Different parameters for baIance sheetreading

*1. BOOK VALUE PER SHARE*

The book value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The term "book value" is a company's assets minus its liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity.

Common stockholder's equity, or owner's equity, can be found on the Balance Sheet for the company. In the absence of Preference Shares, the total stockholder's equity is used.

*Concept of Book Value per Share*

Book value per share is just one of the methods for comparison in evaluating a company. Enterprise value, or firm value, market value, market capitalization, and other methods may be used in different circumstances or compared to one another for contrast, e.g, Enterprise Value would look at the market value of the company's equity plus its debt, whereas Book Value per share only looks at the equity on the balance sheet. Conceptually, book value per share is similar to net worth, meaning it as assets minus debt, and may be looked at as though what would occur if operations were to cease. One must consider that the balance sheet may not reflect with certain accuracy, what would actually occur if a company did sell all of their assets.

*Use of Book Value per Share*

The book value per share may be used by some investors to determine the equity in a company relative to the market value of the company, which is the price of its stock. For example, a company that is currently trading for Rs. 20 but has a book value of Rs. 10 is selling at twice its equity. This example is referred to as price to book value (P/B), in which book value per share is used in the denominator. In contrast to book value, the market price reflects the future growth potential of the company.

Book value per share is also used in the Return on Equity formula, (ROE), when calculating on a per share basis. ROE is net income divided by stockholder's equity. Net income on a per share basis is referred to as EPS, (Earnings per Share). Book value per share is expressing stockholder's equity on a per share basis.

*2. INVENTORY TURNOVER RATIO*

*Definition*

Inventory turnover ratio, defined as how many times the entire inventory of a company has been sold during an accounting period, is a major factor to success in any business that holds inventory. It shows how well a company manages its inventory levels and how frequently a company replenishes its inventory. In general, a higher inventory turnover is better because inventories are the least liquid form of asset.

*Inventory Turnover Ratio Analysis Explanation*

Inventory turnover ratio explanations occur very simply through an illustration of high and low turnover ratios. Despite this, many businesses do not survive due to issues with inventory. A low inventory turnover ratio shows that a company may be overstocking or deficiencies in the product line or marketing effort. It is a sign of ineffective inventory management because inventory usually has a zero rate of return and high storage cost. Higher inventory turnover ratios are considered a positive indicator of effective inventory management. However, a higher inventory turnover ratio does not always mean better performance. It sometimes may indicate inadequate inventory level, which may result in decrease in sales.

*Inventory Turnover Ratio Calculation*

Inventory turnover ratio calculations may appear intimidating at first but are fairly easy once a person understands the key concepts of inventory turnover.

*Cash Tied Up In Inventory*

When your cash is tied up in inventory, it is bad news for your company. Make it your goal to increase inventory turnover to free up cash.

*3. RETURN ON NET WORTH*

*Definition*

Return on Networth is a ratio developed from the perspective of the investor and not the company. By looking at this, the investor sees if entire net profit was passed on to him, how much return he would be getting. It explains the efficiency of the shareholders’ capital to generate profit.

*Formula*

Return on Net Worth (RONW) is a measure of profitability of a company expressed in percentage. It is calculated by dividing the net income of the firm by shareholders’ equity. The net income used is for the past 12 months. It can be represented mathematically as follows:

RONW = Net Income ÷ Shareholders’ Equity

RONW = 100,000 / 500,000 = 0.2 or 20%

The net income should be of the past year and the equity should be as of the end of the period for which return on net worth is being calculated. Also, equity should be adjusted for stock splits and should not include preference shares.

*Explanation*

In terms of its implication, return on net worth indicates how much profit has been generated for every rupee of equity investment. Even more plainly, return on net worth is a measure of how well the company is utilizing the money invested by shareholders.

A high return on net worth percentage is indicative of the prudent use of shareholders’ money while a low percentage indicates less efficient deployment of equity resources.

Return on net worth is considered as a vote of the efficiency of a company’s management with an increasing percentage indicating higher efficiency in generating profit on every dollar invested.

*Interpretation*

For studying this measure, it is important to look at it over several periods of time in order to assess whether the company has been more or less efficient in generating profits on shareholders’ equity over the years. Also, an increasing RONW may result from a decline in value of shareholders’ equity. Hence, a share buyback can artificially increase return on equity from which investors and analysts may draw an incorrect conclusion of higher profits or increased efficiency. Hence, it is important to look at the ratio in its entirety before drawing conclusions about the firm being analyzed.

Combined with return on assets (ROA), return on net worth can show whether leverage is being employed by a company. For instance, if ROE is greater than ROA for the same period, it is a sign of leverage being used to increase profits because higher debt means fewer requirements for equity, which will boost ROE. When comparing different companies in terms of their return on net worth, it is important to ensure that the companies are comparable in terms of the business cycle as well as industry else the measure may not be useful.

For instance, comparison of RONW of a company from the technology and another from the utility sector may not give the right picture as technology companies tend to have lower debt while utility companies usually have high levels of debt. Also, technology companies are usually higher growth companies while utilities are usually stable businesses, thus making a comparison between the ROE of these two companies incorrect.

*4. CASH HOLDING PER SHARE*

*What is Cash Per Share*

Cash per share represents a company's total cash divided by its number of shares outstanding. Cash per share is the percentage of a firm's share price that is immediately accessible for spending on activities such as research and development, mergers and acquisitions, purchasing assets, paying down debt, buying back shares and making dividend payments to shareholders. Cash per share consists of cash and short-term investments. It is money that a firm has on hand; it does not come from borrowing or financing activities.

*Breaking down Cash Per Share*

When a firm has high levels of cash per share, it is holding a significant percentage of its assets in a very liquid form. This decision can indicate economic uncertainty and an unwillingness by firms to invest given the current economic climate. High levels of cash per share can indicate that a firm is performing well, with positive earnings and cash flow and the ability to reinvest in itself. However, high levels of cash per share do not always coincide with overall financial strength. Rather, available cash offers a level of financial flexibility, but can also represent a cost of capital inefficiency if a company holds on to too much cash.

Cash per share can be further broken down into different segments of cash or cash available to various forms of capital (financing).

Free Cash Flow (FCF) is a common cash flow measure highlighting available cash after operations which can be distributed to pay down debt or dividend to equity shareholders. Another common cash flow metric is Free Cash Flow to Equity (FCFE), which is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid.

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