The operating margin ratio uses operating income and revenue to determine the profit a company is getting from its operations. This ratio, along with net profit margin, can give investors a good visibility on the profitability of a company as a whole. The operating margin ratio is calculated by dividing net operating income by total…...
Profitability Ratio 1. Gross Profit Margin 2. Net profit Margin 3. Return on equity 4. Return on assets 5. Return on capital employed 6. Gross Profit margin 7. Net Profit margin 8. Earnings per share Valuation Ratios 1. P/E ratios 2. Earnings Yield 3. Price / Book value Favorite… To get access, please buy CA...
WACC ā Weighted Average cost of capital – (E/E+D)*Ke + [D(1-t)/E+D]*Kd E ā Market Value of Equity D ā Market Value of Debt Ke ā Cost of equity Kd ā Cost of Debt T ā Tax rate A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may…...
FCFE = Net Income + D&A + Net Borrowings – Net Capital Expenditure – Net Change in working capital FCFF = Net Income + D&A + Interest (1-T) – Net Capital Expenditure – Net Change in working capital Favorite… To get access, please buy CA Interview Question Bank...
Realized gains refer to profits from completed transactions whereas unrealized gains refer to profits that have materialized, but the transactions have not been completed. Realized gains are the profits earned from already completed transactions, thus they involve a receipt of cash. These are recorded in the income statement. Unrealized gains refer to profits that have…...
Debt extinguishment occurs when a debt instrument is terminated. This occurs when the borrower repays the lender or bonds are retired by the issuer. Extinguishment may not involve full repayment of a debt; the two parties may agree on a lesser repayment amount if the borrower is unable to make a full repayment of the…...
Debt covenants can simply be defined as agreements between the business and the creditors. Under this, the borrowing company is supposed to abide by certain conditions, in order to be entitled to receive the loan. If those conditions are not met, the borrower is considered to be a defaulter. For instance, “the borrower shall not…...
So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons: They show your liquidity. That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can afford, and what you canāt. They…...
There are two ways to prepare a cash flow statement: the direct method and the indirect method: Direct method ā Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive. Indirect method ā The indirect method presents…...
Basic Earnings Per Share is the ratio, that is reckoned to know the earnings available to each equity share. It is calculated by considering companyās ordinary shares. On the other extreme, diluted earnings per share are computed when there are potential shares, i.e. convertible securities, in the companyās financial structure. Basic EPS is a tool…...
A PE firm will typically monetize their investment in one of the following ways: Sale to a Strategic Buyer: Sales to strategic buyers typically have higher valuations and are more convenient since they are willing to pay more for the likelihood of synergies. Another alternative is to sell to another financial buyer (often known as…...
Professionals in a variety of businesses rely on financial modeling. Here are just a few examples: Bankers use it in sales and trading, equity research, and both commercial and investment banking, public accountants use it for due diligence and valuations, and institutions apply financial models in private equity, portfolio management, and research. Note: You can…...
A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. It allows companies to make important decisions on whether or not to pursue a specific project. The hurdle rate describes the appropriate compensation for the level of risk presentāriskier projects generally have higher hurdle rates…...
ā Pivot Table is an interactive way to quickly summarize large amounts of data. It is used to summarize, sort, reorganize, and group. It allows us to extract the significance from a large, detailed data set. ā VLOOKUP: It is a function that makes Excel search for a certain value in a column, to return…...
The linkage of the 3 financial statements can be described as: ā Financing activities mostly affect the balance sheet and cash from finalizing, except for interest, which is shown on the income statement. ā Net income from the income statement flows to the balance sheet and cash flow statement. ā The sum of the last…...
In Financial Planning & Analysis (FP&A), the practice of creating financial models is primarily for short to medium-term budgeting, forecasting, and planning at a corporation (or operating company). FP&A teams work with the accounting and finance departments to compile consolidated budgets, refine forecasts, and report on actual vs. expected results. The financial models are internal…...
A general answer and a structured answer are given below – General Answer: Improving margins and profits is an important goal for any business, and there are several strategies that can be implemented to achieve this. Increase sales: One of the most straightforward ways to improve margins and profits is to increase sales. This can…...
RETURN ON INVESTMENT ROI compares the profits of an investment compared to the cost of the investment to determine gains. RETURN ON CAPITAL EMPLOYED ROCE looks at earnings before interest and taxes (EBIT) compared to capital employed to determine how efficiently a firm uses capital to generate earnings. RETURN ON EQUITY Return on equity (ROE)…...
Unsystematic risk, also known as “specific risk,” “diversifiable risk” or “residual risk,” is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of…...
The required rate of return is the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The RRR is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money, and corporations use…...
In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate. Usually the government bond rate is used as the Risk free Rate. This raises several questions – which government,…...
Unlevered beta compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the effect of debt on beta. It is a purer form of beta because it indicates the risk arising from the operations of the…...
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market. A security’s beta is calculated by dividing the covariance the security’s returns and the benchmark’s returns by the variance of the benchmark’s returns over a specified period. A beta of 1 indicates that the security’s…...
Beta: Beta represents the sensitivity of a stock with respect to market. Examples: Stock with 1.1 of beta means if market is up by 10% over a period, stock will be up by 11% = (1.1*10) Alpha: Excess Return earned over the benchmark market rate of return (like Nifty, Sensex) Favorite… To get access, please...
The formula for calculating beta is the covariance of the return of an asset with the return of the Market, divided by the variance of the return of the benchmark over a certain period. Note that this is a “regression beta”. Generally, regression beta is not the ideal way of calculating the beta required for…...
The Cost of Equity is always higher than Cost of Debt. Note that we have used the word ALWAYS not USUALLY. This is because for any given company, equity will always be riskier than debt, and hence costlier. Risk is the main reason why equity is more expensive – the equity investor faces an uncertainty…...
CAPM = Rf + B (Rm-Rf) Rf = Risk Free rate B = Beta Rm = Market risk The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected…...
The main objectives of FP&A department include measuring historical performance, evaluating future business needs, highlighting issues and strengths in the business, clearly communicating the most relevant financial information to management, and instilling confidence in the quality of information presented. A good financial model must address all of these and be simple enough for anyone to…...
Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or are not making the profits they should be making, due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Usually the objective is to buy a badly managed mature firm, turn it around…...
Financial modelling is a quantitative analysis which is used to decide or a forecast about a project generally in asset pricing model or corporate finance. Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project. In simple terms financial modelling means forecasting companiesā…...
Working capital is the amount of a company’s current assets minus the amount of its current liabilities. The adequacy of a company’s working capital depends on the industry in which it operates, its relationship with its customers and suppliers, its inventory levels and more. Working Capital and Net Working Capital are usually interchangeable – Current…...
The most popular credit indicators are – For long term debt: Leverage ratios: Debt / Equity, Debt / Total Capital, Debt / EBITDA, Coverage ratios: Interest Coverage (very important), fixed charge coverage, Debt Service Coverage Ratio (also called DSCR – very important) Others: Loan to Value Ratio Debt to equity, Debt to Total Assets, Debt…...
An asset acquisition strategy is the purchase of a company by buying its assets instead of its stock. An asset acquisition strategy may be used for a takeover or buyout if the target is bankrupt – this will enable the buyer to takeover the assets without taking over the debt. Usually, this needs to be…...
