This document is about vital financial ratios.

1. Liquidity Ratio
This reflects a company ability to meet its short term obligations
1) 𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒂𝒔𝒉+𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
2) 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
3) 𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒂𝒔𝒉
𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Leverage Ratio
This reflects firm’s Debt financing
1) Debt/Equity Ratio
2) Interest Coverage Ratio
3) Debt Service Coverage Ratio
Profitability Ratio
These ratios reflects the firm’s business operations
1) Net Profit Margin
2) RoE
3) RoCE
RoE (Return on Equity)
A measure of Profitability, Asset Turnover * Total Assets to Net worth
= Net Profit Margin * Total Assets Turnover * Total Assets to Net worth

2. RoNW (Return on Net worth)
=
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
𝑵𝒆𝒕 𝒘𝒐𝒓𝒕𝒉
Where, Net worth = Equity capital + Reserves & surplus – accumulated losses (if any)
RoCE (Return on total Capital Employed)
=
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅
Where, Capital Employed = Net worth + Total Long term borrowings
EVA (Economy Value Added)
It is the economic profit generated after the cost of invested capital.
It is the opportunity cost of invested capital that is not realized by trading accounting
measures.
= Net Operating Profit After Tax – (Invested Capital * Cost of Capital)
Where,
Invested capital ----- Book value of capital (common and preferred capital)
Cost of Capital ----- Minimum required rate of return for investors
= Net Operating Profit After Tax — (Capital Invested*WACC)
= Net Operating Profit After Tax — (Total Assets—Total Liabilities)*WACC
Cost of Equity
Minimum required rate of return investing in the stock and ownership
Cost of Debt
Book value of Debt other than bonds, bonds valued at market value
Enterprise value
= Market value of Equity (market cap) + Book value of Debt – Cash and Cash Equivalents
(Other than Bonds, valued at market value)

3. α (Alpha)
Excess return of the stock over the risk adjusted market return, given the level of risk
measured by β
Return of the stock when there is no market return
β (Beta)
Stock’s volatility with respect to market volatility
=
𝒄𝒐𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆(𝒙, 𝒎)
𝝈 𝒎 𝟐
Where,
𝝈 𝒎 𝟐----- market variance
X----- Stock
m----- Market
Price to Earnings ratio (P/E)
=
𝒄𝒍𝒐𝒔𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒔𝒕𝒐𝒄𝒌
𝑬𝑷𝑺
Earnings per Share (EPS)
=
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕
𝑭𝒖𝒍𝒍𝒚 𝒅𝒊𝒍𝒖𝒕𝒆𝒅 𝑬𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔
Industry P/E
=
𝒎𝒂𝒓𝒌𝒆𝒕 𝒄𝒂𝒑 𝒐𝒇 𝒕𝒉𝒆 𝑰𝒏𝒅𝒖𝒔𝒕𝒓𝒚 (𝒂𝒈𝒈𝒓𝒆𝒈𝒂𝒕𝒆)
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒐𝒇 𝒕𝒉𝒆 𝑰𝒏𝒅𝒖𝒔𝒕𝒓𝒚 (𝒂𝒈𝒈𝒓𝒆𝒈𝒂𝒕𝒆)
Market cap
= closing price of the stock *fully diluted shares of the company
Book value
= Original cost – accumulated Depreciation

4. =
𝑵𝒆𝒕𝒘𝒐𝒓𝒕𝒉
𝑻𝒐𝒕𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔
Total Risk
= Systematic risk (Market risk) + Unsystematic risk (Firm specific risk)
= 𝜷 𝟐
𝝈 𝒎 𝟐 + 𝒆 𝟐
Total Return
= α + 𝒓 𝒇 + β (𝒓 𝒎 − 𝒓 𝒇)
Where,
𝒓 𝒇= Risk free rate of return
𝒓 𝒎= market return
Present Value (PV)
=
𝐅𝐮𝐭𝐮𝐫𝐞 𝐕𝐚𝐥𝐮𝐞
(𝟏+𝑲𝒆) 𝒏
Where, Ke----- Rate of Interest
Future Value (FV)
= PV*(𝟏 + 𝑲𝒆) 𝒏
Where, Ke----- Rate of Interest
Net Present Value (NPV)
= Present Value of cash inflows – cash outflows
Internal Rate of Return (IRR)
= NPV/cash outflow

