CONCEPTS

JOINT STOCK COMPANY

A joint-stock company is a business entity where different stakes can be
bought and owned by shareholders. Each shareholder owns company stock in
proportion, evidenced by his or her shares (certificates of ownership).
Joint stock companies are a form of partnership in which each member,
or stockholder, is financially responsible for the acts of the company
Joint-stock companies paid out divisions (dividends), to
their shareholders by dividing up the profits of the voyage in the proportion of
shares held.
For example, suppose Bob holds shares of Company ABC, a joint stock company.

These shares give Bob a percentage of the vote on Company ABC's management
decisions, board elections, etc. The shares also give Bob unlimited responsibility for
company ABC's outstanding unpaid liabilities. In other words, unless Bob sells his
shares of Company ABC, he is liable in whole and in part for principal and interest
obligations on bonds or other outstanding loans.

INFLATION
Inflation is the rate at which prices rise and purchasing power falls. The
rate at which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling

DEBENTURES
In corporate finance, a debenture is a medium- to long-term debt instrument used by
large companies to borrow money, at a fixed rate of interest
A debenture is thus like a certificate of loan or a loan bond evidencing the fact
that the company is liable to pay a specified amount with interest and although the
money raised by the debentures becomes a part of the company's capital structure,
it does not become share capital.
Debenture holders have no rights to vote in the company's general meetings
of shareholders, but they may have separate meetings or votes e.g. on changes to
the rights attached to the debentures. The interest paid to them is a charge against
profit in the company's financial statements.

INCOME VS RECEIPTS
Income and receipts are to be understood as different entities.
Receipts are the amount that we have received. They may relate to
anything from receipts on account of sales, receipts on account of
capital,, receipts on account of previous due.
Income is the term used to indicate the amount received or receivable
that will be the source for earning profits.

EXPENSES VS.PAYMENT
Expense and payment are to be understood as different entities.
Payments are amount that we have paid out. They may relate to anything
from payment on account of purchases, payment on account of capital,
payment on account of previous dues.
An expense is the term used to indicate that the amount that is payable
or paid.

ASSETS VS LIABILITY
Accounting standards define an asset as something your company owns that can
provide future economic benefits. Cash, inventory, accounts receivable, land,
buildings, equipment -- these are all assets.
Liabilities are your company's obligations -- either money that must be paid or
services that must be performed. Liabilities are what you owe. like bills from
your suppliers, salaries you have to pay to your employees, debts for loans you have
taken out, rent you owe on the real property, taxes due , etc A successful company
has more assets than liabilities, meaning it has the resources to fulfill its obligations.
On the other hand, a company whose liabilities exceed its assets is probably in
trouble.

TRADE PAYABLE
Trade payables are for the purchase of physical goods or for services, including
things such as advertising, entertainment, office supplies, utilities or travel
expenses.

TRADE PAYABLE, also known as an account payable, is an amount owed to a

creditor for goods and services received.
The accounts payable entry is found on a balance sheet under the heading current
liabilities.

Prudence
Prudence is a key accounting principle which makes sure that assets and
income are not overstated and liabilities and expenses are not
understated. You should also be conservative in recording the amount of
assets, and not underestimate liabilities. The result should be
conservatively-stated financial statements.

FORTEITURE OF SHARE
A share in a company that the owner loses (forfeits) by failing to meet the
purchase requirements. Requirements may include paying any allotment or call
money owed, or avoiding selling or transferring shares during a restricted period.
When a share is forfeited, the shareholder no longer owes any remaining balance,
surrenders any potential capital gain on the shares and the shares become the
property of the issuing company. The issuing company can re-issue forfeited shares
at par, a premium or a discount as determined by the board of directors.
Example: Mr. A buys 100 shares of a company but for the time being the company asks him to pay only
50% amount. The company makes a deal with Mr. A that whenever needed the rest of the money will be
asked for. Now some months later when the company asks for the remaining 50% amount, Mr. A says that
he is incapable of paying. The company gives him some more time to pay but he still can't pay. So the
company seizes his shares and he no longer remains a shareholder of the company! He even loses the
50% amount that he had paid. This seizure of shares is called share forfeiture. But as explained above,
share forfeiture rules have to be mentioned in the company's Articles of Association compulsorily.

