7 Financial Terms worth knowing before investing in Shares!
TERM
01
Business Cost Example- Vada Pav King Ltd. is into the business of making Vada Pav. The expense of Vada Pav making company incurs in its regular operations are its Business Cost
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Raw Material cost
Expenses on potatoes, onion, oil, spices, gram flour and pav
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Power & Fuel cost
Expenses on kerosene or cooking gas to make vada and electricity to light the shop
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Employee Cost
Salaries to employees involved in making & distribution of vada pav
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Rent Cost
Rent paid for the shop
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Sales Cost
Expense of advertisement & Sales management
Profit & Loss Account shows the
TERM
02
Profit and Loss
financial performance of the company during a specific period of time usually a quarter or year. It summarizes the revenue, costs and expenses incurred to calculate net profit or loss. It also shows the ability of a company to generate profit by increasing revenue and/or reducing costs
For example Annual Result (period of 12 months) – for the year ending 31st Mar 2014 Quarter Result (period of 3 months) – for the quarter ending 30th Jun 2014
Balance Sheet
Balance sheet Shows the financial position of the company at a specific point in time. It summarizes a company's assets, liabilities and shareholders' equity which give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
TERM
03
Time
Most of Financial Companies follow Financial year from 1st April to 31st March
TERM
04
Net Profit Margin Calculate Formula Net Profit Margin = Profit After Tax/Net Sales*100
Net Profit Margin is an indicator of overall profitability of the business i.e. how efficiently it is converting its sales into profits based on its pricing power and control over its costs.
ProStock Example
Particulars
Vada Pav King
Net Profit Rs
30
Net Sales Rs
150
Net Profit Margin
30/150*100
In this case Net Profit Margin is 20%
(%)
20
TERM
05
Earning Per Share
Calculate Formula Earning Per Share = Net Profit / Number of Company’s Shares
Earnings Per Share is that portion of company’s profit for one Share, out of total number of shares of company. It’s tells the return earned by company on one share value. The Earnings Per Share is a useful measure of profitability as investors usually look for companies with steadily increasing earnings per share. Growth in EPS is an important measure of management performance because it shows how much money the company is making for its shareholders.
ProStock Example
Particulars
Vada Pav King
Net Profit Rs
300
Number of Shares Outstanding
10
Earning Per Share
300/10
In this case Earning Per Share is Rs 30
(Rs )
30
TERM
06
Price Earning Ratio
Calculate Formula Price to Earning Ratio = Current Share Price/Earning Per Share
Price to Earning Ratio tells how much are investors willing to pay for a stock based on its current earnings. It tells, how many years it will take to get back the investment by company profits.
ProStock Example
Particulars
Vada Pav King
Current Share Price Rs
450
Earning Per Share Rs
30
Price to Earning Ratio
450/30
15
In this case it will take 15 years to recover the investment of Rs 450 from the earning of Rs 30
TERM
07
Book Value Per share
Calculate Formula Book Value Per Share = (Shareholder’s Equity – Preference Stock)/Weighted Average Number of Shares Outstanding
Book Value Per Share indicates the level of safety associated with each common share after removing effects of liabilities. Tells ,how much an investor can realize in the event of closing down the company. This can also be compared with current stock price to decide about under/over valuation of the stock.
ProStock Example
Particulars
Vada Pav King
Shareholder’s Equity
60
Number of Shares Outstanding
1
Book Value Per Share
60/1
(Rs )
60
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