5. Benefit Cost Ratio (BCR) or Profitability Index (PI)
=
𝑷𝑽 𝒐𝒇 𝒄𝒂𝒔𝒉 𝒊𝒏𝒇𝒍𝒐𝒘𝒔
𝒄𝒂𝒔𝒉 𝒐𝒖𝒕𝒇𝒍𝒐𝒘
Weighted Average cost of Capital (WACC)
=
𝑬
𝑬+𝑫
𝑲𝒆 +
𝑫
𝑬+𝑫
𝑲𝒅 (𝟏 − 𝒕)
Where,
Ke = Cost of Equity
Compensation that the market demands in exchange for owning the asset and bearing the
risk of ownership.
Kd = Cost of Debt
It is the effective rate that a company pays on its current debt.
Cost of Equity can be calculated by two ways
1) Dividend Capitalization model =
𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 (𝒏𝒆𝒙𝒕 𝒚𝒆𝒂𝒓)
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒎𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆
+
𝑮𝒓𝒐𝒘𝒕𝒉 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
2) Capital Asset Pricing Model (CAPM) = 𝒓 𝒇 + β (𝒓 𝒎 − 𝒓 𝒇)
Where, (𝒓 𝒎 − 𝒓 𝒇) is known as Risk Premium
Cost of Debt is calculated by,
Book value of its Debt
Discount rate is calculated by,
CAPM model = 𝒓 𝒇 + β (𝒓 𝒎 − 𝒓 𝒇)
Sensitivity analysis
How NPV will change in response to a given change in any input variables.
For example,
What if Unit sales fall 15% below?
What if Sales price per Unit falls?
What if variable costs increase?

6. Green Shoe Option
In an underwriting agreement, the Underwriter has the right to sell investors more shares
than originally planned by the issuer. It can provide additional price stability to a security
issued because the underwriter has the ability to increase the supply and smooth out price
fluctuations if demand exists.
Debt syndication
Public Issue of Corporate Bonds, private placement of Bonds and Debentures, ECBs,
FCCBs, ICDs, Loan against securities.
Equity Syndication
Institutional raise of funds, High Net worth Individuals (HNIs), Initial Public Offering
(IPOs), Follow on IPOs (FPOs).
Sweat Equity share
Equity shares issued by the company to Employees or Directors at a discount of for
consideration other than cash for providing know-how or making available rights in the
nature of intellectual property rights of value additions.
Share Certificate
It is a document issued by the company and is evidence that the person named therein is
the holder of the specified number of shares.
Share Warrant
It is a bearer document issued by the company under its common seal stating that the
bearer of the warrant is the holder of shares specified in the document. (U/S 114)
Preference shares
The shares which enjoy the preferential right in the matter of payment of dividend or
repayment of capital. Before Equity share holders, Preferential shareholders are entitled to
get dividend.
Methods of raising Capital by issue of shares
1. By issue of Prospectus
2. By an Offer for Sale or by deemed Prospectus
Any document issued by the Issuing House is treated as a Prospectus issued by the
company. The company allots Shares or Debentures at a predetermined price to a
Financial Institution or an Issue House for sale to the Public. Then the Issuing
House publishes a document called an ‘Offer for Sale’ attached to the application
form, offering to the public, shares for sale at a higher price.