DIRECTORES REPORT
The Directors' Report is a document produced by the board
ofdirectors under the requirements of UK company law, which details the
state of the company and its compliance with a set of financial,
accounting and corporate social responsibility standards.
DIRECTORS REPORT is written by the Directors of a company and
forms part of the companys financial statements. This report must
support and elaborate on the information contained in the Income

Statement, Balance Sheet and Source and Application of Funds

Statement.

AUDITORS REPORT
This type of report is issued by an auditor when the financial statements
presented are free of material misstatements and are represented fairly in
accordance with the Generally Accepted Accounting Principles, which in other words
means that the company's financial condition, position, and operations are fairly ...
This is written in a standard format, as mandated by generally accepted auditing
standards (GAAS). GAAS requires or allows certain variations in the report, depending
upon the circumstances of the audit work that the auditor engaged in. For example,
the report may include a qualified opinion, depending upon the existence of any scope
limitations that were imposed upon the auditor's work.

RATIO ANALYSIS
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas.
The ratios are categorized as:
liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and
coverage.Quantitative analysis of information contained in a companys financial statements.

Ratio analysis is used to evaluate various aspects of a companys operating and financial
performance such as its efficiency, liquidity, profitability and solvency. The trend of these
ratios over time is studied to check whether they are improving or deteriorating. Ratios are
also compared across different companies in the same sector to see how they stack up,
and to get an idea of comparative valuations. Ratio analysis is a cornerstone of
fundamental analysis.

For example, if the average price/earnings (P/E) ratioof all companies in the S&P 500
index is 20, with the majority of companies having a P/E between 15 and 25, a stock with a
single-digit P/E would be considered undervalued, while one with a P/E of 50 would be
considered overvalued. Of course, this ratio would typically only be considered as a
starting point, with further analysis required to identify if these stocks are really as
undervalued or overvalued as the P/E ratios suggest

a) L IQUIDITY RATIO:
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these
ratios show the cash levels of a company and the ability to turn other assets into cash to pay off
liabilities and other current obligations. Liquidity is not only a measure of how much cash a
business has. It is also a measure of how easy it will be for the company to raise enough cash or
convert assets into cash. Assets like accounts receivable, trading securities, and inventory are
relatively easy for many companies to convert into cash in the short term. Thus, all of these assets
go into the liquidity calculation of a company.

1. CURRENT RATIO:
Current ratio, also known as liquidity ratio and working capital ratio, shows the proportion of current assets of a
business in relation to its current liabilities.
Current Ratio =

Current Assets
Current Liabilities

Explanation
Current ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be settled within 12
months) are covered by its current assets (i.e. assets expected to be realized within 12 months). A current ratio of 2
would mean that current assets are sufficient to cover for twice the amount of a company's short term liabilities.

Example
ABC PLC has the following assets and liabilities as at 31st December 2012:
$m
$m
Non Current Assets
Goodwill
Fixed Assets

75
75

Current Assets
Cash in hand

25

150

Cash in bank
Inventory
Receivable

50
25
100

200

100
60

160

50
25

75

Current Liabilities
Trade payables
Income tax payables
Non Current Liabilities
Bank Loan
Deferred tax payable

http://accounting-simplified.com/financial/ratioanalysis/current.html
2. QUICK RATIO
The quick ratio or acid test ratio is aliquidity ratio that measures the ability of a company to
pay its current liabilities when they come due with only quick assets. Quick assets are
current assets that can be converted to cash within 90 days or in the short-term. Cash, cash
equivalents, short-term investments or marketable securities, and current accounts
receivable are considered quick assets.
The quick ratio is calculated by adding cash, cash equivalents, short-term investments, and
current receivables together then dividing them by current liabilities.
Quick ratio: current asset (Non current portion of stock and debtors, loans and advances )
Current liability (Non-current portion sundry creditors Sundry debtors are taken into account
net of provision.Long term provisions are excluded.)

