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Tag: Investment Analysis

  • How To Figure Out The Yield And Price Of Bonds

    Many investors find it hard to understand bond prices and the possible returns from bond investments. Many new investors will be shocked to learn that the value of bonds changes every day, just like the value of any other publicly traded security.

    The yield is the amount of money someone can expect to make from investing in bonds. The easiest way to figure this out is to use the formula yield = (coupon amount) / (price). If the bond is bought at face value, the yield may be the same as the interest rate. So, the yield changes along with the price of the bond.

    Another yield that investors often figure out is the amount of money they get back when their bonds mature. This more complicated calculation will give the expected total yield if the bond is held until it matures.

    What are the parts of market bonds?

    If you want to learn more about the different kinds of bonds you can invest in, you can choose from a wide range of bonds on the market. The bonds you choose to buy in the end will depend on how well you can handle risk and how much money you have to invest. Even though bonds are safer than stocks, they come in many different types, so you should learn about all of them before you invest.

    Most bonds can be broken up into:

    Government bonds: These are bonds that the government itself gives out. Because the Indian government paid for them, they are safe. Most of the time, the interest rate on these bonds is not very high. In the Reserve Bank of India’s list of “government bonds,” there are other differences between fixed and floating bonds. You should know a little bit about these subcategories because they might affect the investments you make.

    Fixed-rate securities: These are bonds with a fixed interest rate. This rate won’t change as long as the bond is in effect. Even if market rates change, this fixed rate will still apply. When the market is doing well, you can expect small returns, but you are also protected.

    Bonds with variable rates: As their name suggests, the interest rates on these bonds will change based on the highs and lows of the market. If the market changes in a good way, you could make money, but if they change in a bad way, you could lose your profits.

    Corporate bonds: bonds from private companies are called corporate bonds. The bonds that these companies give out can be secured or not. When choosing a market, you should be aware of the different types of corporate bonds. Corporate bonds that are backed by collateral are safe. This means that the issuer will pay back the investment if the bond goes bad before or at the time it is due. Debentures are basically unsecured corporate bonds, and all they are is a promise from the company to pay back the bond. In other words, businesses promise to pay interest on time and pay it when it’s due. These bonds could be a bet on the value of “faith” more than anything else.

    Bonds that save people money on taxes: The Indian government gives out bonds that save people money on taxes or are tax-free. Aside from the interest, the owner would also benefit from a tax point of view. Seniors and anyone else who wants to pay less in taxes over time might want to look into these bonds.

    Bank and financial institution bonds are bonds that banks and other financial institutions give out. Many of the bonds in this category come from this business sector. The financial institutions that back these bonds have been rated by the government and have a history of making good financial decisions.

  • Financial Ratios That Every Investor Should Know About – Part 2

    In continuation of our series about important financial ratios that everyone should know about, here are a few more that will help you become a better investor.

    EV/EBITDA

    People often use the P/E ratio and the enterprise value (EV) by EBITDA to figure out how much a company is worth. Market capitalization plus debt less cash equals EV. It gives a much more accurate takeover valuation because it takes into account debt. This is its main advantage over the price-to-earnings ratio, which can be thrown off by very high earnings that come from debt, as we’ve seen. EBITDA stands for earnings before taking into account interest, taxes, depreciation, and amortisation.

    This ratio shows how much a business with a lot of debt is worth. As EV/EBITDA is not affected by the capital structure, it can be used to evaluate businesses with different amounts of debt. A lower ratio shows that a company is undervalued. It is important to note that the ratio is high for industries with fast growth and low for industries with slow growth.

    RATIO OF PRICE TO EARNINGS GROWTH

    The PEG ratio is used to figure out how the price of a stock, its earnings per share (EPS), and the growth of the company are all linked.

    A high P/E ratio is often a sign of a business that is growing quickly. This could mean that something is worth too much. The P/E ratio is divided by the expected growth rate to see if a high P/E ratio makes sense given the expected growth rate in the future. The end result can be compared to that of peers who grew at different rates.

