Return on Investment
Abbreviated as ROI, refers to a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.
Wednesday 3 June 2009
Return on Equity
Return on Equity
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Return on Invested Capital
Return on Invested Capital
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
Return on Capital Employed
Return on Capital Employed
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Return on Capital
Return on Capital
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
- If the Return on Invested Capital of a firm exceeds its WACC, then the firm created value.
- If the Return on Invested Capital is less than the WACC, then the firm destroyed value.
Where Warren Buffett Discovers Companies with Hidden Wealth
Warren Buffett has discovered 4 basic types of businesses with durable competitive advantages:
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
PETRONAS Dagangan Berhad
Business Summary
PETRONAS Dagangan Berhad engages in the marketing of petroleum products and operation of service stations. The company markets a range of petroleum products, including motor gasoline, aviation fuel, kerosene, diesel, fuel oil, bunker fuel, lubricants, liquefied petroleum gas (LPG), and asphalt to motorists, households, airlines, shipping lines, transporters, plantations, processing and manufacturing plants, power stations, and commercial enterprises in Malaysia. It markets its products directly to customers, as well as through its network of service stations, LPG dealers, and industrial dealers. The company was incorporated in 1982 and is based in Kuala Lumpur, Malaysia. PETRONAS Dagangan Berhad is a subsidiary of Petroliam Nasional Berhad.
PETRONAS Dagangan Berhad engages in the marketing of petroleum products and operation of service stations. The company markets a range of petroleum products, including motor gasoline, aviation fuel, kerosene, diesel, fuel oil, bunker fuel, lubricants, liquefied petroleum gas (LPG), and asphalt to motorists, households, airlines, shipping lines, transporters, plantations, processing and manufacturing plants, power stations, and commercial enterprises in Malaysia. It markets its products directly to customers, as well as through its network of service stations, LPG dealers, and industrial dealers. The company was incorporated in 1982 and is based in Kuala Lumpur, Malaysia. PETRONAS Dagangan Berhad is a subsidiary of Petroliam Nasional Berhad.
Exchange
Bursa Malaysia
Company Name
Petronas Dagangan
Stock Code
5681
Sectors
Paid Up Capital *
MYR 993.45
Par Value
- (as at 2008-03-31)
Market Cap *
MYR 7,848.29 (based on value of 7.9000 per share)
Bursa Malaysia
Company Name
Petronas Dagangan
Stock Code
5681
Sectors
Paid Up Capital *
MYR 993.45
Par Value
- (as at 2008-03-31)
Market Cap *
MYR 7,848.29 (based on value of 7.9000 per share)
Performance (as at 2008-03-31) *
Total Assets:
MYR 8,609.61
Intangible Assets:
MYR 23.40
Revenue:
MYR 22,301.58
Earnings Before Interest and Taxes:
MYR 908.16
EPS (Basic) Inc. Extraordinary Items:
MYR 0.67
PE Inc. Extraordinary Items:
11.86
EPS (Basic) Exc. Extraordinary Items:
MYR 0.67
PE Exc. Extraordinary Items:
11.86
Net Income:
MYR 661.67
Dividends - Common/Ordinary:
MYR 332.91
Dividends - Total:
MYR 332.91
Goodwill:
MYR 23.40
Minority Interest:
MYR 46.73
Reserves:
-
Return On Assets:
7.69%
Return On Equity:
16.89%
Shareholder's Equity:
MYR 3,917.42
Total Assets:
MYR 8,609.61
Intangible Assets:
MYR 23.40
Revenue:
MYR 22,301.58
Earnings Before Interest and Taxes:
MYR 908.16
EPS (Basic) Inc. Extraordinary Items:
MYR 0.67
PE Inc. Extraordinary Items:
11.86
EPS (Basic) Exc. Extraordinary Items:
MYR 0.67
PE Exc. Extraordinary Items:
11.86
Net Income:
MYR 661.67
Dividends - Common/Ordinary:
MYR 332.91
Dividends - Total:
MYR 332.91
Goodwill:
MYR 23.40
Minority Interest:
MYR 46.73
Reserves:
-
Return On Assets:
7.69%
Return On Equity:
16.89%
Shareholder's Equity:
MYR 3,917.42
---
Historical 5 Yr PE 11.3 to 15.8
Historical 10 Yr PE 9.8 to 14.0
Present PE based on 7.90 = 11.9
Earnings Yield = 8.4%
DY = 4.24% (MYR 332.91/MYR 7,848.29 )
ROTC = 16.89%
Between the end of 1998 and the end of 2007:
- total earnings were $3.129 a share,
- total dividends were $1.09 a share and
- retained earnings were $2.039 per share ($3.129 - $1.09 = $2.039) to add to its equity base.
