7 Financial Terms worthknowing before investing inShares!

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

Expenses on potatoes, onion, oil, spices, gram flour and pav

Expenses on kerosene or cooking gas to make vadaand electricity to light the shop

Salaries to employees involved in making & distribution of vada pav

Rent paid for the shop

Expense of advertisement & Sales management

Raw Material cost

Power & Fuel cost

Employee Cost

Rent Cost

Sales Cost

Profit & Loss Account shows thefinancial performance of thecompany during a specific period oftime usually a quarter or year. Itsummarizes the revenue, costs andexpenses incurred to calculate netprofit or loss. It also shows theability of a company to generateprofit by increasing revenue and/orreducing 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

TERM

02 Profit and Loss

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.

Balance sheet

Most of Financial Companies follow Financial year from 1st April to 31st March

Time

Balance Sheet TERM 03

Net Profit Margin is an indicatorof overall profitability of thebusiness i.e. how efficiently itis converting its sales intoprofits based on its pricingpower and control over itscosts.

Calculate Formula

ProStock Example

Net Profit Margin = Profit After Tax/Net Sales*100

TERM

04 Net Profit

Margin

Particulars Vada Pav King (%)

Net Profit Rs 30

Net Sales Rs 150

Net Profit Margin 30/150*100 20

In this case Net Profit Margin is 20%

Earnings Per Share is that portion ofcompanys profit for one Share, out oftotal number of shares of company. Itstells the return earned by company onone share value.

The Earnings Per Share is a useful measureof profitability as investors usually lookfor companies with steadily increasingearnings per share. Growth in EPS is animportant measure of managementperformance because it shows howmuch money the company is making forits shareholders.

Calculate Formula

ProStock Example

Earning Per Share = Net Profit / Number ofCompanys Shares

TERM

05 Earning Per

Share

Particulars Vada Pav King (Rs )

Net Profit Rs 300

Number of SharesOutstanding

10

Earning Per Share 300/10 30

In this case Earning Per Share is Rs 30

Price to Earning Ratio tells how much areinvestors willing to pay for a stockbased on its current earnings.

It tells, how many years it will take to getback the investment by companyprofits.

Calculate Formula

ProStock Example

Price to Earning Ratio = Current Share Price/EarningPer Share

TERM

06 Price Earning

Ratio

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 theinvestment of Rs 450 from the earning of Rs 30

Book Value Per Share indicates the level ofsafety associated with each commonshare after removing effects ofliabilities.

Tells ,how much an investor can realize inthe event of closing down the company.This can also be compared with currentstock price to decide about under/overvaluation of the stock.

Calculate Formula

ProStock Example

Book Value Per Share = (Shareholders Equity Preference Stock)/Weighted Average Numberof Shares Outstanding

TERM

07 Book Value

Per share

Particulars Vada Pav King (Rs )

Shareholders Equity 60

Number of SharesOutstanding

1

Book Value Per Share 60/1 60

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