With news around Germany sliding into a Technical recession, here's basic explainer.
May 26, 2023
Decoding Technical Recessions: What They Mean for the Economy in Simple Terms
May 04, 2022
What is India VIX - the volatility indicator?
April 11, 2022
Inverted Yield Curve
One of the finance term which has suddenly gained lot of attention is 'Inverted Yield Curve'. So let's understand what does the Inverted Yield curve mean and what it indicates.
Yield curve is basically graphical representation drawn on expected interest (called yield) to be received on government bond (called as G-Security, Treasury bill, GILT etc) over different maturity period. Under normal situation, you get higher interest on Government bonds carrying longer maturity - which when plotted on graph give you positive slope for the yield curve. It looks something like below:
Historically, this yield curve has shown inverted or negative slope in the lead up to the recessionary environment or economic slowdown. This generally looks something like below:
What to look out for? : Investors watch parts of the yield curve as recession indicators, primarily the spread between the yield on 2-year to 10-year (2/10) curve Treasury bills. Following graph by Reuters shows the historical recession and inverted yield curve happening very clearly.
December 27, 2021
CAGR meaning and calculation
CAGR or Compounded Annual Growth Rate refers to the mean annual growth over given period of time. To simply put, it shows the average annual return generated over a period of time thereby smoothing out any spikes or drops from the return over a period.
Let's take an example - you invested in a stock "A" at the beginning of year 2019 at Rs 1,000 and at end of year 2020 it's trading at Rs 500 and now at the end of 2021 its trading at Rs 3,000. How do you compute your average annual return? This is wherein CAGR comes to play, helping you smooth out the fluctuation to show your average return over 2019 to 2021.
How to calculate CAGR?
October 13, 2021
Debentures explained
Definition: A debenture is defined as an instrument of debt executed by the company representing its obligation to repay the money at a specified rate and with an interest. It is one of the methods of raising the debt capital by company.
A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.
Types: Debentures are primarily issued in two types - Convertible Debenture or Non-Convertible Debenture. Convertible debentures are a type of debentures that can be converted into equity shares of the company. Non-convertible debentures are defined as the type of debentures that cannot be converted into equity shares of the company- Convertible debenture carries lower interest rate, as they carry advantage of converting to equity at later stage
- Maturity value of Convertible debenture is dependent on the share price
September 23, 2021
Dividend dates you must know
Here's quick guide for different dates you would read during Dividend announcement made by the Company and what does it signify -
Dividend Declaration Date : Date on which the dividend is announced by the company
This is the first trigger event, when company announces the dividend. This announcement includes details like dividend amount, total amount of dividend distribution and the record date (will explain this next).
Record Date (Cut-off date) : This is the date by when your name must be on the company's record books as a shareholder to be eligible to receive the dividend
On the dividend declaration day, together with quantum of dividend, the company also announces the Record Date. The record date is the date to simply put date on which final list of shareholder eligible for dividend would freeze. So if you want to be eligible for dividend, your name should be present on the company’s list of shareholders i.e. record book, by this date.
Shareholders whose name are not registered until this date on the company’s record book will not receive the dividend.
Ex-Dividend Date : The date before which you must own the stock
The Ex-dividend date is usually two days before the record date. Reason for 2 days is due to the stock settlement time of 2 days followed in India. When you buy a stock, it takes two days (settlement time) before it gets reflected in your demat account. If you buy the stock on or after the Ex-dividend date, stock will not be reflected in your account within Record date and hence you won't get the dividend, instead, the previous owner of stock will get the dividend.
Dividend Payment Date : This is the date when dividend is disbursed to the shareholders
This is the date set by the company on which the dividends are disbursed to the shareholders.
Only those shareholders who bought the stock before the Ex-dividend date and got their name in record book of the company would be entitled to get this dividend.
So if you are planning to get benefit of Dividend, Ex-dividend date is crucial and you need to make sure, that you buy the stock before stock starts trading as Ex-Dividend in secondary market.
Want to learn about how Dividend yield is calculated? Read here.
July 01, 2021
Free Cash Flow explained
In simple terms, Free Cash Flow (FCF) refers to the amount of cash generated by the entity after accounting for reinvestment in non-current assets.
FCF = Cash from Operations [-] Capital Expenditure
Wherein, Cash from Operations = Net Income [+] Non-Cash expense [+] Changes in Net Working Capital. This number can readily be referenced from Cash Flow statement presented by the entity.
Non-Cash expense includes P&L expenses which have not been actually spent in Cash, like - Depreciation, Amortization, Stock based compensation, impairment charges etc.
Working Capital is calculated primarily difference between current asset and current liabilities, like - Accounts Receivable, Inventory, Accounts Payable, etc.. Change in Net Working capital may be positive or negative number and will need to be added or deducted accordingly
Lot of Equity research report also calculates Levered and Unlevered Free Cash flow. So it's very important to understand the difference between them
Unlevered Free Cash Flow, also called Free Cash Flow to Firm (FCFF)
Levered Free Cash Flow, also called Free Cash Flow to Equity (FCFE)
Main difference between FCF, FCFF and FCFE is with respect to how the interest and debt is treated. Here's quick formula to give an idea on interest / debt treatment.
Free Cash Flow: Includes interest expense, but NOT debt issuances or repayments
Unlevered Free Cash Flow: Excludes interest expense and ALL debt issuances and repayments
Levered Free Cash Flow: Includes interest expense, and mandatory debt repayments
Formula to calculate each:
FCF: Cash Flow from Operations [–] Capital Expenditure
Unlevered Free Cash Flow (or FCFF): Earnings before Interest & Taxes (EBIT) [-] Taxes [+] Non-Cash Adjustments (like Depreciation, amortiztion, stock compensation) [+] Changes in Net Working Capital [–] Capital Expenditure
Levered Free Cash Flow (or FCFE): Net Income [+] Non-Cash Adjustments [+] Changes in Net Working Capital [–] Capital Expenditure [–] Debt Repayments
Note - as we started FCFE from Net Income, tax impact on debt repayment should be adjusted to arrive at more accurate number.
Unlevered free cash flow or FCFF is mostly used while doing discounted cash flow analysis