Calculation of Financial Ratios

EBITDA

Profit/(loss) before depreciation, amortisation and write-downs

EBITDA, % of net sales

EBITDA x 100
Net sales

Operating profit/(loss) before goodwill amortisation (EBITA)

Operating profit/(loss) before goodwill amortisation

Operating profit/(loss) before goodwill amortisation (EBITA), % of net sales

Operating profit/(loss) before goodwill amortisation x 100
Net sales

Profit/ (loss) before taxes, % of net sales

Profit /(loss) before taxes ² x 100
Net sales

Return on equity, % (ROE)

Profit/(loss) for the period ³ x 100
Equity (on average)⁴

Return on capital employed, % (ROCE)

Profit/(loss) before taxes ⁵ +interest charges and other financial costs x 100
Balance sheet total less interest-free debt (on average)

Return on net assets, % (RONA)

Operating profit/loss + goodwill amortisation_______________________________________x 100
Fixed assets⁶ – less goodwill + inventory + short-term receivables less short-term interest-free debt (on average)

Equity ratio, %

Equity ⁷ _____________________________________ x 100
Balance sheet total less received advance payments

Capital expenditure

The acquisition cost of tangible and intangible assets and investments belonging to the fixed assets including receivables from granted loans counted as fixed assets (not including corporate acquisitions)

Capital expenditure, % of net sales

Capital expenditure x 100
Capital expenditure

Capital expenditure

R&D costs x 100
Net sales

Gearing, %

Interest-bearing debt less cash and cash equivalents x 100
Equity⁸

Interest-bearing net debts

Interest-bearing debt less cash and cash equivalents
² FAS: Profit/(loss) before extraordinary items
³ FAS: Profit/(loss) before extraordinary items less taxes
⁴ FAS: Equity + minority interest (on average)
⁵ FAS: Profit/(loss) before extraordinary items
⁶ IFRS: Non-current assets less deferred tax assets
⁷ FAS: Equity + minority interest8 FAS: Equity + minority interest

- Salcomp

Free Cash Flow: Free, But Not Always Easy

The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery.

What Is Free Cash Flow?
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.

To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations:

Cash Flow From Operations (Operating Cash) - Capital Expenditure --------------------------- = Free Cash Flow

To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment:

Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure ---------------------------- = Free Cash Flow

It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later.

What Does Free Cash Flow Indicate?
Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up.

By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business.

Is Free Cash Flow Foolproof?
Although it provides a wealth of valuable information that investors really appreciate, FCF is not infallible. Crafty companies still have leeway when it comes to accounting sleight of hand.

Without a regulatory standard for determining FCF, investors often disagree on exactly which items should and should not be treated as capital expenditures. Investors must therefore keep an eye on companies with high levels of FCF to see if these companies are under-reporting capital expenditure and R&D. Companies can also temporarily boost FCF by stretching out their payments, tightening payment collection policies and depleting inventories. These activities diminish current liabilities and changes to working capital. But the impacts are likely to be temporary.

The Trick of Hiding Receivables
Let's look at yet another example of FCF tomfoolery, which involves specious calculations of the current accounts receivable. When a company reports revenue, it records an account receivable, which represents cash that is yet to be received. The revenues then increase net income and cash from operations, but that increase is typically offset by an increase in current accounts receivable, which are then subtracted from cash from operations. When companies record their revenues as such, the net impact on cash from operations and free cash flow should be zero since no cash has been received.

What happens when a company decides to record the revenue, even though the cash will not be received within a year? This question is inspired by telecom equipment maker Nortel Networks' year 2000 financial statements. The receivable for a delayed cash settlement is therefore "non-current" and can get buried in another category like "other investments". Revenue then is still recorded and cash from operations increases, but no current account receivable is recorded to offset revenues. Thus, cash from operations and free cash flow enjoy a big but unjustified boost. Tricks like this one can be hard to catch.

Conclusion
Alas, finding an all-purpose tool for testing company fundamentals still proves elusive. Like all performance metrics, FCF has its limits. On the other hand, provided that investors keep their guard up, free cash flow is a very good place to start hunting.

