What is equity?

Funds brought into a business by its shareholders is called equity. It is a measure of a stake of a person or group of persons starting a business.

What does investing in equity mean?

When you buy a company’s equity, you are in effect financing it, and being compensated with a stake in the business. You become part-owner of the company, entitled to dividends and other benefits that the company may announce, but without any guarantee of a return on your investments.

What is fundamental analysis?

The analysis of factual information like financial figures, balance sheet, and other information publicly available is known as fundamental analysis. This information is used to derive a fair price of the share of the company. The faithful fundamentalists believe that the market incorporates all facts relating to the financial performance of the company. But a systematic analysis will ensure a more accurate valuation of the price. Fundamental analysts use tools such as ratio analysis (P/E, MV/BV) and discounted cash flow analysis in order to arrive at the fair value of a company and hence its share.

What are financial ratios?

A ratio is a comparison of two figures. They are culled from the financial statements of a company. These help in assessing the financial health of a company. It could be a ratio between an item from a balance sheet versus another item on the balance sheet. Or it could be a ratio between one figure of the balance sheet with a figure from Profit and Loss account or it could be comparison of one year’s figure with a figure from the previous year.
For example Return on Equity = Net profit (A Profit and a Loss figure) divided by Net Worth (a balance sheet figure) in percentage terms.

What are the various kinds of financial ratios?

There are many financial ratios. Some of the better known include:

• Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet its current obligations. Liquidity ratios by establishing a relationship between cash and other current assets to current obligations give measure of liquidity.

e.g. Current ratio [CR] = Current Assets/Current liabilities.

A high CR ratio (>2.5) indicates that a company can meets its short term liabilities.

• Leverage Ratios: Leverage ratio indicates the proportion of debt and equity in financing the firm’s assets. They indicate the funds provided by owners and lenders.

e.g —–Debt-equity ratio (D-E ratio) total long term debt/net worth.
A high D-E ratio indicates that the company’s credit profile is bad.

• Activity Ratios: Activity ratios are employed to evaluate the efficiency with which firms manage and run their assets. They are also called turnover ratios.

e.g– Sales Turnover ratio = sales/total assets .
A Sales Turnover ratio indicates how much business a company generates for every additional rupee invested.

• Profitability Ratios: These ratios indicate the level of profitability of the business with relation to the inputs or capital employed. Some better-known profit ratios include operating profit margin (OPM). Operating profit margin is a measure of the company’s efficiency, either in isolation or in comparison to its peers.

What is EPS, P/E, BV and MV/BV?

• Earning Per Share (EPS): EPS represents the portion of a company’s profit allocated to each outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by the total number of shares outstanding during that period. It is one of the measures of the profitability of common shareholder’s investments. It is given by profit after tax (PAT) divided by number of common shares outstanding.
• Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and earning per share.
• Book Value (BV): (of a common share) The company’s Net worth (which is paid-up capital + reserves & surplus) divided by number of shares outstanding.
• Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a security and Book Value of the security.

What is technical analysis?

Technical analysis is the study of historic price movements of securities and trading volumes.

Technical analysts believe that prices of the securities are determined largely by forces of demand and supply. Share prices move in patterns which are easily identifiable. Crucial insights into these patterns can be obtained by keeping track of price charts, leading to predictions that a stock price may move up or down. The belief is that by knowing the past, future prices can predicted.