Zero-Dividend Preferred Stock which are also referred to as capital shares, come with attributes of bonds and shares and do not pay a dividend to its holder. In such a scenario, the holder of Zero-Dividend Preferred Stock generates income through capital appreciation in the value of the stock, usually when the holder receives one-time payment at the end.
What is Earnings Per Share? EPS is the per share profit by a business in a given period. While analysing a business financially, it serves as one of the basic tools. EPS is calculated by dividing profits by total shares outstanding for a given period. EPS is reported on the profit and loss statement of an enterprise and works as a denominator for beloved price-to-earnings ratio (P/E ratio), used not just by novice investors but also fund managers. A business is required to generate sustainable earnings in its life cycle, and earnings or profits are essentially among major intend of a promotor. To know more about P/E ratio read: Understanding Price-Earnings Ratio But reported earnings of a business will likely differ from actual cash earnings because devising profits mandate broader accounting standards and principles to provide a fair picture of an enterprise. EPS, therefore, becomes imperative for investors, market participants and other users of information. EPS estimates are circulated by sell-side analysts to market participants. Financial Modelling is applied to arrive at the EPS estimates of future financial years, semi-annual periods or quarterly, depending on the reporting adopted by the firm. Analyst estimates are then collected by market data providers like Reuters, Bloomberg, IRESS to provide a consensus view of analysts on the business and its financials, including revenue, operating expense, earnings before interest and tax, profit after tax, EPS. Market estimates enable participants to evaluate the expectations of sell-side analysts from a particular company, sector or even index. Analyst estimates also indicate the divergence between an individual’s expectations and collective expectations of analysts that are tracking the company. An individual can, therefore, determine whether the stock of the company is undervalued or overpriced by the market against hi one’s fair value estimates that are based on the expectations from the company. More on EPS read: What Do We Mean By Earnings Per Share (EPS)? How to calculate EPS? Although general formula considers total shares outstanding in the denominator, it is preferred to use weighted average shares outstanding over a period because companies issue new shares, buyback or cancel shares. Net Income is the profit reported by a business after incurring income tax. It is also called as Net Profit After Tax. Dividends on Preferred Shares are paid to preferential shareholders because they have first right over the income of a business, but preferred shares don’t have voting rights like common shareholders or ordinary shareholders. Weighted Average Shares Outstanding is calculated after incorporating changes in number of shares during a period, and using weighted average shares outstanding provides a fair financial position of a company. Basic V/S Diluted EPS Diluted EPS is calculated after adding the weighted average number of shares that would be issued after the conversion of dilutive shares to weighted average shares outstanding. Dilutions can include share rights, performance rights, convertible bonds etc. Whereas Basic EPS is calculated by taking weighted average shares outstanding that incorporate changes to number of shares outstanding such as buyback, new issues etc. What is Adjusted-EPS? In a financial period, firms may incur one-time expenses or transactions that are not usual in the normal course of business. The objective of adjusted EPS is to arrive at a fair picture of the business, especially for financial forecasting. Extraordinary items are excluding from EPS to arrive at adjusted EPS figure. These items can include gain on sale of assets, loss on sale of assets, merger costs, capital raising costs, integration expenses etc. What is Normalised EPS? Normalised EPS is calculated to arrive at an EPS figure, which embeds the fluctuations in income due to business cycles or industry cycles. It also includes adjustments made for calculation of adjusted EPS such as one-time gains or losses. Normalised EPS is a useful measure for companies that are sensitive to economic cycles or changes in the business environment. By smoothening out the fluctuations, it provides a fair picture of the business. If a company has reported high normalised earnings over periods, it is considered that the company is less sensitive to changes in business cycles because of its stable revenues and income during the periods. EPS and Price-to-earnings ratio Calculation of price-to-earnings ratio requires EPS as denominator and price of the stock as numerator. EPS therefore becomes a very important financial metric for investors. EPS and price data also allows participants to compare the historical trends of the P/E ratio with the current market scenario and P/E ratio of the stock. How can increase grow EPS? Businesses can increase EPS by focusing on increasing their revenue, by improving operational efficiencies either by deploying technology to reduce cost, or negotiate better prices with vendors, operate in tax efficient manner, etc. Businesses can also improve EPS by undertaking corporate action such as buying back of shares. Read: Pros and cons of buybacks – Story of 5 Popular Stocks including Aurizon Good read: Every Doubt You Have On Earnings Per Share- Explained Right Here!
