Meaning of Debt Equity Ratio Capitalization of a company consists of funds raised by issuing various types of securities, i.e., ordinary shares, preference shares, debentures etc. To decide as to the ratio of various types of securities to total capitalization is a very difficult task but the decision in this important for the business to decide as to the ratio of ownership capital to the creditorship capital or loan capital. The ratio of borrowed capital to the owned capital may be called debt equity ratio. In other words, debt equity ratio is the ratio between borrowed capital on the one hand and owned capital on the other. Debt equity ratio is positively correlated with the capital gearing. If capital gearing in a company is high, debt equity ratio would also be high or vice versa. For example, if the total capital of Rs. 1,00,000 in a company consists of Rs. Continue reading
Financial Management Concepts
DuPont Analysis – Return on Equity (ROE) Analysis
Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont analysis is a useful tool in providing both an overview and a focus for such analysis. History of DuPont Analysis The DuPont model of financial analysis was made by F. Donaldson Brown, an electrical engineer Continue reading
Double Entry System of Bookkeeping
The recording of financial transactions undertaken by an individual or an organization defined Bookkeeping. The organization could be an enterprise, a charitable organization or even a local sports club. The necessary support for such accounting function is provided by bookkeeping as the preparation of cost reports, financial statements, and tax returns. Making entries to specific accounts with debit and credit system and keeping track of a business’s financial transactions is involved. Bookkeeping has evolved through the years from clay tablets, to paper ledgers, and now computerized systems. Even for now, bookkeeping fundamentals have not been changed through the ages. And chances are the future societies will not be able to exist without a formal system of financial recording keeping. In short, some of the same problems that plagued ancient bookkeepers still exist even with modern advancement. The process of bookkeeping is always considered to be as vital importance to categorize Continue reading
The Concept of Zero Working Capital
In today’s world of intense global competition, working capital management is receiving increasing attention form managers striving for peak efficiency the goal of many leading companies today, is zero working capital. Proponent of the zero working capital concept claims that a movement toward this goal not only generates cash but also speeds up production and helps business make more timely deliveries and operate more efficiently. The concept has its own definition of working capital: inventories+ receivables- payables. The rational here is (i) that inventories and receivables are the keys to making sales, but (ii) that inventories can be financed by suppliers through account payables. Zero working capital also refers to the equality between current assets and current liabilities at all times. To avoid excess investment in current assets, firms try to meet their current liabilities out of the current assets fully if they follow this concept. Consequently, smooth and uninterrupted Continue reading
Difference between Cash Credit and Overdraft
Cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. This type of financing is similar to a line of credit. Furthermore, cash credit is a facility to withdraw the amount from the business account even though the account may not have enough credit balance. The limit of the amount that can be withdrawn is sanctioned by the bank based on the business cycle of the client and the working capital gap and the drawing power of the client. This drawing power is determined, based on the stock and book debts statements submitted by the borrower at monthly intervals against the security by hypothecating of Continue reading
Valuation of Assets in a Demerger
A demerger scheme usually involves the allotment of shares in the transferee company to the shareholders of the transferor company, in lieu of their reduction of their interest in the transferee company having a mirror image of shareholdings. If post demerger as part of strategy, intention is to create holding subsidiary relationship or retain part stake than it is possible to allot shares of the transferee company to the transferor company. In the context of a demerger scheme, a valuation exercise is mandatory in order to determine the number of shares to be issued to the shareholders of the transferor company in consideration for the spin off/demerger of the undertaking or undertakings. If demerger is going to be in ‘Shell Company’, than valuation is primarily to determine the capital structure of the Transferee/Resultant Company. If the demerged and resulting companies belong to same group of management and shareholders are common, Continue reading