- the company's per share earnings increased from $0.216 a share to $0.645, the difference was $0.426 a share.
- return on retained capital/earnings RORC was 0.426/203.9 = 21%
---
I like this company. It is a company that I can relate to. Petronas service stations are sprouting all over the place. It has a virtual monopoly supplying energy to certain niche sectors. Its revenue has been good and profitable. It generates a lot of free cash flow. It has been reinvesting into its business regularly, and the return on the equity is a 16.89% which is one of the my investing criteria. Its ROTC is 16.89%, as this company has no borrowings. Its earnings yield is at least 2x that of the risk free FD interest rate. Its dividend has been increasing over the years and I do not anticipate any decrease in future dividend despite the poor economic environment. In fact, it is predicted that the future earnings should continue to show an uptrend, and growth is encouraging with new Petronas stations opening up in new locations funded by self generated profit. The company is debt free.
At 7.90, its PE of 11.86 is at the lower end of its historical 5 year and 10 year PEs. There is safety of capital with a reasonable potential for moderate return (low risk with moderate return) for those with a longer term investing horizon. Just loudly sharing my view, you will need to make your own investing decision based on your personal assessment.
Opportunities in Calamities
Bad-news situations come in 5 basic flavors:
The perfect buying situations is created when a stock market correction or panic is coupled with an industry recession or an individual business calamity or structural changes or a war.
- Stock market correction or panic
- Industry recession
- Individual business calamity
- Structural changes
- War
The perfect buying situations is created when a stock market correction or panic is coupled with an industry recession or an individual business calamity or structural changes or a war.
Company Recovery after a correction, panic or bubble-bursting situation.
1. Companies with durable competitive advantage
a) Correction or panic during a bull market: Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation: But beware: In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover. After the crash of 1973-74, it took Capital Cities and Philip Morris until 1977 to match their 1972 bull market highs. It took Coca-Cola until 1985 to match its 1972 bull market high of $25 a share. On the other hand, if you bought during the crash, as Warren Buffett did, it didn't take you long to make a fortune.
2. Companies of the price-competitive type
Be warned: Companies of the price-competitive type may never again see their bull market highs, which means that investors can suffer real and permanent losses of capital if they buy them during a bubble.
Take Home Lessons
The bull/bear market cycle offers many buying opportunities for the selective contrarian investor.
The most important aspect of these buying opportunities is that they offer the investor the chance to buy into durable-competitive-advantage companies that have nothing wrong with them other than sinking stock prices.
The herd mentality of the shortsighted stock market creates buying opportunities for both you and Warren.
After the bubble bursts
After the bubble bursts, a couple of things can happen.
The first is that the country will slip into a recession. You will see reports of layoffs and falling corporate profits. The Fed will actively drop interest rates, which will, in a year or so, respark the economy. The immediate impact of lower interest rates will be an increase in car and house sales. Seeing this, investors will anticipate the revival of the economy and jump back into the market. This time, though, they will be investing in the big names -like GE and Hewlett-Packard - that have earnings. They won't chase after the once-hot bubble stocks. Those stocks are dead until they begin earning money.
If the Fed's dropping of interest rates doesn't revive the economy, the country will slip into a depression and stock prices will really go to hell. It happened in the early 1920s, and the ensuing crash made 1929 pale in comparison. If that happens, you are in a major recession/depression and the stock market will be giving companies away. Value investors, including Warren, dream of such an opportunity, while the rest of the world dreads it. That's because Warren is a selective contrarian investor with a ton of cash and a long-term perspective.
However, Warren Buffett does not buy or sell baseed on what he thinks the market will do. He is price-motivated. This means that he will only invest when the price of the company makes business sense.
