What is Book Value of a Company

Book value of a company is one of the most important factors while investing in a company. In layman’s terms the significance of book value per share is the amount that can be paid on a single share in case of bankruptcy or liquidation.

It is defined as the ratio of Share holders Fund and Number of Outstanding Shares.

Share holders fund is the product of face value and number of shares plus reserves and surplus (undistributed Profit).

Book Value = ((Face Value of a share * Number of Shares) + Undistributed Profit )/ Number of Shares

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Current Ratio and Quick Ratio/ Acid Test Ratio

Liquidity refers to the ability of a firm to meet its short term obligations, usually 1 year.

The following two ratios are considered as Liquidity ratios

Current Ratio
Acid Test Ratio

Current Ratio = Current Assets / Current liabilities

Acid Test Ratio = Quick Assets / Current Liabilities

Acid Test ratio is also known as Quick ratio since it considers only the quick assets which are more liquid. Inventory is not considered as part of quick assets since it’s can’t be converted quickly into cash. Read more

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Liabilities and Types of Liabilities

A balance sheet is nothing but a representation of assets and liabilities of a company at a particular point of time. In India liabilities are shown on left side of the balance sheet and assets are shown on right side.

Liabilities are anything that a company owes. In normal course of business debt and obligations arise for a company because of involvement in lots of transactions and interaction with people and other business firms.

Liabilities can be classified into the following 2 categories.

Current Liabilities
Long term Liabilities

Current Liabilities

These are the obligations that a company needs to meet within 1 year. Accounts payable, short term loans taken from banks and financial institutions, Accrued debt, Advances taken etc are the current liabilities. Read more

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Assets and Types of Assets

Assets are anything owned by the company whether it is tangible or intangible. Assets can be classified into below 3 categories

1.    Quick Assets
2.    Current Assets
3.    Long term Assets

Quick assets are those which are in the form of cash or which can be quickly converted to Cash. They show the liquidity of a company which means the company’s capability to meet its immediate obligations.

Usually quick assets are treated as the current assets excluding inventory. Read more

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Assumptions behind financial statements

Financial Statements are generally prepared on Accrual basis of accounting.

Accrual Basis: Effects of transactions are recorded as and when they occur, irrespective of whether cash inflow or outflow happens. For example, if goods are purchased on Credit, the same is recorded as a purchase when the delivery from Vendor occurs, though the cash outflow may happen after the credit period.

Going Concern: Financial statements are normally prepared on the assumption that the Enterprise is a going concern and will continue operation for the foreseeable future. Read more

March 15, 2009 | Filed Under Fundamental Analysis | 1 Comment

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