Rights Issue – Example

Assume company XYZ has announced rights issue in the ratio of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ then you will be entitled to get 40 (100 * 2/5) new shares of XYZ. The new shares are usually given at deep discount price so that the full issue gets subscribed and the company may raise the required capital. A future date is fixed for this corporate action. 

After this corporate action the share price comes down proportionate to the issue ratio, theoretically.  Actual value differs from this theoretical value based on the intention of the funds’ raise.

Consider share price of XYZ is Rs 300 and the company is offering new shares at Rs 200 and you hold 100 shares of XYZ.

You can buy 40 shares at Rs 200. The amount required to buy new shares Rs 8000.
Value of the existing shares 300 * 100 = Rs 30,000
Total value of 140 shares = 30,000 + 8000  = Rs 38,000
Theoretical share price ex-rights = 38,000 / 140 = Rs 271.5 Read more

July 25, 2009 | Filed Under Stocks | Leave a Comment 

Financial Ratios – Dividend Policy Ratios

These ratios give an insight into the dividend policy of a company.

Dividend Yield   =  Dividend per share / market value of the share

This ratio doesn’t show the future growth.

Payout ratio = Dividend per Share / Earnings per share

Price Earnings ratio (P/E ratio):

This ratio comes under valuation ratios as this is useful in assessing the value of a share.

Price earnings ratio = Market value of a share / Earnings per share Read more

May 31, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

Financial Ratios – Profitability Ratios

Profitability ratios can be classified into two categories. 

1.    Profit margin ratios
2.    Rate of return ratios

Profit margin ratios show the relation between the profit and the sales whereas the rate of return ratios show the relation between profit and the investment.

Profit margin Ratios

Profit margin is referred to the relation between the earnings of a company and its sales. If a company has higher profit margin that company is more efficient. Usually in less competitive market (sector) the companies enjoy high profit margins.

Gross profit margin      = Gross profit / Sales

Gross profit is the difference between net sales and cost of goods sold. This ratio shows the margin left after covering manufacturing cost.  This profit is before overhead, payroll, interest and tax. Read more

May 31, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

Financial Ratios - Turnover Ratios

Turnover ratios are also referred to as Activity Ratios  or Asset Management Ratios .

They show the relationship between levels of different assets. They tell us how efficiently assets are deployed by the firm.

Key Turnover ratios are

Inventory Turnover Ratio = Net Sales/ Inventory

The numerator of this ratio is net sales for the year and the Denominator is the inventory balance at the end of the year. This ratio reflects the efficiency of inventory management. The inventory should be inline with sales; not too high not too low. Read more

May 31, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

Financial Ratios - Leverage Ratios

Financial leverage refers to the use of the debt capital. Share holders are interested to know the leverage position of a company. Debt is cheaper but considered riskier compared to equity. Leverage ratios help in assessing the risk arising from the debt.

Leverage ratios can be classified into two categories.

1.    Structural ratios
2.    Coverage ratios

Structural ratios tell us the portion of debt and equity in the structure of the company. Coverage ratios tell us the debt servicing commitments and the sourcing the funds to meet them.

The following two ratios fall under Structural ratios. Read more

May 30, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

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