The first is that the country will slip into a recession. You will see reports of layoffs and falling corporate profits. The Fed will actively drop interest rates, which will, in a year or so, respark the economy. The immediate impact of lower interest rates will be an increase in car and house sales. Seeing this, investors will anticipate the revival of the economy and jump back into the market. This time, though, they will be investing in the big names -like GE and Hewlett-Packard - that have earnings. They won't chase after the once-hot bubble stocks. Those stocks are dead until they begin earning money.
If the Fed's dropping of interest rates doesn't revive the economy, the country will slip into a depression and stock prices will really go to hell. It happened in the early 1920s, and the ensuing crash made 1929 pale in comparison. If that happens, you are in a major recession/depression and the stock market will be giving companies away. Value investors, including Warren, dream of such an opportunity, while the rest of the world dreads it. That's because Warren is a selective contrarian investor with a ton of cash and a long-term perspective.
However, Warren Buffett does not buy or sell baseed on what he thinks the market will do. He is price-motivated. This means that he will only invest when the price of the company makes business sense.
Tuesday 2 June 2009
Why the Efficient Market Theory is Both Right and Wrong
Why the Efficient Market Theory is Both Right and Wrong
Once upon a time a couple of enterprising university professors got together and proclaimed that the stock market was efficient, meaning that on any given day a stock was accurately priced given the information available to the public. They also concluded that because of this efficiency, it would be impossible to develop an investment strategy that could do better than the market did as a whole. Because of the market's efficiency, they concluded, the most profitable approach to investing would be through index funds that go up and down with the rest of the market. (This type of fund buys a basket of stocks, without regard to price, representing the stock market as a whole.)
Warren Buffett recognizes that because 95% of all investors are hell-bent on trying to beat each other out of the quick buck, the stock market is very efficient. He sees that it is impossible to beat these people at their short-term game. He also realizes that the shortsighted investment mind-set that dominates the stock market is completely devoid of any true long-term investment strategy. You only have to look to the options market to see hard evidence of this.
Once upon a time a couple of enterprising university professors got together and proclaimed that the stock market was efficient, meaning that on any given day a stock was accurately priced given the information available to the public. They also concluded that because of this efficiency, it would be impossible to develop an investment strategy that could do better than the market did as a whole. Because of the market's efficiency, they concluded, the most profitable approach to investing would be through index funds that go up and down with the rest of the market. (This type of fund buys a basket of stocks, without regard to price, representing the stock market as a whole.)
Warren Buffett recognizes that because 95% of all investors are hell-bent on trying to beat each other out of the quick buck, the stock market is very efficient. He sees that it is impossible to beat these people at their short-term game. He also realizes that the shortsighted investment mind-set that dominates the stock market is completely devoid of any true long-term investment strategy. You only have to look to the options market to see hard evidence of this.
- Short-term options trading, up to 6 months out, is a fully developed market with multiple exchanges, writing tens of thousands of option contracts, on hundreds of different companies, each and every day the stock market is open.
- The so-called long-term options market, up to 2 years out, is tiny and deals in fewer than fifty stocks. From Warren's investment perspective, 2 years out is still short-term.
- No exchange has an active options market writing contracts 5 to 10 years out. It simply doesn't exist.
Warren's great discovery is that, from a short-term perspective, the stock market is very efficient, but from a long-term perspective, it is grossly inefficient. He had only to develop an investment strategy to exploit the shortsighted market's inefficient long-term pricing mistakes. To this end, he developed selective contrarian investing.
Are you Mr. Market or Mr. Buffett?
Benjamin Graham's teaching on the shortsightedness of the stock market
There are certainly many opinions in the blogs. Those who visit these for "tips" maybe disappointed.
Investing should be a lonely journey, through hard work guided by your own philosophy and strategy.
Nevertheless, some of the blogs information can be useful too. One can also learn and benefit from the emotions and thought processes driving these bloggers.
You should be aware of the "noises" which are temporarily good or bad news that many bloggers get excited with. For the long term investors, the news that matters are quite different yet again.
Perhaps, this point can be better illustrated by the parable of Mr. Market made famous by Benjamin Graham.
