## Stock-working capital ratio And It’s Formula/Calculation

June 30, 2018

Stock-working capital ratio establishes relationship between stock and working capital. Alternatively it is known as "Inventory-working capital ratio". This ratio shows the extent to which the working capital is blocked in inventories. This ratio highlights the predominance of stocks in current financial position of organization. A higher ratio indicates week working capital. This ratio is the indicator of the adequacy of working capital. Standard stock working capital ratio is 1:1

Formula:

Stock Working Capital Ratio= Stock/Working Capital

Components:
1) Stock (closing stock)
2) Working capital I.e. current assets less current liabilities.
It can be expressed in percentage also by multiplying this ratio by 100.

## Proprietary Ratio And It’s Formula/Calculation

June 29, 2018

Proprietary ratio is a test of the financial and credit strength of the business. It establishes relationship between proprietors to total assets. This ratio determines the long term solvency of the company. Alternatively this ratio is also known as Worth Debt Ratio. Net worth to Total Assets Ratio, Equity Ratio, Net worth Ratio or Assets Backing Ratio, Proprietor's funds to Total Assets Ratio or Share holders Funds to Total Assets Ratio. This ratio is expressed in percentage. This ratio is exercised to indicate the long term solvency of the business. This ratio shows general financial strength of the business. It determines the extent of trade on equity. It indicates long term solvency of business. It tests credit strength of business. It can be used to compare proprietary ratio with others firms or
industry.

Formula:

Proprietary ratio=(Proprietor' s Shareholder' s Fund/Total Assets)*100

Components:
1) Proprietors Funds = Paid up equity + Reserves and surplus less accumulated loss + Paid up preference capital
2) Total assets = Fixed assets + investment + current assets

## Liquid ratio And It’s Formula/Calculation

June 28, 2018

Liquid ratio expresses the relationship between liquid assets and liquid liabilities. This ratio is also known as quick ratio or acid test ratio. It is calculated by dividing liquid assets by liquid liabilities. Standard quick ratio is 1:1. This ratio indicate immediate solvency of enterprise. Unlike Current Ratio this is more qualitative concept. As it eliminates inventories, it is rigorous test of liquidity. This ratio is more important for financial institutions.

Liquid Ratio = Liquid Assets or Quick Assets/Quick Liabilities or Current Liabilities

Liquid assets is Current assets less (Stock, prepaid expenses and advance tax etc)

Liquid liabilities is Current liabilities less (Bank overdraft and cash credit etc)

To know more about Current Ratio, Current Assets and Current liabilities, read Current Ratio And It’s Formula/Calculation

## Current Ratio and it’s formula/Calculation

June 27, 2018

Current ratio is also known as working capital ratio. It expresses the relationship between current assets and current liabilities. This ratio is calculated by dividing current assets by current liabilities. It is expressed as pure ratio, standard current ratio is 2:1. Means current assets should be double the current liabilities. This ratio tests the credit strength and solvency of an organization. It shows the strength of working capital, it indicates ability to discharge short term liabilities.

Current Ratio=Current Assets/Current Liabilities

Current assets includes

I) Inventories of raw materials, finished goods, work-in-progress, stores & spare, loose tools,

II) Sundry debtors,

IV) Cash on hand and bank,

V) Prepaid expenses, accrued income,

VI) Bills receivables,

VII) Marketable investments, short term securities.

Current liabilities includes sundry creditors, bills payables, outstanding expenses, unclaimed dividends, interest accrued but not due on secured and unsecured loans, advances received, income received in advance, provision for tax, purposed dividend loan instalment of secured and unsecured loan payable within 12 months.

## Different types of Mutual Funds

June 21, 2018

Mutual funds can be classified based on their structure, nature and investment objective

#### Types of mutual funds by structure

Close ended fund/scheme: A close ended fund or scheme has a predetermined maturity period (eg. 5-7 years). The fund is open for subscription during the launch of the scheme for a specified period of time. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices or they are listed in secondary market.

Open ended fund/scheme: The most common type of mutual fund available for investment is an open-ended mutual fund. Investors can choose to invest or transact in these schemes as per their convenience. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).

Interval schemes: Interval schemes combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. FMPs or Fixed maturity plans are examples of these types of schemes.