- Investopedia

Taxing Times

If you claim to be a smart investor, then you cannot view your investment solely on the basis of the return it can generate. You have to simultaneously check out the tax implications of that investment.

Is it an avenue that will help you save tax like the Public Provident Fund (PPF) or an Equity Linked Savings Scheme (ELSS)? Would you have to pay tax on the interest earned (fixed deposit) or is it tax free (PPF)? Would dividends be taxed or not? Would you be taxed if you made a profit on a sale (stocks, mutual funds or real estate)?

An investment made may seem fantastic, like a fixed deposit with an absolutely great interest rate. But since the interest earned is taxed, the yield drops. And, if you fall in the highest tax bracket, that is going to be your tax impact. All of a sudden, the investment sucks!

What we have done here is look at the tax implication on all investments made in mutual funds.

Where the tax angle is concerned, there are just two categories to consider - equity and debt. This should avoid any sort of confusion. Schemes that invest 65 per cent or more of their entire corpus in domestic equity (shares of companies listed in stock exchanges in India) are termed as equity schemes. The rest fall into the debt category.

Before we move on, let's just talk of one set of funds called the asset allocation funds. These funds have the mandate to be totally flexible in their asset allocation. They can move all their assets into equity or totally exit it, all at the discretion of the fund manager or a mathematically computed programme that takes the call. This makes their tax computation a bit difficult. Hence it is only at the end of the year that one gets to know where these funds have invested and accordingly determine their tax status.

Another area where we do have some ambiguity is in the case of arbitrage funds, which are categorized as "Hybrid: Arbitrage". These funds take advantage of a price mismatch between the cash market and the futures market. But, the asset allocation may also move between equity and debt as in the case of UTI SPrEAD. The average debt allocation has been in the vicinity of 68 per cent while equity has been around 6 per cent (March 2008 - August 2008). As on August 31, 2008, UTI SPrEAD had an equity allocation of 10.56 per cent, while the corresponding figures for JM Arbitrage Advantage and SBI Arbitrage Opportunities were 71.48 per cent and 71 per cent, respectively. JP Morgan India Alpha states in its Offer Document that this arbitrage fund should be treated as a debt fund.

GETTING A FIX ON CAPITAL GAINS
When an investor sells an asset and makes a profit, it is termed as a capital gain (capital loss should the reverse hold). This asset could be anything - home, land, stocks, mutual funds, fixed return instruments like fixed deposits, bonds and debentures, and even gold. The tax levied on this profit is called the capital gains tax.

Depending on how long you held the asset, it is broken up into Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG).

Where all mutual funds are concerned, LTCG comes into play if you sell your units after 12 months of holding. But, if you sell them within a year of buying, then STCG is applicable.

Equity
Where all equity mutual funds are concerned, the deal is identical for an individual or corporate.

The LTCG is not taxed. That's right, it is nil. So if you sell your shares or units of your equity fund after a holding period of a year, you pay absolutely no tax on the gain.But if you sell it before a year, then the STCG tax is 16.99 per cent. This includes the capital gains tax rate as well as the surcharge and cess (15%+10%+3%).

Debt
If you sell your debt fund before a year of holding, STCG comes into play. If you sell it after a year, then LTCG is relevant.

The good aspect with LTCG is that the income tax authorities give you the option to include the benefit of indexation. Indexation is the process by which inflation is taken into account when doing the tax calculation. This is excellent because it reduces the amount of capital gains and consequently the amount you end up paying as tax.

ARE DIVIDENDS TAXED?
There seems to be a lot of confusion concerning the Dividend Distribution Tax (DDT). It is a tax imposed only on the Asset Management Company (AMC) and not on the investor. However, the AMC will deduct the dividend tax from the money that will eventually go to the investors. So it's the investor that loses out in the end, not the AMC.

MAKING THE RIGHT CHOICE
Let's look at a basic dilemma facing investors: Is a growth option more viable or a dividend one? After looking at the tax implications, which one is the better option?

To answer this query, we will have to assume two scenarios, one where the investment is done for a period of less than 12 months, and the other for more than a year. This will enable us to better understand the short- and long-term capital gains impact.