    A PEG ratio of 1 means that the price of the stock is fair. If the number is less than 1, it could mean that the stock is undervalued.

    RETURN ON EQUITY

    The main goal of any investment is to make money. Return on equity, or ROE, is a way to measure how much money shareholders get back from the company’s operations and profits as a whole. Investors can use it to figure out how profitable businesses in the same industry are. Having a number is always better. The ratio shows how good the management is. ROE is the ratio of net income to shareholder equity.

    Even though businesses with a lot of growth should have a higher ROE, a ROE of 15-20% is still good. The biggest benefit is when earnings are put back into the business to make a higher ROE, which leads to a faster growth rate. But it’s important to keep in mind that a rise in debt will also lead to a rise in ROE.

    INTEREST COVERAGE RATE

    It is found by dividing interest costs by EBIT, which stands for earnings before interest and taxes. It tells how healthy a company’s finances are and how many interest payments it can make through its activities alone.

    When comparing businesses in different industries with very different depreciation and amortisation costs, EBITDA can be used instead of EBIT. Or, if you want a more accurate picture of a company’s ability to pay its bills, you could look at its earnings before interest but after taxes.

    CURRENT RATIO

    This shows the liquidity situation of the company, or how ready it is to pay its short-term debts with its short-term assets. If the number is higher, it means that working capital problems won’t affect how the company runs. Red flags go up when the current ratio is less than one.

    The ratio can be found by dividing the current liabilities by the current assets. Receivables and stock are examples of what are called “current assets.” Businesses can find it hard to turn receivables into cash and inventory into sales. This could make it harder for it to meet its obligations. In this case, the investor may look at the acid-test ratio, which is similar to the current ratio but doesn’t include inventory and receivables.

    ASSET TURNOVER RATIO

    It shows how well the management makes use of resources to make money. The better the ratio, the more money the business makes for every rupee it spends on an asset. The ratio is better if it is higher. Experts say that the comparison should be made between businesses that work in the same industry. This is because the ratio could be different in different industries. Asset-heavy industries like telecommunications and power have a low asset turnover ratio, while retail has a high one (as the asset base is small).

    DIVIDEND YIELD

    Dividends per share are based on how much each share is worth. If the number is high, that means the business is doing well. But penny stocks, which are low-quality but have high dividend yields, and businesses that sometimes make a profit or have extra cash they can use to pay special dividends should be avoided. In a similar way, a low dividend yield may not always mean that an investment is a bad one. For example, businesses (especially those just starting out or growing) may decide to reinvest all of their profits in order to give their shareholders good long-term returns.

    Financial ratio research helps evaluate things like profitability, effectiveness, and risk. Before investing in a stock, you should also look into the macroeconomic environment, the quality of the management, and the outlook for the industry.

  • Financial Ratios That Every Investor Should Know About – Part 1

    Before investing in a company’s stock, the financial parameters must be carefully looked at to find out what its real value is. Before you buy shares, you should think about the eleven financial ratios we give you.

    Before investing in a company’s stock, the financial facts must be carefully looked at to find out what its real value is. This is usually done by looking at the balance sheet, cash flow statement, and profit and loss account of the company. This can be hard and take a long time. It’s easier to learn about a company’s performance by looking at its financial ratios, most of which can be found online for free.

    This is a good way to quickly figure out how healthy a company is, but it is not a foolproof method.

    You should think about these eleven financial ratios before you buy a stock.

    P/E Ratio

    The price-to-earnings ratio, or P/E, shows how much investors are willing to pay for each rupee of earnings. It shows whether the market is putting too much or too little value on the company.

    The best P/E ratio can be found by comparing the current P/E to the past P/E of the company, the average P/E of the industry, and the P/E of the market. A company with a P/E of 15 may seem expensive when compared to its historical P/E, but if the industry P/E is 18 and the market average is 20, it may be a good investment.

