INVESTING IN SHARES COMPANY PERFORMANCE RATIOS DEFINITION OF TERMS/RATIONALE
PURCHASE PRICE - This is the purchase day's share price. It can be obtained from the NSE Website or from the newspapers based on the previous day
PURCHASE COMMISSION - These are the levies an investor is charged when purchasing shares. They are pegged at a maximum of 2.1% of the total investment which is arrived at by adding percentages stated in THE CAPITAL MARKETS (LICENSING REQUIREMENTS) (GENERAL) REGULATIONS, 2002 which are:
NET BROKERAGE COMMISSION
CDSC GUARANTEE FUND
CMA INVSTOR COMPENSATION FUND
DIVIDEND PER SHARE - This should be either the dividend declared and paid by the company in the last financial year or the investor's expected dividend payout
SALE PRICE - This is the price that the investor expects to sell the shares at.
SALE COMMISSION - These are levies that an investor is charged when selling shares. They are pegged at a maximum of 2.1% . Calculated just like the purchase commission
WORKING CAPITAL TURNOVER- Working capital is defined as current assets minus current liabilities. Working capital turnover indicates how efficiently the company generates revenue with its working capital. A high working capital turnover ratio indicates greater efficiency (i.e., the company is generating a high level of revenues relative to working capital.
TOTAL ASSET TURNOVER- The total asset turnover ratio measures the company’s overall ability to generate revenues with a given level of assets. A higher ratio indicates greater efficiency. Because this ratio includes both fixed and current assets, inefficient working capital management can distort overall interpretations. A low asset turnover ratio can be an indicator of inefficiency or of relative capital intensity of the business.
CURRENT RATIO- This ratio expresses current assets in relation to current liabilities. A higher ratio indicates a higher level of liquidity (i.e., a greater ability to meet short-term obligations). A current ratio of 1.0 would indicate that the book value of its current assets exactly equals the book value of its current liabilities.A lower ratio indicates less liquidity, implying a greater reliance on operating cash flow and outside financing to meet short-term obligations. Liquidity affects the company’s capacity to take on debt.
DEBT TO ASSET RATIO- This ratio measures the percentage of total assets financed with debt. Generally, higher debt means higher financial risk and thus weaker solvency.
EQUITY MULTIPLIER- This ratio measures the amount of total assets supported for each one money unit of equity. The higher the equity multiplier, the more leveraged the company is in the sense of using debt and other liabilities to finance assets.
GROSS PROFIT MARGIN- Gross profit margin indicates the percentage of revenue available to cover operating and other expenses and to generate profit. Higher gross profit margin indicates some combination of higher product pricing and lower product costs. The ability to charge a higher price is constrained by competition, so gross profits are affected by (and usually inversely related to) competition.
NET PROFIT MARGIN- Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales.
RETURN ON ASSETS - ROA is a financial ratio that indicates the percentage of profit a company earn in respect to its overall resources. it is defined as net income divided by total assets.
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