Types of Equity Funds
Diversified: Funds that invest in Indian equity across sectors and market cap.
ELSS: Tax-saving funds that have a 3-year mandatory lock-in period.
Index: Such portfolios replicate the relevant index constituents. It also includes Exchange Traded Funds (ETFs).
Sector: Funds with a focus on a particular sector - FMCG, banking, auto, media, healthcare & pharma, technology, power.
Thematic: Focus on a theme like infrastructure.
Hybrid: Only the equity oriented ones.
Fund of Funds: Those funds that invest in the schemes of the other funds.

Types of Debt Funds
Medium Term: The maturity profile of the portfolio is more than 3 years.
Short Term: The maturity profile ranges from 1-3 years .
Ultra Short Term: Also termed as liquid funds, the maturity profile is less than 1 year.
Liquid Plus: 30% - 50% of the assets are in debt securities of maturity greater than 1 year, the balance maturity is less than a year.
Gilt: Short Term: The funds invest in government securities (G-Secs) with a maturity profile of less than 3 years.
Gilt: Medium-Long Term: G-Secs with a maturity profile greater than 3 years.
Floating Rate Short Term: Portfolio with floating rate debt instruments tilted towards short-term maturity.
Floating Rate Long Term: Portfolio with floating rate debt instruments tilted towards long-term maturity.
Hybrid: Those with an equity allocation of less than 65%.
Gold ETFs: Exchange Traded Funds take exposure to physical gold.
MIPs: With a max. equity exposure of 15%, their portfolio consists of bonds, CP, CDs, G-Secs and T-Bills.
International Funds: They invest in foreign equity, not domestic.
Fund of Funds: Those that invest in funds abroad do not fulfill the criteria of investing in domestic equity. FMPs:Fixed Maturity Plans are close-ended income schemes that invest in debt and money market instruments maturing in line with the tenure of the scheme.

IS AN STP WORTH IT?
In a Systematic Transfer Plan (STP), a fixed amount is switched from one scheme to another at regular intervals. In effect, it works out to be a combination of a Systematic Withdrawal Plan (SWP) and a Systematic Investment Plan (SIP).

A SWP is one where the mutual fund allows you to redeem units at regular intervals. A SIP, on the other hand, allows you to buy units periodically. Both the dates, and the amount to be withdrawn or invested, will be predetermined.

So how would a STP work? Let's say an investor puts a lump sum amount in a debt scheme. He then instructs the mutual fund to transfer a small amount from this debt scheme to an equity scheme every single month at a particular date. So it is a SWP from the debt fund but a SIP into the equity one.

Since the STP works on the principle of redemption and fresh investment, the tax implication would be same as capital gains (short-term or long-term) on the redemption of equity or debt funds.

WHAT IS THE STT?
The Securities Transaction Tax (STT) is levied on the value of a transaction. So when you redeem your units in an equity fund (not debt) or switch them to another scheme, STT of 0.25 per cent will be applicable.

- ValueResearch

Declaration, Ex-dividend And Record Date Defined

Have the workings of dividends and dividend distributions mystified you too? Chances are it's not the concept of dividends that confuses you; the ex-dividend date and date of record are the tricky factors. In this article we'll sort through the dividend payment process and explain on what date the buyer of the stock gets to keep the dividend.

Before we explain how it all works, let's go over some of the basics to ensure we have the proper foundation to understand the more complex issues. Some investment terms are thrown around more often than Frisbees on a hot summer day, so it's important that we define exactly what we're talking about.

Different Types of Dividends
The decision to distribute a dividend is made by a company's board of directors. There is nothing requiring a company to pay a dividend, even if the company has paid dividends in the past. However, many investors view a steady dividend history as an important indicator of a good investment, so most companies are reluctant to reduce or stop their dividend payments. (For more information on buying dividend paying stocks, see the articles How Dividends Work for Investors and The Importance of Dividends.)

Dividends can be paid in various different forms, but there are two major categories: cash and stock. The most popular are cash dividends. This is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits.