7. 3. Issue of shares to the existing Shareholders
4. Private Placement of shares
A Private company is prohibited from issuing its shares to the general public and hence
raises capital by issuing shares to the close friends and relatives of the promoters.
A Public company too, can raise its capital from private sources instead of resorting to a
public issue of shares. Raise of funds from private sources is usually done by utilizing the
services of a broker or an underwriter who acts as an agent to procure buyers for the
shares. In such a case, the company is not required to issue a prospectus, but needs to file a
Statement-In-Lieu of Prospectus with the Registrar.
i.e., Public issue/Rights issue/Offer for sale
Conditions for the issue of securities:
The companies issuing securities offered through an offer documents shall have Net
Tangible Assets of at least 3 crores can make IPO.
Others can go by Book Building Process or Project Appraisal methods.
Book Building – A process undertaken by which a demand for the securities proposed to
be issued by a body corporate is elicited and built up and the price for such securities is
assessed for the determination of the quantum of such securities to be issued by means of a
notice, circular, advertisements, documents or information memorandum or Offer
document.
Generally, for price discovery.
The process which an Underwriter attempts to determine at what price to offer an IPO
based on demand from institutional investors.
An Underwriter ‘Builds a book’ by accepting orders from fund managers indicating the
number of shares they desire and the price they are willing to pay.
Offer Document – ‘Prospects’ in case of a Public Issue or Offer for sale. ‘Letter of Offer’
in case of Rights Issue.
Green shoe option

8. An option of allocating shares in excess of the shares included in the Public Issue. Its main
purpose is to stabilize post listing price of the newly issued shares.
Minimum subscription = 90%
The amount payable on application on each share should not be less than 5% of the nominal
value of the share.
Participatory Notes
These are the financial instruments issued by the investors of Hedge funds that are not
registered with SEBI, to invest in Indian stock Exchanges.
Indian based brokerages buy Indian securities and then issue P-Notes to foreign investors.
Any dividends or capital gains collected from the underlying securities go back to
investors.
It is similar to informal ADRs process, where brokerages hold on to stocks for foreign
investors.
Indian regulators are not happy because they have no way to know who owns the
underlying securities.
Cross margin
Calculated after considering the combined positions in Futures, Options, Cash markets etc.
The total margin comes down due to cross hedges.
The zone where Loss is minimum optimum
Notional loss = market domain
Actual loss = investor driven
Return on Margin (ROM)
It represents the gain or loss compared to the exchanges perceived risk as reflected in required
margin.
=
𝑹𝒆𝒂𝒍𝒊𝒛𝒆𝒅 𝒓𝒆𝒕𝒖𝒓𝒏
( 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒎𝒂𝒓𝒈𝒊𝒏)(
𝒚𝒆𝒂𝒓
𝒕𝒓𝒂𝒅𝒆 𝒅𝒖𝒓𝒂𝒕𝒊𝒐𝒏
) − 𝟏
Annualized RoM = (RoM+1)

9. Approaches to appraising the value of a company
1) Adjusted Book Value approach
2) Stock and Debt approach
3) Direct comparison approach
4) Discount Cash Flow approach
Multiples used to value a company
P/E ratio, EBITDA (a proxy for cash flow), EBIT, Book Value
Business risk
Risk arising due to Operations (EBITDA).
Financial risk
Risk arising due to debt finance use.
Liquidity risk
Risk arising due to counter party not obliging his part of due.
Value chain analysis
Activities from the supply of basic raw materials to the end-use product delivered into the
final customer’s hands.
Balance sheet
Presents the financial position of a company at a given point in time. It comprised of
Assets, Liabilities and Shareholder’ Equity.
Assets = Liabilities + Shareholder’s Equity
Income Statement
Shows the resources obtained through its own operations. It comprised of Revenue,
Expenses and Net Profit.
Net Profit = Revenues – Expenses
Retained Earnings Statement

10. It is the amount of profit a company invests in itself (i.e. profit that is not used to pay back
debt or distributed to shareholders as a dividend)
This statement will be reflected to Balance sheet.
A project is accepted only when BCR › 1
A project is accepted only when NPV › 0
A project is accepted only when IRR – Cost of Capital › 0
IRR – NPV = 0
NPV – Present Value of future cash flows
BCR (Benefit Cost Ratio) or Profitability Index=
𝑷𝑽 𝒐𝒇 𝑭𝒖𝒕𝒖𝒓𝒆 𝒄𝒂𝒔𝒉𝒇𝒍𝒐𝒘𝒔
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