Net Present Value

Net present value (NPV) is a standard method for the financial appraisal of long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. By definition,

NPV = Present value of net cash flows. For its expression, see the formula section below.

Formula

Each cash inflow/outflow is discounted back to its PV. Then they are summed. Therefore


Where

t - the time of the cash flow

n - the total time of the project

r - the discount rate

C_t - the net cash flow (the amount of cash) at time t.

C₀ - the capital outlay at the beginning of the investment time ( t = 0 )

What is Dividend per share?

Dividend per share

Dividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that shareholders have (or will) receive, over an year, for each share they own.

DPS = total dividends paid ÷number of shares in issue

Dividends are paid to holders of shares on the "record date" which will be announced beforehand by the company. More important from an investor's point of view is the ex-dividend date on, and after, which shares bought or sold on a stock exchange under normal terms will be sold without the dividend (so that the seller will get the dividend).

Companies may pay interim dividends during the year as well as a final dividend. These should all be added together to get the total annual amount in order to calculate DPS, dividend yield and other ratios.

Special dividends may also be declared. They main significance of a dividend being declared a special dividend is that this is a signal to investors that it is not part of a company's normal dividend policy and therefore does not indicate that future similar dividends will be paid annually, as is otherwise the case. These should not be included in the DPS or when calculating dividend yield, but should be looked at separately.

Most companies avoid dividend cuts unless their financial condition demands it or there has been some other change in the business or its capital structure. As a result of this, increases in the dividend are taken to be a sign that the management is confident that the new level can be maintained or improved on.

Important Ratios

Other Ratios

Liquidity Ratio:

Current Ratio:

                             Current Assets

                             ---------------------

                             Current Liabilities

Quick Ratio:

Current Assets-(Inventory + Prepaid Expenses)

                             ---------------------------------------------

                             Current Liabilities

Cash Ratio:

                             Cash + Marketable Securities

                             --------------------------------

                             Current Liabilities

Asset Turnover Ratios:

Debtors Turnover Ratio:

                                      Credit Sales

                                      -------------------

                                      Average Debtors

Average collection period:

                                                No. of Days in the year (365 days)

                                                ---------------------------------

                                                     Debtors Turnover Ratio

Inventory Turnover Ratio:

                                                Cost of goods sold

                                                -------------------

                                                Average Inventory

Note: In case, cost of goods sold is not available then sales will be taken in the place of cost of goods sold.

Inventory Period:

                                      365 days

                                      ----------

                                      Inventory Turnover

Creditors Turnover Ratio:

                                      Credit Purchases

                                      -----------------------

                                      Average Creditors

Payments Period:

                                      365 days

                                      -------------------------

                                      Creditors Turnover Ratio

Debt to Equity Ratio & Leverage Ratio

Debt to Equity Ratio

A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt.

Debt to Equity Ratio:

                                      Long term debt

                                      ----------------

                                         Equity 

For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25. It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.

When used to calculate a company's "financial leverage" the debt usually includes only the Long Term Debt (LTD).

Leverage Ratio

1. Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

2. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ

ROI and ROTA

Return on Investments

Measure of the earning power of assets. The ratio reveals the firm's profitability on its business operations and thus serves to measure management's effectiveness. It equals Net Income divided by average total assets; also called rate earned on total assets. Other versions of ROI exist, such as net income before interest and taxes divided by average total assets. Return on investment is a commonly used measure to evaluate divisional performance.

Return on Investment:

                                      Net Income before interest and tax

                                      ----------------------------------

                                          Average Total Assets

  

Return on Total assets

A ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid.

Return on total assets:

                                                EBIT

                                      ----------------

                                      Total Net Assets

Here, EBIT= Net Income + Interest Expense + Taxes.

The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets.

To calculate ROTA, you must obtain the net income figure from a company's income statement, and then add back interest and/or taxes that were paid during the year. The resulting number will reveal the company's EBIT. The EBIT number should then be divided by the company's total net assets (total assets less depreciation and any allowances for bad debts) to reveal the earnings that company has generated for each dollar of assets on its books.

Important financial concepts

Net profit definition:

Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). also called net income or net earnings.

                                                          OR

Amount of money earned after all expenses, including overhead, employee salaries, manufacturing costs, and advertising costs, have been deducted from the total revenue.

Price Earning Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:         

                                      Market value per share

                                      ------------------------

                                      Earnings per share (EPS)

Gross Profit Ratio

Gross profit divided by net sales. High ratios are favorable in that they indicate the business is earning a good return on the sale of its merchandise, although that may also invite competition.

Gross profit ratio:

                                      Gross profit

                                      --------------

                                      Net Sales