A half stock is described as a standard or preferred stock that is sold with a par value or face value of 50% of the standard cost. For example, if the par value of a stock is $100, then the half stock?s value will be $50.
What is a Balance Sheet? A balance sheet is a financial statement of an enterprise. It is one of the three primary financial statements used in analysing a business or modelling forecast for a business. Other two include the income statement and cash flow statement. It shows the financial positions of business in a given period and includes critical information like the value of assets, liabilities, cash and shareholders’ equity. In this way, a balance sheet enables the information seeker to evaluate the net worth of an enterprise. Good read: Evaluating Financial Statements The balance sheet is a source of information for a number of stakeholders, including investors, creditors, bankers. It helps stakeholders to make efficient decisions and provide transparency. Enterprises are primarily judged on the financial position, which is based on the income statement, balance sheet and cash flow statement. The balance sheet is also referred to as Statement of Financial Position and is applied, along with other financial information, in deriving financial ratios, financial modelling, stress testing, credit appraisal, credit rating etc. It reflects the position of an enterprise during a given period, which could be quarterly, semi-annual, and annual. Corporations are required to publish financial information regarding the business under different laws across jurisdictions. Why does the balance sheet balance? Balance sheet is balanced because of the double entry bookkeeping system, which necessitates the effect of transaction on two accounts. For instance, an entrepreneur starting a business with $5000 cash will increase cash (Assets) and capital (Shareholder’s Equity). The below equation is the result of double entry bookkeeping system. Assets In the assets section, balance sheet represents the value of a business which can be converted to cash and is owned by the enterprise. Assets represent the ownership of an enterprise. Companies derive assets through transactions, investments, acquisitions, internal developments etc. Assets are generally recorded at a cost which was paid at the time of transaction. But conservative accounting principle necessitates companies to record assets at current costs, and the difference between actual cost and current cost is charged to profit and loss account. The balance sheet does not include internally generated assets like Domino’s Pizza Logo, McDonald’s logo that are valuable for business. However, such intangible assets are recorded in the balance sheet when an enterprise purchases intangible assets or acquire by way of business combinations. Companies are required to report assets less than costs at times like anticipated losses from a receivable are charged to the income statement, and receivable are reduced by same amount in the balance sheet. Depreciation and amortisation is the process charging expenses of long-term assets to the income statement and reducing the same amount from the balance sheet value of long term assets. There are two types of assets: current assets and non-current assets Current Assets: Current assets are those assets that could be realised in cash in one year. These assets include cash, cash equivalents, inventory, trade receivables, financial assets, prepaid assets, financial assets etc. Current assets also indicate the expected amount of cash a business can potentially convert over one year period. It also includes assets held for sale purpose. Current Assets are used to calculate working capital and other financial ratios. Non-current Assets: Non-current assets are those assets that would not be converted into cash easily. These are long term assets of the business and expected to generate long term benefits for the business. Non-current assets include property, plant, machinery, lease assets, intangible assets, financial assets, deferred tax assets, investments, advance, long-term receivables etc. Liabilities Liabilities represent the obligations of an enterprise. It can be the source of assets and also represent a claim on assets of an enterprise. A liability is recorded as a result of past event or transaction, and settlement of liability is expected to result in an outflow of funds, resource or economic benefits. There are three types of current liabilities: current liabilities, non-current liabilities and contingent liabilities. Current liabilities: Current liabilities are short term commitments of an enterprise that are needed to be settled within one year. It reflects the amount of funds that would be required by an enterprise to pay-off its short-term obligations. Current liabilities include trade payables, borrowing, current tax payable, lease liabilities, financial liabilities, provisions, accrued expenses. Information seekers use current liabilities to evaluate the liquidity of an enterprise and various other ratios. Non-current liabilities: Non-current liabilities are also known as long term liabilities of an enterprise because these are due after one year. A company with a loan maturing in ten years’ time will be required to report principal amount under non-current liabilities. Non-current liabilities include long-term borrowings/debt, deferred tax liabilities, lease liabilities, financial liabilities, provisions, capital leases, etc. Contingent liabilities: Contingent liabilities are the obligations of a firm that could become due to the outcome of a future event. Moreover, these are potential obligations of a firm. A common example of contingent liabilities could be litigation against the company, which may force it to pay money upon judgement. Shareholder’s Equity It is the amount of capital the owners or shareholders of an enterprise have provided to the business. Shareholder’s equity also includes the amount of cash generated by the business after repaying all necessary obligations in a given period. Shareholder equity includes equity share capital, preferred share capital, paid-up capital, retained earnings, accumulated losses. Negative shareholder equity would mean that the liabilities of the company exceed assets of the company. A positive shareholder’s equity indicates that the company has surplus assets over liabilities.
