Stock Analysis Terminologies with Examples
What are Outstanding Shares?
Outstanding Shares refer to the number of ordinary shares that, after their issue, have been sold and are being held by shareholders. These are common stock authorized by the company, issued, purchased and held by investors. Outstanding shares may also be referred to as shares outstanding or issued shares.
How to calculate Market Capitalization?
Market capitalization or Market Cap refers to the value of a company’s outstanding shares. Market Capitalization = Current StockPrice x Shares Outstanding
Market Cap Example: Let’s assume Company XYZ has 1,000,000 shares outstanding and the current share price is Rs.75. Based on this information and the formula above, we can calculate that Company XYZ’s market capitalization is 1,000,000 x 75 = 75,00,00,000 (Rs.75 million).
What is Ex-Dividend Date?
Ex-dividend Date is the date on or after which a security is traded without a previously declared dividend or distribution. To determine whether you should get a dividend, you need to look at two important dates. They are the “record date” and the “ex-dividend date”.
Example:
| Declaration Date | Ex-Dividend Date | Record Date | Payable Date |
| Friday, 7/26/2016 | Thursday, 8/8/2016 | Monday, 8/12/2016 | Tuesday, 9/10/2016 |
On July 26, 2016, Company XYZ declares a dividend payable on September 10, 2016 to its shareholders. XYZ also announces that shareholders of record on the company’s books on or before August 12, 2013 are entitled to the dividend. The stock would then go ex-dividend two business days before the record date.
In this example, the record date falls on a Monday. Excluding weekends and holidays, the ex-dividend is set two business days before the record date or the opening of the market—in this case on the preceding Thursday. This means anyone who bought the stock on Thursday or after would not get the dividend. At the same time, those who purchase before the ex-dividend date on Thursday will receive the dividend.
What is a Share Warrant?
Share Warrant is a freely transferable certificate indicating that the bearer is entitled to specified shares of stock. It is a common source of funding used by companies, both public and private. It gives the warrant holder a right to subscribe equity shares at a pre determined price on or after a pre determined time period.
Example of share warrant: If Company XYZ issues bonds with warrants attached, each bondholder might get a Rs.1,000 face-value bond and the right to purchase 100 shares of Company XYZ stock at Rs.20 per share over the next five years. Here, the exercise price is Rs.20, which is 15% higher than what Company XYZ stock was trading at when the bonds were issued. The warrant’s exercise price often rises according to a schedule as the bond matures. This schedule is set forth in the bond indenture.
What is Reserve Capital?
Reserve Capital is the amount reserved and not used by the company for a longer period and called up only on the company’s liquidation. It is different from Capital Reserve as Capital Reserve is an amount reserved or maintained by the company to meet future expenses or for future investment. The reserve capital is generally kept unused and not spent for any purpose.
Example of reserve capital: Company ‘Y’ is holding Rs.250000 as a Reserve Capital which it can use at the time of Liquidation.
What is Dividend?
Dividend means a portion of profits earned by the growing or well progressed companies distributed to the shareholders of the company. Dividend can be paid in any form namely- cash (Cash Dividend) or stock (Stock bonus)
How to calculate Dividend per Share?
- Calculation of dividend per share:
Dividend per Share (DPS) = Dividend/ Number of equity shares
- It can also be calculated as Earnings per share X Payout ratio, where the payout ratio refers to the amount distribution to the shareholders.
What is EPS in stock market?
- Earnings Per Share (EPS) is part of a company’s profit allocated to each outstanding shares of common stock.
- It is comparison between company income and stock price. EPS serves as an indicator of a company’s profitability.
- It is calculated as follows:
Example: Quality Co. has net income during the year of Rs.50,000. Since it is a small company, there are no preferred shares outstanding. Quality Co. had 5,000 weighted average shares outstanding during the year. Quality’s EPS is calculated like this:
As you can see, Quality’s EPS for the year is Rs.10. This means that if Quality distributed every dollar of income to its shareholders, each share would receive 10 dollars.
How to calculate the Return on Equity?
ROE i.e. return on equity is the gain produced out of the money which the shareholders have invested.
ROE = Annual Net Income/ Average Stockholders’ Equity
In order to calculate ROE, we will need year ending balance sheets of two consecutive financial years to find average shareholders’ equity. Net income is the after tax income. The average shareholders’ equity is calculated by dividing the sum of shareholders’ equity at the beginning and at the end of the year by 2.
Example of ROE: Company A earned net income of Rs.1,722,000 during the year ending march 31, 2011. The shareholders’ equity on April 30, 2010 and March 31, 2011 was Rs.14,587,000 and Rs.16,332,000 respectively. Calculate its return on equity for the year ending March 31, 2011.
Solution
Average Shareholders’ Equity = ( Rs.14,587,000 + Rs.16,332,000 ) / 2 = Rs.15,459,500
Return On Equity = Rs.1,722,000 / Rs.15,459,500 ≈ 0.11 or 11%.
What is ROEC?
- ROEC stands for Return on Economic Capital. Economic capital is that capital which a financial institution or other trading organization defines based on its own risk analyses such as market risk, credit risk, legal risk, and operational risk on a realistic basis against possible losses affirm may bear.
- It is the amount of money which is needed to insure survival in a worst-case situation. Firms and financial services regulators should then aim to hold risk capital of an amount equal at least to economic capital.
- Therefore, economic capital is often calculated as value at risk. The balance sheet, in this case, would be prepared showing market value (rather than book value) of assets and liabilities.
What is EBITDA?
- Earnings Before Interest, Taxes, Depreciation and Amortization’
- EBITDA is the operating income earned by the company.
- The EBITDA is the deduction of interest, taxes depreciation and amortisation.
- It mainly focuses on operational efficiency of the firm and ascertains the business performance.
- Here first interest and taxes will be deducted and again we will add back the depreciation and amortization.
EBITDA Formula : EBIT + Depreciation + Amortization
What are Penny Stocks?
- Stocks which are available at a very low cost ranging from Rs.1 to Rs.10.are known as penny stocks.
- It follows a concept of high risk-high return concept.
- Penny stocks can be provided by those companies which have good earning potential in terms of profitability as penny stocks are highly volatile in nature.
- The promoters of the company should have 40% minimum holding.
Example of penny stock: IL&FS is one of the top penny stocks having a price of Rs.22.4 paying a dividend of 7% of cost price.
What is NPV?
Difference between the cash inflows and cash outflows determines the Net present value i.e. NPV. The NPV denotes the present value of the investment which should necessarily consider the time value of money.
- Steps which involve are:
- Ascertain the total cash inflow and cash outflows of the project and the time periods which they occur.
- NPV= Present value of cash inflows – Present value of cash outflows
Accept the project if it is positive and reject if it is negative and if two projects are mutually exclusive the project with higher NPV will be preferred.
What is CAPM?
Capital Asset Pricing Model i.e. CAPM is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used to calculate the return for the risky securities. It is the relationship between systematic risk and expected return of stocks, this is estimated by considering two main factor called time value and risk value.
Example of CAPM: If stock X is riskier than Stock Y, CAPM model is used to estimate the price worth for particular stock (X or Y), then the stock should be of lower price to reimburse investor’s risk. There are some inputs like rate of return, market expected rate and beta of the asset will helps to arrive at investment’s fair value.