Monday 25 January 2016

Demistifying Financial Terms for Non-Finance People - Part 1

Operating Profit & OPM:


Operating Profit gives an indication of the current operational profitability of the business and allows a comparison of profitability between different companies after removing out expenses that can obscure how the company is really performing.

Interest cost depends on the management's choice of financing, tax can vary widely depending on acquisitions and losses in prior years, and depreciation and amortization policies may differ from company to company.


Depriciation refers to Tangible Fixed Assets grouped into categories, especially for Balance Sheet reporting. Most Fixed Assets gradually lose value because they have a limited useful life - they 'depreciate', which means that they lose their value. So they have to be depreciated in the Year End Accounts.


Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time. Now don't ask what intangible is ! :) In this case, intangibles includes  licenses / permits / contracts / patents / copyrights / franchises / goodwill / trademarks / trade names.


EBITDA, PBT & PAT:
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization.




PBT stands for Profit Before Tax:
Profit before tax deducts all expenses from revenue including interest expenses and operating expenses, excluding tax. Since taxes change every year, PBT gives investors a good idea about the company profits every year.


PAT stands for Profit After Tax:
Profit after tax, also referred as the bottom-line, is a measure of the profitability of the company after deducting all its expenses.




Total Assets & Asset Turnover Ratio:
Total Assets is the sum of all assets, current and fixed. The asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. The higher the ratio indicates that the company is utilizing all its assets efficiently to generate sales. Companies with low profit margins tend to have high asset turnover.


Net Sales:
Sales is the total amount of products or services sold by the company.


Networth:
Networth is the difference between a company's total assets and its total liabilities. It is also known as shareholder`s equity.


Return On Capital Employed %:
Capital Employed is defined as total assets less current liabilities. Return On Capital Employed is a ratio that shows the efficiency and profitability of a company's capital investments. The ROCE should always be higher than the rate at which the company borrows money.


Gross Block:
Fixed assets are long-term tangible piece of property that the company owns and uses in the production of its income. Gross Block is the cost of fixed assets eg buildings, real estate, equipment, furniture etc not excluding the depreciation amount charged on it.


Dividend:
Dividend is a payment made by a company to its shareholders usually as a distribution of profits. When a company makes profit it can either re-invest it in the business or it distribute it to its shareholders by way of dividends. The dividend payout ratio is the amount of dividends paid to shareholders relative to the amount of total net profit of a company.

A reduction in dividends paid is not appreciated by investors and usually the stock price moves down as this could point towards difficult times ahead for the company. On the other hand a stable dividend payout ratio indicates a solid dividend policy by the company's management.


Book Value (Rs):
Book value is a company's assets minus its liabilities. In simple terms it would be the amount of money that a share holder would get if a company were to liquidate.







No comments:

Post a Comment