#### Types of mutual funds by nature

Equity mutual funds: These funds invest maximum part of their corpus into equity holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks. The Equity funds are sub-classified depending upon their investment objective, as follows:

• Diversified equity funds
• Mid-cap funds
• Small cap funds
• Sector specific funds
• Tax savings funds (ELSS)

Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.

Debt mutual funds: These funds invest in debt instruments to ensure low risk and provide a stable income to the investors. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. Debt funds can be further classified as:

• Gilt funds
• Income funds
• MIPs
• Short term plans
• Liquid funds

Balanced funds: They invest in both equities and fixed income securities which are in line with pre-defined investment objective of the scheme. The equity portion provides growth while debt provides stability in returns. This way, investors get to taste the best of both worlds.

#### Types of mutual funds by investment objective

Growth schemes
Also known as equity schemes, these schemes aim at providing capital appreciation over medium to long term. These schemes normally invest a major portion of their fund in equities and are willing to withstand short-term decline in value for possible future appreciation.

Income schemes
Also known as debt schemes, they generally invest in fixed income securities such as bonds and corporate debentures. These schemes aim at providing regular and steady income to investors. However, capital appreciation in such schemes may be limited.

Index schemes
These schemes attempt to reproduce the performance of a particular index such as the BSE Sensex or the NSE 50. Their portfolios will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

## UNDERSTANDING CAPITAL STRUCTURE THEORIES

June 15, 2018

To maintain financial stability, a firm has to maintain an optimum capital structure . This optimum capital structure can be obtained when the market value per share is the maximum. Therefore, the objective of the firm should be taken to select a financing or debt equity mix which will maximise the value of the firm, optimum leverage can be the mix of debt-equity which maximises the value of a company. In order to achieve this goal, the finance managers has to follow the theories of capital structure of corporate enterprises. There are four major theories which explain the relationship between capital structure, cost of capital and value of the firm. They are:

1) Net Income Approach

2) Net Operating Income Approach

3) Modigliani-Miller Approach (MM)

In order to understand this relationship, following 9 assumptions are need to be made:
(1) The firm employs only two types of capital I.e debt and equity capital
(2) Taxes are not considered
(3) The firm pays its earnings in full as dividend. There is no returned earnings
(4) The firm’s total assets are given and there is no change in the assets

(5)The firm’s total financing remains constant. The firm can change its capital structure by interchanging the source of finance
(6) The operating profit is not expected to change
(7) The business risk remains constant and it is independent of capital structure and financial risk
(8) The firm has a perpetual life. It means the business is a going concern and it has long life
(9) All the investors has the same subjective probability distribution of the future expected operating profit for a given firm

## List of Life Insurance, General Insurance, Health Insurance and Reinsurance Companies in India

June 08, 2018

As of June 2018, there are 24 General insurance companies out of which 7 are public limited companies/state owned. As far as Heal insurance concern, there are 6 private insurance companies and there is no state-owned company. In Life insurance sector, we have 24 companies including 1 public limited company I.e. Life Insurance Corporation of India.  Finally, we have 2 Re-insurance company where each one belongs to public and private.

## Reinsurance Companies

### Private

Source:  DEPARTMENT OFECONOMIC AFFAIRS, Ministry of finance, India.

## Understand 6 points before any investments

June 03, 2018

In the modern and digital world, we have several options available to invest our savings. Each person has different objectives on their investment. Here are 6 most important factors that you should consider before letting your money work for you.

### Safety

Perhaps, there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet, we can get close to ultimate safety for our investment funds through the purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy’s top companies. Such securities are arguably the best means of preserving principle while receiving a rate of return. Safety investment is usually found in the money market and include Treasury bills (T-bills), Certificate of Deposits (CD), Commercial Paper or the fixed income bonds in the form of municipal and other government bonds, and corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills and Government bonds.

### Income

Safety investment often have the lowest rate of income return or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. There is an inverse relationship between safety and yield; as yield increases, safety generally goes down, and vice versa. In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shared with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but presumably also offer a higher income return than AAA bonds. Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it’s just to keep up with the economy’s rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month.

### Growth of Capital

The growth of Capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunities for an increase in value. For this reason, common stock generally ranks among most speculative of investments as their return depends on what will happen in an unpredictable future. Blue- chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by the long-term increase in corporate revenues and earnings as the company matures. Yet, rarely is any common stock able to provide the near absolute safety and income generation of government bonds.