For example, suppose you own 100 shares of Cory's Brewing Company (ticker: CBC). Cory has made record sales this year thanks to an unusually high demand for his unique peach flavored beer. The company therefore decides to share some of this good fortune with the stockholders and declares a dividend of $0.10 per share. This means that you will receive a check from Cory's Brewing Company for $10.00 ($0.10*100). In practice, companies that pay dividends usually do so on a regular basis of four times a year. A one-time dividend such as the one we just described is referred to as an extra dividend.

The stock dividend, the second most common dividend paying method, pays additional shares rather than cash. Suppose that Cory's Brewing Company wishes to issue a dividend but doesn't have the necessary cash available to pay everyone. He does, however, have enough Treasury stock to meet the requirements of the dividend payout. So instead of paying cash, Cory decides to issue a dividend of 0.05 new shares of CBC for every existing one. This means that you will receive five shares of CBC for every 100 shares that you own. If any fractional shares are left over, the dividend is paid as cash (because stocks can't trade fractionally).

Another type of dividend is the property dividend, but it is used rarely. This type of allocation is a physical transfer of a tangible asset from the company to the investors. For instance, if Cory's Brewing Company was still insistent on paying out dividends but didn't have enough Treasury stock or enough money to pay out all investors, the company could look for something physical (property) to distribute. In this case, Cory might decide that his unique peach beer would be the best substitute, so he could distribute a couple of six-packs to all the shareholders.

The Important Dates of a Dividend
There are four major dates in the process of a company paying dividends:

• Declaration date– This is the date on which the board of directors announces to shareholders and the market as a whole that the company will pay a dividend.
• Ex-date or Ex-dividend date– On (or after) this date the security trades without its dividend. If you buy a dividend paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-dividend date, you won't get the dividend. Conversely, if you want to sell a stock and still receive a dividend that has been declared you need to sell on (or after) the ex-dividend day. The ex-date is the second business day before the date of record.
• Date of record– This is the date on which the company looks at its records to see who the shareholders of the company are. An investor must be listed as a holder of record to ensure the right of a dividend payout.
• Date of payment (payable date) – This is the date the company mails out the dividend to the holder of record. This date is generally a week or more after the date of record so that the company has sufficient time to ensure that it accurately pays all those who are entitled.

Why All These Dates?
Ex-dividend dates are used to make sure dividend checks go to the right people. In today's market, settlement of stocks is a T+3 process, which means that when you buy a stock, it takes three days from the transaction date (T) for the change to be entered into the company's record books.

As mentioned, if you are not in the company's record books on the date of record, you won't receive the dividend payment. To ensure that you are in the record books, you need to buy the stock at least three business days before the date of record, which also happens to be the day before the ex-dividend date.



As you can see by the diagram above, if you buy on the ex-dividend date (Tuesday), which is only two business days before the date of record, you will not receive the dividend because your name will not appear in the company's record books until Friday. If you want to buy the stock and receive the dividend, you need to buy it on Monday. (When the stock is trading with the dividend the term cum dividend is used). But, if you want to sell the stock and still receive the dividend, you need to sell on or after Tuesday the 6th.

*Note: Different rules apply if the dividend is 25% or greater of the value of the security. In this case, the Financial Industry Regulatory Authority (FINRA) indicates that the ex-date is the first business day following the payable date. For further details on dividend issues, search FINRA's website.

A Money Machine?
Now that we understand that a dividend can be received by purchasing the stock before the ex-date, can we make more money? Nope, it's not that easy. Remember, everybody knows when the dividend is going to be paid, and the market sees the dividend payout as a time when the company is giving out a part of its profits (reducing its cash). So the price of the stock will drop approximately by the amount of the dividend on the ex-dividend date. The word "approximately" is crucial here. Due to tax considerations and other happenings in the market, the actual drop in price may be slightly different. In any case, the point is that you can't make free profits on the ex-dividend date.

Conclusion
The reasons for and effects of all these dates are by no means easy to grasp. It's important to clear up any confusion between ex-dividend and record dates. But always keep in mind that when you're investing in a dividend paying stock, it's more crucial to consider the quality of the company than the date on which you buy in.

- Investopedia