Interest Coverage Ratio is used to assess the possibility of a company to be bankrupt. The higher the ratio of interest expense to net profit, the higher the possible the company is going to be bankrupt.
This is a very simple step but can help you protect your investment fund. Please always treat this as your first step before carrying out other complicated evaluation methods such as ROA, ROE etc.
Think about what will happen if Company Y has Interest Coverage Ratio equals to 0.5 or 50%. This means half of the total net profit of the company is used to pay its interest expense. Besides, one should bear in mind that the interest expense is not going to be reduced as long as the debt is not paid off.
The situation above is very risky since the company must mention its profit in order to pay their interest expense. In the meanwhile, if the some of the company long-term debt is expired. I have no idea how the company can cover it in the coming year.
To conclude, please avoid investing a company with high Interest Coverage Ratio unless you are well understand why the interest coverage ratio is high and sure this company can handle the situation I have mentioned above. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
Reference: http://beginnersinvest.about.com/od/incomestatementanalysis/a/interest-coverage-ratio.htm
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Tampilkan postingan dengan label FundamentalAnalysis. Tampilkan semua postingan
Tampilkan postingan dengan label FundamentalAnalysis. Tampilkan semua postingan
Fundamental Analysis: Return Of Equity, ROE, in a Stock Market Investment
Basically, all investors wish to invest to a company which is using their investors' fund wisely. In order words, most investors concern about how much the company generate profits with one dollar from investor.
Therefore, Return Of Equity, ROE, equals to the net profit divided by Shareholder's Equity.
For example, ROE of 10% or 0.10 means the company has the ability to generate $1.00 with every $10.00 from investor. Is it a good deal?? I don't know. But comparison other company in the same section with give you a better understand about ROE.
Some business may has relatively high ROE but other might not as mention in ROA before. To sum up, both ROE and ROA are used to evaluate the profitability of a company. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
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Therefore, Return Of Equity, ROE, equals to the net profit divided by Shareholder's Equity.
For example, ROE of 10% or 0.10 means the company has the ability to generate $1.00 with every $10.00 from investor. Is it a good deal?? I don't know. But comparison other company in the same section with give you a better understand about ROE.
Some business may has relatively high ROE but other might not as mention in ROA before. To sum up, both ROE and ROA are used to evaluate the profitability of a company. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
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Fundamental Analysis: Return Of Assets, ROA, in a Stock Market Investment
In the term of definition of Return Of Assets, ROA, is to evaluate the ability of a company to generate profit with a dollar of asset.
Therefore, ROA = (profit) / (assets)
But few questions exist here immediately, which type of profit should I refer to? and which type of assets should I refer to?
According to Wikipedia,
But, please be very careful when using ROA in evaluating a company. This is because you should be very careful about what type of assets a company has claimed as their total assets and what type of income as well.This is because ROA can be increased when either income is increased or total assets is decreased.
For example, investor should always focus on one-time dispose assets activity since it can immediately increase ROA value.
Next, ROA is different from business to business. Therefore, it is a good idea to company ROA with its competitors. For instance, business such as software company may have higher ROA compared to construction sector.
Lastly, remember to find out how the ROA of a company in last few years. Is it keep increasing? Is it
suddenly increasing more than 10%? And then, find out the reason behind of this matter.
Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
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Therefore, ROA = (profit) / (assets)
But few questions exist here immediately, which type of profit should I refer to? and which type of assets should I refer to?
According to Wikipedia,
But, please be very careful when using ROA in evaluating a company. This is because you should be very careful about what type of assets a company has claimed as their total assets and what type of income as well.This is because ROA can be increased when either income is increased or total assets is decreased.
For example, investor should always focus on one-time dispose assets activity since it can immediately increase ROA value.
Next, ROA is different from business to business. Therefore, it is a good idea to company ROA with its competitors. For instance, business such as software company may have higher ROA compared to construction sector.
Lastly, remember to find out how the ROA of a company in last few years. Is it keep increasing? Is it
suddenly increasing more than 10%? And then, find out the reason behind of this matter.
Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
Homepage. Advertise here. Subscribe.
Fundamental Analysis: Balance Sheet: Total Assets = Total Liability + Total Equity
Balance sheet in a financial report shows the financial portfolio of a company. Three components can be found in balance sheet, that are, total assets, total liabilities and total equity. Therefore, from the balance sheet, value investors can figure out whether this company is using lots of debt to expand their business and boost their income or has ability to improve their financial condition in such a way that reduce the risk of bankruptcy or other.
