number of outstanding shares to get the intrinsic worth per share.

Great going,NK.........appreciate your posts for both its content and its intent to help others!!

Once again,great going,my friend!

Saint

Thanks a lot for all kind words and encouragement, Saint.

cheers,
nkpanjiyar

Value Analysis
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What is Fundamental Analysis?

Fundamental analysis is the analysis, wherein the investment decisions are taken on the basis of the financial strength of the company. There are two approaches to fundamental analysis, viz., E-I-C analysis or the Top Down approach to Fundamental analysis and C-I-E analysis or the Bottom up approach. In the following section, we explain both these approaches.

Economy-Industry-Company Analysis

In the Top down approach, first of all the overall Economy is analyzed to judge the general direction, in which the economy is heading. The direction in which the economy is heading has a bearing on the performance of various industries. Thats why Economy analysis is important. The output of the Economy analysis is a list of industries, which should perform well, given the general trend of the economy and also an idea, whether to invest or not in the given economic conditions.

Measuring a Company's Financial Health

Gaining a true picture of a company's finances means not only scrutinizing the financial statements but also analyzing relationships among various assets and liabilities, thus highlighting trends in a company's performance and changes in its financial strength relative to its competitors.

This section explains how to read a company's financial statements. Measures of value :

Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time. Book value can be figured as assets minus liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value. This is contrasted with its market capitalization, or total share price value, which is calculated by multiplying the outstanding shares by their current market price.

You can also compare a company's market value to its book value on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result to the current stock price to help determine if the company's stock is fairly valued. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock may be undervalued and a bargain to investors. In fact, the company itself may be a bargain, and hence a takeover target.

Price/earnings ratio (P/E) is the more common yardstick of a company's value. It is the current stock price divided by the earnings per share for the past year. For example, a stock selling for $20 with earnings of $2 per share has a P/E of 10. While there's no set rule as to what's a good P/E, a low P/E is generally considered good because it may mean that the stock price has not risen to reflect its earning power. A high P/E, on the other hand, may reflect an overpriced stock or decreasing earnings. As with all of these ratios, however, it's important to compare a company's ratio to the ratios of other companies in the same industry.

A measure of solvency

Debt-to-equity ratio provides a measure of a company's debt level. It is calculated by dividing total liabilities by shareholders' equity. A ratio of 1-to-2 or lower indicates that a company has relatively little debt. Ratios vary, however, depending on a company's size and its industry, so compare a company's financial ratios with those of its industry peers before drawing conclusions.

Measures of liquidity

Current ratio. Current assets divided by current liabilities yields the current ratio, a measure of a company's liquidity, or its ability to meet current debts. The higher the ratio, the greater the liquidity. As a rule of thumb, a healthy company's current ratio is 2-to-1 or greater.

When things go wrong, as they sometimes will,
When the road you're trudging seems all up hill,
When the funds are low, and the debts are high,
And you want to smile, but you have to sigh,
When care is pressing you down a bit,
Rest if you must, but don't you quit!

Life is queer with its twists and turns,
As everyone of us sometimes learns,
And many a failure has turned about,
When they might have won had they stuck it out.
Don't give up though the pace seems slow,
You may succeed with another blow!

Often the goal is nearer than
It seems to a faint and faltering one,
Often the struggler has given up
When they might have captured the victor's cup.
And they learned too late, when the night slipped down
How close they were to the golden crown.

Success is failure turned inside out,
The silver tint to the clouds of doubt.
And you never can tell how close you are,
It may be near when it seems so far.
So stick to the task when you're hardest hit,
It's when things seem the worst, that you must not quit!

-- Author : Unknown

cheers,
nkpanjiyar

ahh my friend,welcome back ..........looking forward to more wisdom from you!

Saint

Have read this verse dozens of times over the past many years & still never cease to be inspired by the words. Am still trying to get the author's name, so far elusive. I remember reading this verse on the notice board of my daughter's school in Muscat way back in the mid-eighties & am pretty sure there was a name attached to it. Hope I'm right.

Great post nk, as usual. This verse should inspire one & all in this forum to get on with the learning & try to be successful in trading the markets. For those who think that TA and such are not for them & a waste of time, how else can one learn without doing it in the first place? Perhaps this quote by Picasso will help egg them on........

quote...

I am always doing that which I can not do, in order that I may learn how to do it. - Pablo Picasso (1881-1973)

...unquote