    If the P/E ratio is high, the price of the stock may be high. A stock with a low price-to-earnings ratio may have more room to go up. P/E ratios should be used along with other financial ratios to help people make good decisions.

    PRICE-TO-BOOK Ratio

    The price-to-book value (P/BV) ratio compares the market price and book value of a company. Book value is simply the amount left over after a company sells all of its assets and pays off all of its debts.

    The P/BV ratio is used to figure out the value of a company’s shares if it has a lot of real assets on its balance sheet. If the P/BV ratio is less than 1, the stock is undervalued because the value of the company’s assets is higher than what the market is putting on the stock. It shows what a company is really worth and helps figure out the value of businesses with mostly liquid assets, like banks and financial institutions.

    DEBT TO EQUITY Ratio

    It shows how leveraged a company is, or how much debt it has compared to the amount of money its founders put into the business (equity). Most of the time, a low number is better. But it can’t be looked at by itself.

    The debt will be worth more if the company makes more money than it spends on interest. But if it isn’t, shareholders will lose.

    A business with a low debt-to-equity ratio may be expected to have a lot of room to grow because it has more ways to get money.

    But it’s not that simple. It varies by industry, with higher numbers in industries that need a lot of capital, like manufacturing and the car business. A high debt-to-equity ratio could be a sign to the market that the company has invested in a lot of high-NPV projects, but it could also mean that the company has a lot of debt and, therefore, a higher risk of credit default.

    A stock may be overpriced if its P/E ratio is high. A stock with a low price-to-earnings ratio may have more room to go up. P/E ratios should be used along with other financial factors to help make good decisions.

    OPERATING PROFIT MARGIN (OPM)

    The OPM is good at setting prices and running its business well. It is found by dividing the operational profit by the net sales. A higher OPM shows that it is efficient to get raw materials and turn them into finished goods.

    It figures out how much money is left over after paying for variable costs like salaries and raw materials. The margin is bigger the better it is for investors.

    When analysing a company, check to see if its OPM has been going up over time. Investors should compare the OPMs of different companies in the same business sector.

  • RoE Vs RoCE – The Values You Should Know Before Investing

    When it comes to financial ratios, there is no such thing as the best measure. Each ratio has its own advantages and disadvantages. Two of the most common ratios are the Return on Equity (ROE) and the Return on Capital Employed (ROCE). The first is valuable from the point of view of equity shareholders, while the second is important from the point of view of how a company uses its capital. First, let’s explain the difference between ROE and ROCE. When comparing return on capital to return on capital employed as a way to judge a company, which is the better statistic? ROE or ROCE? Which is better? First, let’s look more closely at how ROE and ROCE are used.

    ROE

    Return on equity is one of the most popular ways to figure out how much money shareholders made (ROE). When you put money into an investment, you want to know how much money it is making. Shareholders get dividends out of the company’s profits as they come in. After paying dividends, any money left over is added to the business’s net worth. ROE is important because it shows investors that the money that is being put back into the business is still making a good return. The business can do one of two things with the money it makes. First of all, by giving dividends to shareholders, it reduces the company’s wealth. The second plan is to put the money back into the business for internal use. If a company decides to reinvest profits instead of giving them out as dividends, it must show a strong return on equity (ROE) to support this decision.

    ROE is very vulnerable because the business needs capital and depends on capital assets. For example, telecommunications and oil, which require a lot of capital, tend to have low ROEs. On the other hand, information technology and fast-moving consumer goods have a better return on equity and need less capital. ROE and P/E ratios, which are used to value stocks, usually go together well. Most of the time, sectors with higher ROEs have higher P/E ratios. To put it another way, most FMCG companies in India are worth more than mining, metals, telecom, and oil extraction companies because they have more assets. Companies with a high return on equity usually have few assets and little debt.

    ROE is calculated by dividing net income by net worth (Equity)

    The company’s net worth is made up of its base equity capital and its free reserves, which were made with money from the company’s profits. ROE not only measures how much value the company leaves for its shareholders, but it also measures how well the organisation uses the profits that are put back into the business.