"When Benjamin Graham was teaching Warren Buffett about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.
Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business's prospects. On other days, he couldn't see past the negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.
Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.
One other thing. Mr. Market doesn't mind if you don't pay any attention to him. He shows up to work every day - rain, sleet, or snow - ready and willing to sell you his half of the business, the price depending entirely on his mood. You are free to ignore him or take him on his offer. Regardless of what you do, he will be back tomorrow with a new quote.
If you think that the long-term prospects for the business are good and would like to own the entire busines, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that's when you would get the best price.
Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market's insanely low selling price.
Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth."
Key point: In an investment world dictated by shortsighted investment goals, where the human emotions of optimism and pessimism control investors' buy and sell decisions, it is short-sighted pessismism that creates Warren's buying opportunity.
Are you Mr. Market or Mr. Buffett?
There are certainly many opinions in the blogs. Those who visit these for "tips" maybe disappointed.
Investing should be a lonely journey, through hard work guided by your own philosophy and strategy.
Nevertheless, some of the blogs information can be useful too. One can also learn and benefit from the emotions and thought processes driving these bloggers.
You should be aware of the "noises" which are temporarily good or bad news that many bloggers get excited with. For the long term investors, the news that matters are quite different yet again.
Perhaps, this point can be better illustrated by the parable of Mr. Market made famous by Benjamin Graham.
"When Benjamin Graham was teaching Warren Buffett about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.
Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business's prospects. On other days, he couldn't see past the negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.
Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.
One other thing. Mr. Market doesn't mind if you don't pay any attention to him. He shows up to work every day - rain, sleet, or snow - ready and willing to sell you his half of the business, the price depending entirely on his mood. You are free to ignore him or take him on his offer. Regardless of what you do, he will be back tomorrow with a new quote.
If you think that the long-term prospects for the business are good and would like to own the entire busines, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that's when you would get the best price.
Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market's insanely low selling price.
Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth."
Key point: In an investment world dictated by shortsighted investment goals, where the human emotions of optimism and pessimism control investors' buy and sell decisions, it is short-sighted pessismism that creates Warren's buying opportunity.
Are you Mr. Market or Mr. Buffett?
Geithner insists Chinese dollar assets are safe
Geithner insists Chinese dollar assets are safe
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
Related Articles
US calls for China to have greater say in world economic affairs
We all want to get back to business but we need an election first
The trillion dollar question
Deficit will be tamed ? Geithner
Tim Geithner will put away the verbal grenades in China
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
Related Articles
US calls for China to have greater say in world economic affairs
We all want to get back to business but we need an election first
The trillion dollar question
Deficit will be tamed ? Geithner
Tim Geithner will put away the verbal grenades in China
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
Wall Street shrugs off GM bankruptcy as world markets rally
Wall Street shrugs off GM bankruptcy as world markets rally
Wall Street shrugged off General Motor's long-expected bankruptcy filing as world share markets started June with a gain, lifted by manufacturing surveys suggesting a more upbeat picture of the global economy.
By Telegraph Staff
Last Updated: 10:19PM BST 01 Jun 2009
The Dow Jones closed up 221 points, or 2.6pc, at 8721 in New York. Other major indexes also advanced with the FTSE 100 closing up 2pc at 4506, Germany's DAX rising 4pc to 5142 and France's CAC gaining 3.1pc to 3379.
Earlier in Asia, Japan's Nikkei 225 stock average, which has surged 37pc since early March, closed up 155.25 points, or 1.6 pec, at 9,677.75, while Hong Kong's Hang Seng index shot up 4pc to 18,888.59.
US purchasing managers index — a broad gauge of business activity — from the Institute for Supply Management rose to a better-than-expected 42.8 in May from April's 40.1. It echoed two surveys in China which showed manufacturing expanding in May and one in the UK which indicated that the rate of decline in British economy was slowing.
The Dow Jones said it would drop GM as a component after the automaker filed for bankruptcy, as well as Citigroup, in which the government now owns a significant stake. GM and Citi will be replaced with Travelers and Cisco Systems next week.
Tim Hughes, head of sales trading at IG Index in London, said: "One of the main drivers today has been the ongoing increase in commodity prices, helping to register some impressive gains for mining stocks."