What are Capital Markets? Capital markets are the lifeline of an economy that facilitates funding for Government, corporations, and other institutions. Moreover, capital markets are funding infrastructure for the economy, therefore lifeline. Savings and investments are channelised to those in need of funding in capital markets. Investors and savers can include households and institutions, while capital seekers primarily include Governments, corporations, and institutions. Capital markets are the place where securities are exchanged between two parties. These securities incorporate equity, bonds, preferred shares, derivatives, commodities etc. Almost all financial instruments are traded in capital markets. Kalkine image Primary Market Vs Secondary Market Primary market is only concerned with the new issuance of securities. The moment security is exchanged between two parties after the initial issue, it happens in the secondary market. A company’s going public move is started through a primary market, where it directly sells securities to specific investors whereas once a company is public, it sells its securities (shares, bonds etc) to a large number of investors through the secondary market. Investment banks provide primary market services to capital seekers. A firm selling a bond goes to investment banks for underwriting, pricing, and listing of the security. Likewise, an initial public offering is also facilitated by investment banks for privately held enterprises looking for multiples. Market makers, brokers and dealers facilitate the secondary market for securities. Mostly these market participants are investment banks, but there are plenty of individual companies too providing secondary market services. Kalkine Image What are the types of capital markets? Stock market Also known as equity market, the stock market is the most popular capital market due to accessibility of investments. The liquidity levels in stock market are usually high, given the scale of market participants. Equity as an asset class has never faded for investors seeking capital appreciation. Stocks represent an ownership stake in the company, and stockholders have voting right on the decisions of the firm. A considerable portion of investors also includes households. Bond market Debt market provides large scale funding sources to an economy and is very crucial for economic development. Countries issue bonds in the debt market to fund their ambitions, while corporations and institutions have a similar intent. Bonds as an asset class is considered as safe because of regular interest payments on the principal amount as well as repayment of principal at the time of maturity. The risk of non-repayment of interest and principal is always present. Government bonds are considered as safest investments in the debt market, and yields on Government bonds depict the risk-free rate at a given point in time. Corporate debt is second to sovereign debt and is relatively riskier than the latter, therefore carries a higher interest rate. Commodity market Commodities are crucial for the global economy and have been factors of production in many industries. Unlike debt or equity, commodities have a movable presence and are traded extensively across global markets. As a resource, commodities have tangible demand and supply dynamic and are priced through these two market forces. While there are several types of publicly traded commodities, the popular ones include gold, silver, iron ore, coal, barley, grain, crude oil, platinum etc. Foreign exchange (FX) market The FX market is an essential part of capital markets, facilitating global trade and cross-currency flows across jurisdictions. Currencies and associated products are traded in the FX market. This market determines the exchange rate between the currencies of two countries. FX rate or exchange rate is evaluated based on the cross-comparison of various variables of two nations, including purchase power parity, the balance of payments, interest rates, inflation, GDP growth etc. Derivative market A derivative is a contract between two parties with an underlying asset, which would be exchanged on a specified future date at a pre-determined price. The value of a derivative contract changes consistently with the change in the value of the underlying asset. But the magnitude of change in the value of the derivative contract would be in multiples compared to change in the value of an underlying asset. The underlying asset to a derivative could be equity, bonds, commodity etc. Derivative also include structured products like total return swap, interest rate swap, swaptions, options, FX swaps etc. Private market A private market is a place where securities are exchanged privately between parties. Companies, before going public, trade in private markets. Private markets remain crucial for the development of new businesses and entrepreneurs. Businesses may experience significant capital activity in the private market. Private equity and venture capital are the prime examples of private market investors, seeking to invest in start-ups, ideas, and budding stories. Public market Public market is extremely transparent than the private market. In the public market, the investor base is large, and the information flow is extensive. All markets discussed above, except the private market, falls under the public market.