How Corporate Dividends are Taxed?
The continuous inflow of capital is vital for any economy to grow in the long run. This inflow of cash is achieved by mobilizing the idle funds to the industrious. This happens when individuals invest their money as equity capital in the companies of the nation. Hence, one of the tasks of the government should […]
Disadvantages of Defined Contribution Pension Plans
Defined contribution plans have come under a lot of criticism because of the various disadvantages that they have. Many of these plans have been viewed as a covert way to absolve the government of any responsibility related to the retirement of its citizens. Given the many other socio-economic factors which are at play, defined contribution […]
Estimating Future Dividends
We have discussed various types of dividend payout models. We have discussed the Gordon growth model, the H model, one stage, two stage, multi-stage and even spreadsheet models. These models are varied in their approach towards calculating the value of a firm. Yet the common link amongst these models is the fact that they all […]
Accounting for Stadium Leases
In the previous article, we have already established that there are many sporting franchises across the world that prefer to rent out stadiums instead of building them outright. We also know that a significant number of sports franchises are indeed using the leasing route. Hence, there are a lot of leasing transactions present in the […]
Lessons Learned in Behavioural Finance
In the past few articles, we have studied about how behavioral finance impacts financial markets more than one might believe. When the subject of behavioral finance was first created, it was thought of as being an unimportant subject. It was perceived as being a cross between financial theory and psychology. However, over the years, behavioral […]
Ratio, as the name suggests, is nothing more than one number divided by the other. However, they become useful when they are put in some sort of context. This means that when an analysts looks at the number resulting out of a ratio calculation he/she must have a reasonable basis to compare it with. Only when the analyst looks at the number and compares it what the ideal state of affairs should be like, do the numbers become powerful tool of management and financial analysis.
Dividing numbers and obtaining ratios is therefore not the main skill. In fact this part can be automated and done by the computer. Companies wouldn’t want to pay analysts for doing simple division, would they?. The real skill lies in being able to interpret these numbers. Here are some common techniques used in the interpretation of these numbers.
Horizontal analysis is an industry jargon for comparison of the same ratio over time. Once a ratio is calculated, it is compared with what the value was in the previous quarter, the previous years, or many years in case the analyst is trying to make a trend. This provides more information of two grounds. They are:
Cross sectional ratio analysis is the industry jargon used to denote comparison of ratios with other companies. The other companies may or may not belong to the same industry. Cross sectional analysis helps an analyst understand how well a company is performing relative to its peers. In a way this removes the effect of business cycles. There are many variations of cross sectional analysis. They are as follows:
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