Yes, this was very strange for me as well when I first saw the formula of total assets equal to the sum of total liability and total equity. Don't worry, a example below will help you have a better understanding about the role of balance sheet in a company.
Example:
At the beginning of year 0:
After Company X is listed with market price of $1000 and number of shares of 1000 or $1 per share. Besides, let's say that company X used this money to buy a plant of $ 200.00 and goods of $200.00. Next, this company makes a long term borrowing of $200.00 from bank with instalment $50.00 per year.
The balance sheet of company X at the beginning of year 0 is shown below:
At the beginning of year 1:
After one year, let's assume the company has sold out $100.00 goods with net profit of $50.00. But only $30 has been received and the remainder become a receivable payment with a period of one year . Besides, in order to expand this business, company have brought new plant which costs $200.00 by using their cash. Furthermore, company X decides to increase $400 to its inventory since company X has higher expectation in incoming year. But this time, company only pay 50% to its creditor.
Therefore, the balance sheet at the beginning of year 1 become:
Explanation: (To check your calculation answers, simply highlight the black area below)
At the beginning of year 2:
Company X has successfully sold its goods with cost of $300.00 and profit of $200.00. However, the company is required to clear its current liabilities now. And assuming the company has successfully received all receivable from its customers. But in this period, up to $300.00 haven't been received from its customers.
Therefore, the balance sheet at the beginning of year 2 become:
Explanation: (To check your calculation answers, simply highlight the black area below)
Retained Profit: $ 250 = previous profit of $50 + current profit of $200
Now, the company has decided to reward their investors with dividend of $0.10 per share or total amount of $100.00. Since the dividend is paid by cash, both amount in Cash and cash equivalent and Retained profit is deduced for this dividend issue.
Therefore, the balance sheet at the end of year 2 become:
As you can see, Total Assets = Total Liability + Total Equity. That's why we always say balance sheet must always BALANCE. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
First edited at Oct 2010
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Balance Sheet: Total Assets = Total Liability + Total Equity
Yes, this was very strange for me as well when I first saw the formula of total assets equal to the sum of total liability and total equity. Don't worry, a example below will help you have a better understanding about the role of balance sheet in a company.
Example:
At the beginning of year 0:
After Company X is listed with market price of $1000 and number of shares of 1000 or $1 per share. Besides, let's say that company X used this money to buy a plant of $ 200.00 and goods of $200.00. Next, this company makes a long term borrowing of $200.00 from bank with instalment $50.00 per year.
The balance sheet of company X at the beginning of year 0 is shown below:
| Non-Current Assets Property, plant and equipment: $ 200.00 Current Assets Inventory : $200.00 Cash and cash equivalents: $ 800.00 Total Assets: $1200.00 | Non-current Liabilities Long term borrowing : $200.00 Total Liabilities: $200.00 Equity Share capital: $ 1000.00 Total Equity: $ 1000.00 |
At the beginning of year 1:
After one year, let's assume the company has sold out $100.00 goods with net profit of $50.00. But only $30 has been received and the remainder become a receivable payment with a period of one year . Besides, in order to expand this business, company have brought new plant which costs $200.00 by using their cash. Furthermore, company X decides to increase $400 to its inventory since company X has higher expectation in incoming year. But this time, company only pay 50% to its creditor.
Therefore, the balance sheet at the beginning of year 1 become:
| Non-Current Assets Property, plant and equipment: $ 400.00 Current Assets Inventory : $500.00 ($100 + $400) Accounts receivable: $120.00 Cash and cash equivalents: $ 430.00 Total Assets: $1450.00 | Non-current Liabilities Long term borrowing : $150.00 Current Liabilities Short term borrowing: $50.00 Accounts payable: $200.00 Total Liabilities: $400.00 Equity Share capital: $ 1000.00 Retained Profit: $ 50.00 Total Equity: $ 1050.00 |
Adding inventory of $400 = $200(cash) + $200(payable)
Selling Profit ($50) + cost ($100) = $150 = Received Cash of $30 + Receivable of $120
Cash equivalents = $800 + $30 - Increase of inventory ($400) = $430
Note: $50 from long term borrowing is shift to current liabilities. At the beginning of year 2:
Company X has successfully sold its goods with cost of $300.00 and profit of $200.00. However, the company is required to clear its current liabilities now. And assuming the company has successfully received all receivable from its customers. But in this period, up to $300.00 haven't been received from its customers.