3. OPERATING CASH FLOW RATIO:

A measure of how well current liabilities are covered by the cash flow generated from
a company's operations.

The operating cash flow ratio is a measure of a company's liquidity. If the operating cash flow is
less than 1, the company has generated less cash in the period than it needs to pay off its shortterm liabilities. This may signal a need for more capital. Thus, investors and analysts typically
prefer higher operating cash flow ratios.

SOLVENCY RATIO:
Solvency is a companys ability to pay its debts as they become due
Solvency measures a company's ability to meet its financial obligations.

Solvency ratios, also called leverage ratios, measure a company's ability to sustain
operations indefinitely by comparing debt levels with equity, assets, and earnings. In
other words, solvency ratios identify going concern issues and a firm's ability to pay
its bills in the long term.Solvency ratios show a company's ability to make payments
and pay off its long-term obligations to creditors, bondholders, and banks. Better
solvency ratios indicate a more creditworthy and financially sound company in the
long-term.
A business can be insolvent but still profitable. For example, a company may borrow money to expand its
operations and be unable to immediately repay its debt from existing assets. In this instance,
the lender assumes cash flows will increase because of the business expansion and enable the company to
comfortably meet payment obligations in the future.

1. DEBT TO EQUITY RATIO:

The debt to equity ratio is a financial, liquidity ratio that compares a company's
total debt to total equity. The debt to equity ratio shows the percentage of
company financing that comes from creditors and investors. A higher debt to
equity ratio indicates that more creditor financing (bank loans) is used than
investor financing (shareholders).
Debt Equity Ratio = Debt
Equity
A debt to equity ratio of 1 would mean that investors and creditors have an equal stake in the
business assets.
A lower debt to equity ratio usually implies a more financially stable business. Companies with
a higher debt to equity ratio are considered more risky to creditors and investors than
companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender. Since
debt financing also requires debt servicing or regular interest payments, debt can be a far more
expensive form of financing than equity financing. Companies leveraging large amounts of debt
might not be able to make the payments.

2. LONG TERM FUND TO TOTAL ASSETS:

3.

Debt-service Coverage ratio

The debt service coverage ratio is a financial ratio that measures a company's
ability to service its current debts by comparing its net operating income with
its total debt service obligations. In other words, this ratio compares a
company's available cash with its current interest, principle, and sinking fund
obligations.
For example, if a company had a ratio of 1, that would mean that the company's net operating profits equals its debt
service obligations. In other words, the company generates just enough revenues to pay for its debt servicing. A ratio
of less than one means that the company doesn't generate enough operating profits to pay its debt service and must
use some of its savings.
Generally, companies with higher service ratios tend to have more cash and are better able to pay their debt
obligations on time.
Debt- service coverage ratio =

Cash Flow from Operating Activities

[Loan Instalments Paid + Finance Charge]

Profitability Ratios
Profitability ratios compare income statement accounts and categories to show a company's
ability to generate profits from its operations. Profitability ratios focus on a company's return on
investment in inventory and other assets. These ratios basically show how well companies can
achieve profits from their operations.
profitability ratios can be used to judge whether companies are making enough operational
profit from their assets. In this sense, profitability ratios relate to efficiency ratios because they
show how well companies are using thier assets to generate profits. Profitability is also
important to the concept of solvency and going concern.

1. Revenue based profitability ratios

Profitability ratios measure a companys ability to generate earnings relative to sales, assets
and equity. These ratios assess the ability of a company to generate earnings, profits and cash
flows relative to relative to some metric, often the amount of money invested. They highlight how
effectively the profitability of a company is being managed.
Common examples of profitability ratios include return on sales, return on investment, return on
equity, return on capital employed (ROCE), cash return on capital invested (CROCI), gross profit
margin and net profit margin. All of these ratios indicate how well a company is performing at
generating profits or revenues relative to a certain metric
.

