Financial Management Tools

Value Creation – Definition, Implementation and Principles

The idea of value creation is to capitalise on what, as an organisation, you already possess. The organisation may be a business, a school, a corporation, a government department — anywhere, in fact, where the main asset of the company is the people within it.

Establishing value creation as a way of life for both managers and workers can help define the role of each more precisely, whilst simultaneously making both feel more integrated and involved within the day to day running of a place of work. Making everyone within an organisation feel that they are more than just ‘cogs in a wheel’ establishes a new feeling of unity and cooperation in organisations and can be a great asset in moving a company or other organisation forward because if everyone feels that they are part of the decision-making process then carrying out the aftermath of those decisions is more likely to be successful.… Read the rest

Abey Francis

Credit Linked Notes (CLN)

Meaning of Credit Linked Notes

Certain investors are prevented from entering into derivatives contracts, either by law or by internal investment policies. Credit Linked Notes (CLNs) allow such investors to derive some of the benefits of credit derivatives.

Credit Linked Notes (CLNs) are regular debt obligations with an embedded credit derivative. They can be issued either directly by a corporation or bank or by highly rated special purpose vehicles created by dealers. The coupon payments made by a CLN effectively transfer the cash flow of a credit derivatives contract to individual investors.

Credit Linked Notes are best understood by a simple example: ABC Investments would like to take on the risk associated with the debt of XYZ Corp.,… Read the rest

Abey Francis

Credit Default Swaps (CDS)

The credit default swap (CDS) is the cornerstone of credit derivatives market. A credit default swap is a swap contract in which protection buyer (buyer of CDS) makes a series of payments over the maturity of CDS to the protection seller & in exchange receives a payment which is contingent on the happening of default by third party (reference entity). In short, it is a credit derivative contract between two parties in order to exchange the credit risk of an issuer (reference entity). The underlying (reference) asset can be bond or loan of any corporation known as reference entity. The reference entity is not a party to the contract.… Read the rest

Abey Francis

Credit Derivatives – Meaning and Definition

Rationale for Introducing Credit Derivatives

Our present society lives on credit. Credit allows us to consume far more than what our savings can sustain. Therefore, credit is the very basis of consumerism. Our economy drives on the basic force of credit. What exactly is credit? Credit is parting with value today against a promise for value in future and this credit has inherent risk in it which is known as credit risk. Credit risk is the risk that the promise of payment in future may be broken. In other words, credit risk is an investor’s risk of loss arising from a borrower who does not make payments as promised.… Read the rest

Abey Francis

Price to Cash Flow Ratio

Instead of Price Earning (P/E) Ratio many investment analysts prefer to look at price cash flow ratio. A Price to Cash Flow Ratio is measured as the company’s current stock price divided by its current annual cash flow per share.

Price/Cash Flow Ratio = Price Per Share / (Cash Flow / Shares Outstanding)

There are varieties of definitions of cash flow. In this context, the most famous measure is simply calculated as net income plus depreciation. Cash flow is usually reported in firm’s financial statement and labeled as cash flow from operations.

The difference between cash and earnings is often confusing largely because the way standard accounting practice defines net income.… Read the rest

Abey Francis

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