Financial Management Concepts

Importance of Price to Earnings Ratio (P/E Ratio)

Price to Earnings Ratio

The most popular ratio used to assess the value of the equity is the company’s price equity ratio abbreviated as P/E ratio. It is calculated as the ratio of the firm’s current stock price divided by the earnings per share (EPS). The inverse of the P/E ratio is referred to as the earnings yield. Clearly the price earning and the earnings yield are required to measure the same thing.   In practice earnings yield less commonly stated and used than P/E ratios.

P/E Ratio =   Market Value per Share/ Earnings per Share (EPS)

Since most companies report earnings each quarter annual earnings per share can be calculated as the most recently quarterly earnings per share times four or as the sum of the last four quarterly earnings per share figures.… Read the rest

Abey Francis

The Difference Between Agency Theory and Stewardship Theory

Agency Theory  

An agency correlation as a contractual set-up under which the business owner or the principal engaged a manager or the agent to execute some service on his behalf and may usually entail some decision making exclusively by the agent. The agency theory revolves on the basic proposition about humans, which deals with principals and agents as self-oriented focusing on exploiting their personal advantage. Agency theory described managers as opportunistic by seizing its optimum advantage for his appointment and role as the mover in the firm for its own benefit, at the expense of the principal. Both parties’ goal is to gain that personal advantage in every way possible with the least outlay and expenditure.… Read the rest

Abey Francis

Valuation of Assets in a Demerger

A demerger scheme usually involves the allotment of shares in the transferee company to the shareholders of the transferor company, in lieu of their reduction of their interest in the transferee company having a mirror image of shareholdings. If post demerger as part of strategy, intention is to create holding subsidiary relationship or retain part stake than it is possible to allot shares of the transferee company to the transferor company. In the context of a demerger scheme, a valuation exercise is mandatory in order to determine the number of shares to be issued to the shareholders of the transferor company in consideration for the spin off/demerger of the undertaking or undertakings.… Read the rest

Abey Francis

Asset Valuation Methods

There are various methods adopted across the globe, however we discuss some of the common and widely accepted  asset valuation methods.

1. Discounted Cash Flow Method

This valuation method based on free cash flow is considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future free cash flow of the company (after providing for changes in working capital and capital expenditures) and discounts it by the firm’s weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity) to arrive at the value of the enterprise as a whole.… Read the rest

Abey Francis

Role of Financial Statements Analysis in Making Investment Decisions

One of the most important long-term decisions for any business is investment with the aim of making gains in the future. Investment decisions are concerned with the use of funds including buying, holding or selling and each decision could be vital to a firm. A careless decision may result in a long-term loss or even worse, bankruptcy. Therefore, an in-depth understanding and analysis is necessary for a high quality investment decision process. This is also even more critical to investors who invest in stock of company or shareholders. Financial statement analysis is critical in making effective stock investment decisions. By study the balance sheet, income statement, cash flow statement and statement of owners’ equity separately and combined, an analyst might have a good sense of a company’s overall financial picture; therefore, the investment decisions are likely to be reasonable and profitable.… Read the rest

Abey Francis

Internal Check – Definition, Objectives, Advantages and Limitations

Internal check is an arrangement of duties of members of staff in such a manner than the work performed by one person is automatically and independently checked by the others.

According to ‘F.R.M.De PAULA’, “Internal check means practically a continuous internal audit carried on by the staff it self, by means of which the work of each individual is independently checked by other members of the staff.”

According to ‘D.R. DAVAR,’ “Internal check is a system or method introduced with defined instructions given to staff as to their sphere of work with a view to control and verification of their work and also maintenance of accurate records as the ultimate aim.”… Read the rest

Abey Francis