2. net profit margin

Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxesand preferred stock dividends (but not common stock dividends) have been
deducted from a company's total revenue.
Net profit margin = [Net Profit/Total Revenue(including non operating income)]*100

A high net profit margin ratio demonstrates how effective your business is at converting
sales into profit. It may mean that you are capitalising on some competitive advantage that
can provide your business with extra capacity and flexibility during the hard times.
A low net profit margin ratio may mean that you are not generating enough sales, the gross
profit margin is too low, or that you are not keeping your operating expenses under control
to leave an acceptable profit.

3. Gross profit margin:

The gross profit margin ratio is used as one indicator of a business's financial health.
It shows how efficiently a business is using its materials and labour in the production
process and gives an indication of the pricing, cost structure, and production
efficiency of your business. The higher the gross profit margin ratio the bette r.
The higher the percentage, the more the business retains of each dollar of sales, which means
more money is left over for other operating expenses and net profit.
A low gross profit margin ratio means that the business generates a low level of revenue to pay for
operating expenses and net profit. It indicates that either the business is unable to control
production and inventory costs or that prices are set too low.

Gross profit = [Gross Profit / revenue from sale of goods and services] *100
For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets
and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%. This
means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of the day.

4. . OPERATING PROFIT MARGIN:

The operating margin ratio, also known as the operating profit margin, is a profitability
ratio that measures what percentage of total revenues is made up by operating income.
In other words, the operating margin ratio demonstrates how much revenues are left
over after all the variable or operating costs have been paid. Conversely, this ratio shows
what proportion of revenues is available to cover non-operating costs like interest
expense.

Operating margin ratio or return on sales ratio is the ratio of operating income of a business to its
revenue. It is profitability ratio showing operating income as a percentage of revenue.

Formula:
Operating Margin = Operating Income / Revenue
Example 1: Determine the operating margin ratio of Company given that its sales are $928,300 and its
operating income is $113,200 for the month. What is the performance of the company compared to its industry
which has average operating margin ratio of 10%?
Solution
Operating margin ratio = $113,200 / $928,300 0.12 = 12%
The company is more profitable than an average firm in its industry.

CAPITAL BASED PROFITABILITY RATIOS :

1. Return on Capital Employed:
Formula:
ROCE =

Net Operating Profit

Capital Employed

Return on capital employed or ROCE is a profitability ratio that measures how efficiently a company
can generate profits from its capital employed by comparing net operating profit to capital employed.
In other words, return on capital employed shows investors how many dollars in profits each dollar of
capital employed generates.

2. RETURN ON EQUITY:
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate
profits from its shareholders investments in the company. In other words, the return on equity ratio
shows how much profit each dollar of common stockholders' equity generates.
So a return on 1 means that every dollar of common stockholders' equity generates 1 dollar of net
income. This is an important measurement for potential investors because they want to see how
efficiently a company will use their money to generate net income.
ROE is also and indicator of how effective management is at using equity financing to fund operations
and grow the company.

Return on equity or return on capital is the ratio of net income of a business during a year to its stockholders'
equity during that year. It is a measure of profitability of stockholders' investments. It shows net income as
percentage of shareholder equity.

Formula

ROE = [Annual Net Income / Average Stockholders' Equity]*100

Example 1: Company A earned net income of $1,722,000 during the year ending march 31, 2011. The shareholders' equity on
April 30, 2010 and March 31, 2011 was $14,587,000 and $16,332,000 respectively. Calculate its return on equity for the year
ending March 31, 2011.
Solution
Average Shareholders' Equity = ( $14,587,000 + $16,332,000 ) / 2 = $15,459,500
Return On Equity = $1,722,000 / $15,459,500 0.11 or 11%

Return on equity is an important measure of the profitability of a company. Higher values are generally
favorable meaning that the company is efficient in generating income on new investment. Investors
should compare the ROE of different companies and also check the trend in ROE over time.