### Tax Minimisation

An investor shall pursue certain investments in order to adopt tax minimisation as part of his or her investment strategy. A highly paid individual seek investments with favourable tax treatment in order to lessor his or her overall income tax burden.

### Liquidity

Liquidity refers to an investment ready to convert into cash position. In other words, it is available immediately in cash form. Liquidity means that investment is easily realisable, saleable or marketable. When the liquidity is high, then the return may be low.

### Marketability

Marketability refers to buying and selling of Securities in the market. Marketability means transferability or saleability of an asset. Securities are listed in a stock market which is more easily marketable than which are not listed. Public Limited Companies shares are more easily transferable than those of private limited companies.

### Concealability

Concealability means investment to be safe from social disorders, government confiscations or unacceptable levels of taxation, the property must be concealable and leave no record of income received from its use or sale. Gold and precious stones have long been esteemed for these purposes because they combine high value with small bulk and are readily transferable.

Let us know in comment section what are the other points you consider before investing.

## Branches of accounting

June 03, 2018

Accounting is not always about finance and records on buying and selling. There are branches of accounting. They are as follows:

### Financial Accounting

Financial Accounting is commonly termed as Accounting. The American Institute of Certified Public Accountants defines Accounting as "an art of recoding, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof."  Reports are always subject to statutory audit and meant for the management as well as for shareholders and creditors of the business concern. The main focus is on recording and classifying monetary transactions in the books of accounts and preparation of financial statements at the end of every accounting period.

Also read: Golden rules of accounting

### Cost Accounting

Chartered Institute of Management Accountants (CIMA) define Cost Accounting as "application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment
of profitability as well as the presentation of information for the purpose of managerial decision-making."

### Management Accounting

Management Accounting is concerned with the use of both Financial and Cost Accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Reports prepared are meant for management and as per management requirement.

### Social responsibility Accounting

Social responsibility accounting is concerned with accounting for social costs incurred by the enterprise and social benefits created.

### Human Resource Accounting

Human resource accounting is an attempt to identify, quantify and report investment made in human resource of an organisation that are not presently accounted for under conventional accounting practice.

## Where to collect information of a listed company or listed stock?

June 01, 2018

Stock market is sensitive to information. It gets volatile when new information flows in to the market. A investor should always have close eyes on the scripts that he/she has put his hard earned money. So, in this post I will highlight places where a an investor can gather information.

### Red Herring Prospectus (RHP)

RHP is good place to start, this provides key information about a company. It contains the purpose of issuing shares, industry overview, company background, detailed financial statements (Balance sheet and earning statements), Information about directors, underwriters and significant stock holders, Legal opinion on issue and etc. In India, the RHP’s are available on the SEBI website. Using the below link you can search any company that is listed in BSE and NSE. The document is available in pdf format. You can download and go thoroughly to understand the nature of business that the company carries.

SEBI link for Red Herring Prospectus of any company

### Quarterly results

For every 3 months public listed companies publish quarterly reports that includes an income statement, balance sheet, and cash flow statement for the quarter and the year-to-date (YTD), as well as comparative results for the prior quarter/ year. By analysing the Quarterly report an investor can understand the company’s performance and growth. Generally, quarters end in March, June, September, and December, and these reports are filed a few weeks later after audited. These quarterly reports can be found in company’s website and stock exchange’s website.

### Annual Reports

An annual report is a detailed report on a company's activities throughout the preceding year. It is intended to give information about the company's activities, strategy, business outlook and financial performance. A detailed financial statements is presented for the current and previous financial year. Annual reports are available on the respective company websites and with stock exchange website.

### Investor Presentations

Many publicly listed companies provide detailed investor presentations that cover company background, company strategy, business outlook and detailed financial statements of the current and preceding financial period.

### Earnings conference calls

Many companies conduct conference calls after quarterly results wherein management provides guidance of performance over the medium term and take questions from investors and analysts.

### Interviews in print media/Television

Management interviews provide clues on management’s focus on performance, transparency and shareholder friendliness.

In comment section leave your choices from where obtain information of a listed company. As your queries and follow me in Twitter @sulthankhan .