    ROCE

    Before you can understand what ROCE is, you have to know what ROE is not. ROE only looks at returns from the point of view of equity shareholders. But there are also other people who have a stake in the company, such as lenders, bond and debenture holders, etc. We need to know how much money the company makes for its owners. You could say that these people have something to gain. That’s great, but how do I decide if I want to buy the debt of a company or not? This is done by looking at the business’s ROCE.

    The ROCE ratio shows how much a company makes from its operations compared to how much capital it uses. What is operational profits? It shows how much money was made after depreciation but before interest and taxes. Even if you say that depreciation is not a cost, the tax shelter from depreciation will be used to make up for it. In that way, it is a cost of doing business. When we talk about capital used, both long-term debt and equity are included. There are two ways to look at the use of capital. First, equity, free reserves, and long-term loans can all be thought of as long-term sources of funding. Another option is to look at the total assets that are not covered by current liabilities (total assets – current liabilities). The following can be used to model ROCE:

    EBIT + ROCE = Earnings Before Interest and Taxes + Return on Capital Employed (Total Assets – Current Liabilities)

    The numerator is the company’s operating profits, and the denominator is its long-term capital in the form of equity and debt. In light of the ROE, how should the ROCE be understood? Let’s look at a really interesting case.

    Which measure of return, ROE or ROCE, is better?

    The main point is that from the point of view of shareholders and figuring out where the P/E Ratio is going, ROE is more important. But when you look at the company as a whole, ROCE is better.

  • How much time should you spend researching stocks?

    Researching stocks is not a long process, but it can take a beginner anywhere from 2 to 4 hours to finish the whole thing. A platform like Zebull Smart Trader for stock screening and fundamental analysis can help get the job done faster.

    Why should you look into stocks?

    Researching doesn’t just mean reading about a company’s founders and how it makes money. It takes into account all internal and external factors, such as the company’s financial statements and how well it does in its industry and compared to its peers, among other things. I’m sure you spend a lot of time researching new gadgets (like a cell phone) before you buy them, so why not do some research before you buy a share in a company?

    How long should you spend researching?

    People have different ideas about how much time they need to spend researching stocks. Even so, the job is a lot easier now that there are platforms and tools for advanced screening and fundamental analysis. With just a few clicks and taps on your computer, you can get all the information you need about a company. But this isn’t where the main part starts.

    Before you can start, you have to figure out which sector and industry you want to invest in. Once you know, the next steps will be a lot easier. You can use the “Top-down Method” to find a potential industry. With this method, you start with the economy and narrow your list down to one or two stocks of a potential industry.

    Let’s follow an example. Assume you have a good opinion of the IT Industry. There are a few things you can do to find the best stock in the industry. First, you need to look at the economy as a whole to see if the IT space is in a growth phase or not. Next, you can go straight to the specific sector (in this case, the IT sector) and try to narrow your search to an even smaller niche. To find these pieces of information, you might have to read business articles and analysts’ predictions. If you have done this before, it shouldn’t take more than a couple of hours. For a beginner, the same process could take an extra hour or more.

    In the same way, picking stocks isn’t too hard because you can get all the financial information you need from fundamental analysis platforms like Zebull Smart Trader. The whole process could take anywhere from two to four hours, depending on how good you are at research and how far you want to go. After you’ve done a lot of research, you’ll be left with a few high-quality stocks in your favourite industry that you can safely put your money into.

    What are your other choices?

    Now that you know how the task is done and how long it will take, you can save time if you still want to. Mutual funds are an easy way to invest because you don’t have to do all the research and stock picking. Your job will be done by a person who is in charge of the fund. In the same way, you can invest in index funds or exchange-traded funds (ETFs) that track the whole Nifty50 or Sensex and give returns based on that. You can save the time you would have spent analysing stocks by using these.