SHAREHOLDERS RATIOS:
A ratio used to help determine how much shareholders would receive in the event of a
company-wide liquidation. The ratio, expressed as a percentage, is calculated by dividing
total shareholders' equity by total assets of the firm, and it represents the amount of assets
on which shareholders have a residual claim. The figures used to calculate the ratio are
taken from the company's balance sheet.

1.Dividend pay out ratio:

Dividend Payout ratio, or simply payout ratio, is the percentage of a company's earnings paid as
dividends to the shareholders. It indicates how well the company's earnings support the dividend
payment.

Dividend payout ratio is the ratio of dividend per share divided by

earnings per share. It is a measure of how much earnings a company is
paying out to its shareholders as compared to how much it is retaining for
reinvestment.
A shareholder has two sources of return, namely periodic income in the form of
dividends and capital appreciation. Dividend payout ratio tells what percentage of
total earnings the company is paying back to shareholders. A healthy dividend payout
ratio leads to investor confidence in the company.

Formula
Dividend Payout Ratio
=

Dividend per Share

Earnings per Share

Dividend payout ratio can also be calculated as total dividends divided by net income.

Example
Zeta Ltd. earned an EPS of $2 in FY 2011 when it paid $1 per share as dividends. Find its dividend payout ratio.
Solution
Dividend Payout Ratio = DPS/EPS = $1/$2 = 50%

2.Price earning ratio:

Price/Earnings or P/E ratio is the ratio of a company's share price to its earnings per share. It
tells whether the share price of a company is fairly valued, undervalued or overvalued.

The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market
prospect ratio that calculates the market value of a stock relative to its earnings by
comparing the market price per share by the earnings per share. In other words, the price
earnings ratio shows what the market is willing to pay for a stock based on its current
earnings.
Investors often use this ratio to evaluate what a stock's fair market value should be by
predicting future earnings per share. Companies with higher future earnings are usually
expected to issue higher dividends or have appreciating stock in the future
Formula:
P/E Ratio = Market Price / Earnings per Share

Example:
The Island Corporation stock is currently trading at $50 a share and its earnings per share for the year
is 5 dollars. Island's P/E ratio would be calculated like this:

10 = 50 / 5
As you can see, the Island's ratio is 10 times. This means that investors are willing to pay 10 dollars for
every dollar of earnings. In other words, this stock is trading at a multiple of ten.

Since the current EPS was used in this calculation, this ratio would be considered a trailing price
earnings ratio. If a future predicted EPS was used, it would be considered a leading price to earnings
ratio.

3.Dividend Yield:
Dividend yield is the ratio of dividend per share to current share price. It is a measure of what
percentage an investor is earning in the form of dividends .

The dividend yield is a financial ratio that measures the amount of cash dividends distributed to
common shareholders relative to the market value per share. The dividend yield is used by investors to
show how their investment in stock is generating either cash flows in the form of dividends or increases
in asset value by stock appreciation.
Investors invest their money in stocks to earn a return either by dividends or stock appreciation. Some
companies choose to pay dividends on a regular basis to spur investors' interest. These shares are
often called income stocks. Other companies choose not to issue dividends and instead reinvest this
money in the business. These shares are often called growth stocks.

Formula
Dividend Yield
=

Dividend per Share

Market capitalization

Analysis
Dividend yield is a measure of investor return. While dividend payout ratio judges the amount
of dividend in relation to the company's earnings for the period, dividend yield ratio provides
a comparison of amount of dividend in relation to investment needed to purchase its share.
A company might be paying out 50% of its earnings but if the company's current share price
is too high the investors might not be attracted by even the high payout ratio. A high share
price will lead to low dividend yield and vice versa.

Example
Company M has an EPS of $4 in FY 2011, its dividend payout ratio is 50% and its share price is $20.
Calculate the dividend yield.

Solution
Dividend per Share = EPS Dividend Payout Ratio = $4 0.5 = $2
Dividend Yield = $2/$20 = 10%
If the average dividend yield in the market is 15%, investors will be less likely interested in the
company's share price.

SOURCE :
http://accountingexplained.com/financial/
ratios/dividend-yield