This Blog is for working professionals/Investors seeking healthy financials without disturbing main job. The Investing Art is decoded guiding you through the fundamentals of Economics & Finance in a simple way so that you are confident to invest independently in a Smart Brilliant way helping achieve your financial goals effectively beating inflation, to have a stress free,sound financial living & enjoy all luxuries though you may have a low income from your main job! Happy Investing..
Saturday, 11 November 2017
Saturday, 4 November 2017
Facts about “Stock Debt”
You may have come across the term “Debt”. You would be
thinking or may have over heard from others that companies or stocks with zero
debt is so much desirable & has got chances of continued growth. Well then
let me clear it out, the debt is not that bad after all! Wonder why? Let me
decode it for you.
Debt is nothing but the short or long-term borrowings of a
company to fund/ finance his business capital needs. If a company is utilizing
the capital of the owner/ promotor for its business needs or further expansion,
the owner would expect atleast double the lending interest (interest levied on the
borrowed amount/debt) on his capital. But if you are utilizing the funding from
debt whose interest is half of the expected return of the owner’s capital, the
debt funding s cheaper!
Always in a balance sheet, the short-term debts must not be
utilized to finance the long-term debts, but vice versa is perfectly fine, ie. the
long-term borrowings can be utilized for paying off the short term debts since
the long term debt, as the name suggests has got longer time/ duration to pay
off unlike the short term debts.
However as per warren buffet, a debt to equity ratio if 0.5
is always desirable to pick a stock. But in Indian scenario a debt to equity ratio
as high as 1.0is acceptable provided its net current assets are more than its
total debt, so that it can clear the debt by liquidating its current assets.
Leverage Analysis
The word leverage has been derived from the word “lever”, which
as you know is an engineering term. By using a lever it is possible to lift
greater weights by exerting less effort. The lever works on the principle of
fulcrum. Similarly, when a highly leveraged organisation increases its turn
over by a certain percentage, its profit increase by a larger percentage. The
fulcrum in such cases is the fixed cost. When fixed costs are higher, the
impact on profit is greater. Fixed cost & variable cost I will explain in
detail on my later post. For now to simply it further, company can generate
more profit & hence earnings per share if it is able to achieve larger
sales volume, leveraging on its debt. Like that the company is utilizing this borrowed
money or debt for doing business & contributing to the company bottom line
(Note- Bottom line means profit and Top line means Sales).
One of the best books depicting this beauty of leverage analysis
is Mr. Anil Lamba’s “Romancing the Balance Sheet”, which is a recommended
must-read book in my list.
Reading Books
Cultivating the habit of reading is very
important if you are a serious investor. A big, but simple secret about reading
books, which I believe is that, these great books are written by authors who
has a life time of precious experiences, depicting cases of pit falls, special
tactics, in depth philosophies, & other invaluable data which while we
complete reading the book, will digest, assimilate & own without spending
the long years which they had spent to gain those knowledge. You hardly spend a
hour a day, but you get a knowledge of these respective author's life time!
Fascinating isn't it?
You may be busy in your hectic office work
schedule, with your family engagements, with your loved one etc., but it is
very much important to find atleast half hour a day to peek into some good
quality books & try to digest it. Picking quality books are again very
important. Misleading, wrong content books can lead you to greater troubles.
Books like Intelligent Investor (by Ben Graham), security analysis, Romancing
the balance sheet (by Anil Lamba) & several other great value adding books
bring in lots of knowledge to you for a sound investing. You can post your
comments or even email me if you want me to suggest you some good books.
A click of my
tiny book rack..:
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