Xstrata and Vedanta were both up more than 9pc in London.
Mr Hughes said the action in commodity markets continues to suggest that the end is in sight for the global slowdown, with gold at its highest for more than three months and oil back to where it was in early November.
"Stock investors seem happy to keep pushing the price of the mining shares higher – this is a sector that has outperformed the wider market for much of this year and at the moment it seems to have plenty of positive momentum behind it."
Investors have been worried of late that the rally in world markets since early March had run out of steam.
Brent crude settled at nearly $68 a barrel and the pound rose more than 3 cents against the dollar to a seven-month high of $1.6428.
http://www.telegraph.co.uk/finance/financetopics/recession/5423078/Wall-Street-shrugs-off-GM-bankruptcy-as-world-markets-rally.html
Wall Street shrugged off General Motor's long-expected bankruptcy filing as world share markets started June with a gain, lifted by manufacturing surveys suggesting a more upbeat picture of the global economy.
By Telegraph Staff
Last Updated: 10:19PM BST 01 Jun 2009
The Dow Jones closed up 221 points, or 2.6pc, at 8721 in New York. Other major indexes also advanced with the FTSE 100 closing up 2pc at 4506, Germany's DAX rising 4pc to 5142 and France's CAC gaining 3.1pc to 3379.
Earlier in Asia, Japan's Nikkei 225 stock average, which has surged 37pc since early March, closed up 155.25 points, or 1.6 pec, at 9,677.75, while Hong Kong's Hang Seng index shot up 4pc to 18,888.59.
US purchasing managers index — a broad gauge of business activity — from the Institute for Supply Management rose to a better-than-expected 42.8 in May from April's 40.1. It echoed two surveys in China which showed manufacturing expanding in May and one in the UK which indicated that the rate of decline in British economy was slowing.
The Dow Jones said it would drop GM as a component after the automaker filed for bankruptcy, as well as Citigroup, in which the government now owns a significant stake. GM and Citi will be replaced with Travelers and Cisco Systems next week.
Tim Hughes, head of sales trading at IG Index in London, said: "One of the main drivers today has been the ongoing increase in commodity prices, helping to register some impressive gains for mining stocks."
Xstrata and Vedanta were both up more than 9pc in London.
Mr Hughes said the action in commodity markets continues to suggest that the end is in sight for the global slowdown, with gold at its highest for more than three months and oil back to where it was in early November.
"Stock investors seem happy to keep pushing the price of the mining shares higher – this is a sector that has outperformed the wider market for much of this year and at the moment it seems to have plenty of positive momentum behind it."
Investors have been worried of late that the rally in world markets since early March had run out of steam.
Brent crude settled at nearly $68 a barrel and the pound rose more than 3 cents against the dollar to a seven-month high of $1.6428.
http://www.telegraph.co.uk/finance/financetopics/recession/5423078/Wall-Street-shrugs-off-GM-bankruptcy-as-world-markets-rally.html
Western economies poised to account for less than 50pc of world GDP
Western economies poised to account for less than 50pc of world GDP
Western world economies will account for less than 50pc of global gross domestic product (GDP) this year, six years earlier than expected, a think-tank has warned.
By Angela Monaghan
Last Updated: 9:18PM BST 01 Jun 2009
The Centre for Economics and Business Research (CEBR) is forecasting that because of the downturn and China's economic resilience, the combined contribution from the US, Canada and Europe to world GDP will be 49.4pc in 2009, down from 52pc in 2008.
CEBR said prior to the financial crisis Western world GDP was not expected to fall below 50pc until 2015. The West's contribution to global GDP has been steadily falling since 2004, when it was about 60pc, but the recession has accelerated that process, CEBR said.
The recession has brought forward the time when the non-Western economies produce more than half of world GDP, for the first time since the middle of the 19th century. We had expected this to happen, but not quite so soon. The West will have to start to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way," said Douglas McWilliams, CEBR's chief executive.
The think-tank predicts the West will account for just 45pc of the world economy by 2012, and expects global GDP to fall by 1.4pc this year, the first decline since 1946. The global economy will start to grow again in the second half of 2009 but will moderate in 2010 as governments embark on "fiscal retrenchment," according to the CEBR.