Therefore, the balance sheet at the beginning of year 2 become:
| Non-Current Assets Property, plant and equipment: $ 400.00 Current Assets Inventory : $200.00 Accounts receivable: $300.00 Cash and cash equivalents: $ 500.00 Total Assets: $1400.00 | Non-current Liabilities Long term borrowing : $100.00 Current Liabilities Short term borrowing: $50.00 Accounts payable: $0.00 Total Liabilities: $150.00 Equity Share capital: $ 1000.00 Retained Profit: $ 250.00 Total Equity: $ 1250.00 |
Inventory : $500 - selling cost of $300 = $200.00
Cash equivalents: $ 500 = $ 430 + received cash from selling of $200 + previous receivable of $120 - payable of $200 - borrowing installment of $50 Retained Profit: $ 250 = previous profit of $50 + current profit of $200
Now, the company has decided to reward their investors with dividend of $0.10 per share or total amount of $100.00. Since the dividend is paid by cash, both amount in Cash and cash equivalent and Retained profit is deduced for this dividend issue.
Therefore, the balance sheet at the end of year 2 become:
| Non-Current Assets Property, plant and equipment: $ 400.00 Current Assets Inventory : $200.00 Accounts receivable: $300.00 Cash and cash equivalents: $ 400.00 Total Assets: $1300.00 | Non-current Liabilities Long term borrowing : $100.00 Current Liabilities Short term borrowing: $50.00 Accounts payable: $0.00 Total Liabilities: $150.00 Equity Share capital: $ 1000.00 Retained Profit: $ 150.00 Total Equity: $ 1150.00 |
As you can see, Total Assets = Total Liability + Total Equity. That's why we always say balance sheet must always BALANCE. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
First edited at Oct 2010
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Getting Started in Investment in Stock Market: Fundamental Analysis: Introduction
By using fundamental analysis, one can figure out the intrinsic value of a company according to its (1) financial statement and (2) business perspective.
Fundamental Analysis in Financial statement:
There are three very important sections which investor need to look around in financial statement or financial report, that are, (1) balance sheet, (2) income statement and (3) cash flow statement.
1. Balance sheet in a financial report tells the financial portfolio of a company. Three components can be found in balance sheet, that are, total assets, total liabilities and total equity. Therefore, from the balance sheet, value investors can figure out whether this company is using lots of debt to expand their business and boost their income or has ability to improve their financial condition in such a way that reduce the risk of bankruptcy or other.
2. Next, from the income statement, the profit margin of a company can be calculated which is useful to determine whether it is a "monopoly" business, traditional business, or competitive business. Normally, a "monopoly" business will have a relatively high profit margin compare to competitive business. Besides, investors also can compare a company profit margin regarding the change, such as raw material prices, in such a way that to have a better understand about which factors will affect the profit of the company. Next, earning per share (EPS), another very important figure in income statement, shows how much is earned by this company in one share.
3. Last but not least, cash flow statement can be used to reveal how a company used their money and whether a company has ability to convert their product or investment into money. As a rule of thumb, if a cash flow statement is not comprehensive, please find another company which is more willing to reveal how the company used their money to their shareholders.
Next post I am going to introduce how a balance sheet work. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
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Fundamental Analysis in Financial statement:
There are three very important sections which investor need to look around in financial statement or financial report, that are, (1) balance sheet, (2) income statement and (3) cash flow statement.
1. Balance sheet in a financial report tells the financial portfolio of a company. Three components can be found in balance sheet, that are, total assets, total liabilities and total equity. Therefore, from the balance sheet, value investors can figure out whether this company is using lots of debt to expand their business and boost their income or has ability to improve their financial condition in such a way that reduce the risk of bankruptcy or other.
2. Next, from the income statement, the profit margin of a company can be calculated which is useful to determine whether it is a "monopoly" business, traditional business, or competitive business. Normally, a "monopoly" business will have a relatively high profit margin compare to competitive business. Besides, investors also can compare a company profit margin regarding the change, such as raw material prices, in such a way that to have a better understand about which factors will affect the profit of the company. Next, earning per share (EPS), another very important figure in income statement, shows how much is earned by this company in one share.
3. Last but not least, cash flow statement can be used to reveal how a company used their money and whether a company has ability to convert their product or investment into money. As a rule of thumb, if a cash flow statement is not comprehensive, please find another company which is more willing to reveal how the company used their money to their shareholders.
Next post I am going to introduce how a balance sheet work. Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.
Written by: Xaivier Chia
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