5. Bond Valuation – Yield to Maturity
Yield to Maturity (YTM) refers to the
expected rate of return a bondholder will receive
if they hold a bond all the way until maturity
while reinvesting all coupon payments at the
bond yield.
Another way of putting it is that the yield to
maturity is the rate of return that makes
the present value (PV) of the cash flow
generated by the bond equal to the price.
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7. Ratio Analysis – Liquidity Ratios
Current Ratio – Indicates the short term liquidity
position of the firm
Formula:
Current Assets/Current Liabilities
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8. Ratio Analysis – Liquidity Ratios
Quick Ratio – More stringent indicator of short
term liquidity of the firm
Formula:
(Current Assets – Inventories)/Current Liabilties
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9. Ratio Analysis – Turnover Ratios
Accounts Receivable Turnover Ratio – Indicates
how many times receivables are generated and
collected during the year
Formula:
Net Credit Sales/Average Accounts Receivable
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10. Ratio Analysis – Turnover Ratios
Average Collection Period – Indicates the
number of days it takes to collect the accounts
receivable
Formula:
360/Average Accounts Receivable
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11. Ratio Analysis – Turnover Ratios
Inventory Turnover Ratio – Indicates the
efficiency of the firm in managing inventories
Formula:
Cost of Goods Sold/Average Inventory
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12. Ratio Analysis – Turnover Ratios
Asset Turnover Ratio – Indicates the efficiency
of the firm in using the assets for generating a
volume of sales.
Formula:
Sales/Average Assets
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13. Ratio Analysis – Profitability Ratios
Gross Profit Margin – Indicates the relation
between production and selling price. It is also a
measure of the efficiency of the production
process of the firm.
Formula:
Gross Profit/Net Sales
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14. Ratio Analysis – Profitability Ratios
Operating Profit Margin – Indicates the
efficiency of the firm in managing its production
costs as well as the overheads.
Formula:
Operating Profit/Net Sales
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15. Ratio Analysis – Profitability Ratios
Net Profit Margin – Indicates the efficiency of
the firm in managing its production expenses,
overheads, financing costs and taxes.
Formula:
Net Profit/Net Sales
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16. Ratio Analysis – Leverage Ratios
Debt-Equity Ratio – Is a measure of the capital
structure of the firm and indicates the amount
of debt raised for every rupee of equity.
Formula:
Debt/Equity
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17. Ratio Analysis – Leverage Ratios
Debt/Assets Ratio – Indicates the percentage of
assets of the firm financed by debt.
Formula:
Debt/Assets
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18. Ratio Analysis – Coverage Ratios
Interest Coverage Ratio – Indicates the ability of
the firm to service its interest obligations.
Formula:
EBIT/Interest Expense
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19. Ratio Analysis – Coverage Ratios
Debt Service Coverage Ratio – Indicates the ability of
the firm to meet its total obligations.
Formula:
(PAT + Depreciation + Non-cash Charges + Interest)/
(Interest + Repayment of term loan)
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20. Ratio Analysis – Dividend Ratios
Dividend Pay-out Ratio – Is the percentage of
the after tax profits which a firm pays out as
dividend to its shareholders.
Formula:
Total Dividend Paid/PAT
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21. Ratio Analysis – Return on Assets
Return on Assets (ROA) – Is the indicator of
the earning ability of the firm on a given asset
base.
Formula:
Net Profit/Assets
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22. Ratio Analysis – Return on Equity
Return on Equity – Is the indicator of the
earning ability of the firm on the shareholders
funds.
Formula:
Net Income/Average Equity
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23. Ratio Analysis – Per Shares
EPS = Net Profit/No of outstanding shares
DPS = Total Dividend/No of outstanding shares
BVPS = Total Equity/No of outstanding shares
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24. Ratio Analysis – Valuation Ratios
P/E Ratio – Is the indicator of how many times
the market is willing to pay with respect to the
earnings
Formula:
Market Price per share/EPS
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25. Ratio Analysis – Valuation Ratios
Price/Book Ratio – Is the indicator of how
many times the market is willing to pay with
respect to the intrinsic value of the firm
Formula:
Market Price per share/BVPS
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28. Risk and Return
Systematic Risk – Non-diversifiable Risk
Inflation
Interest Rate Risk
Political Risk
Natural Calamities
Scams
International Events
Unsystematic Risk – Diversifiable Risk
Business Risk
Financial Risk
Default or Insolvency Risk
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29. Beta
Beta measures the relative risk associated with any
given stock or portfolio in relation to the market
portfolio.
The market portfolio represents the most diversified
portfolio of risky assets an investor could buy as it
includes all the risky assets.
Beta = Non- diversifiable risk of an asset/
Risk of market portfolio
The beta co-efficient is a measure of non-diversifiable
or systematic risk
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30. Beta (cont.)
A beta co-efficient of more than “1.00” indicates
above average risk. Such stock are also called
aggressive stocks.
A beta co-efficient of less than “1.00” indicates
below average risk. Such stocks are also called
defensive stocks.
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