China will overtake Japan in 2009 to become the world's second largest economy in dollar terms, it said.
"One of the factors causing the shift in shares of world GDP is the fact that the Chinese economy has bounced back rapidly," said Jörg Radeke, economist at CEBR. "This will have knock on effects on oil and commodity prices and is one reason why we are forecasting a price of oil of $80 a barrel in 2012," he added.
http://www.telegraph.co.uk/finance/economics/5424031/Western-economies-poised-to-account-for-less-than-50pc-of--world-GDP.html
Western world economies will account for less than 50pc of global gross domestic product (GDP) this year, six years earlier than expected, a think-tank has warned.
By Angela Monaghan
Last Updated: 9:18PM BST 01 Jun 2009
The Centre for Economics and Business Research (CEBR) is forecasting that because of the downturn and China's economic resilience, the combined contribution from the US, Canada and Europe to world GDP will be 49.4pc in 2009, down from 52pc in 2008.
CEBR said prior to the financial crisis Western world GDP was not expected to fall below 50pc until 2015. The West's contribution to global GDP has been steadily falling since 2004, when it was about 60pc, but the recession has accelerated that process, CEBR said.
The recession has brought forward the time when the non-Western economies produce more than half of world GDP, for the first time since the middle of the 19th century. We had expected this to happen, but not quite so soon. The West will have to start to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way," said Douglas McWilliams, CEBR's chief executive.
The think-tank predicts the West will account for just 45pc of the world economy by 2012, and expects global GDP to fall by 1.4pc this year, the first decline since 1946. The global economy will start to grow again in the second half of 2009 but will moderate in 2010 as governments embark on "fiscal retrenchment," according to the CEBR.
China will overtake Japan in 2009 to become the world's second largest economy in dollar terms, it said.
"One of the factors causing the shift in shares of world GDP is the fact that the Chinese economy has bounced back rapidly," said Jörg Radeke, economist at CEBR. "This will have knock on effects on oil and commodity prices and is one reason why we are forecasting a price of oil of $80 a barrel in 2012," he added.
http://www.telegraph.co.uk/finance/economics/5424031/Western-economies-poised-to-account-for-less-than-50pc-of--world-GDP.html
Monday 1 June 2009
Starting a Small Business
Starting a Small Business
The statistics are mind numbing. In North America, 80% of all small businesses started this year will be gone in 5 years. Of the lucky 20% to have survived, another 80% will be gone in 10 years. That's a whopping 96% failure rate over ten years.
Would you start a small business if you were told that you have a 96% chance of failure? Not many people would. But every day, hundreds of people think they will beat the odds. They may be former employees, students, housewives, or others who have never had any business training but are sure that their product or service is so fantastic, so completely unique, that they are destined to succeed.
The hairdressers think that because they are good at cutting hair, they can own and manage a salon. Lawyers think that because they are good at putting together a brief, they can run a ten-lawyer law practice.
Small business is the engine of the world economy. Even Mircrosoft and Ford started in someone's basement or garage. However, people all over the world have an idealized and unrealistic view of how to operate a business, and most discount the importance of the basics, including basic accounting skills.
The small-business owner will need to base the business on sound financial and management principles. Business management is a separate skill from doing whatever it is that their business does.
What is their business plan?
What is their break-even point?
How about their plans for book-keeping for the business?
How about analysing and tracking financial information?
How about understanding and handling the complexities of starting, growing and exiting a business?
How to work with the accountant to strengthen the business and make it more profitable and risk proof?
Therefore, learn and be familiar with some of the basic essential knowledge before starting a small business.
The statistics are mind numbing. In North America, 80% of all small businesses started this year will be gone in 5 years. Of the lucky 20% to have survived, another 80% will be gone in 10 years. That's a whopping 96% failure rate over ten years.
Would you start a small business if you were told that you have a 96% chance of failure? Not many people would. But every day, hundreds of people think they will beat the odds. They may be former employees, students, housewives, or others who have never had any business training but are sure that their product or service is so fantastic, so completely unique, that they are destined to succeed.
The hairdressers think that because they are good at cutting hair, they can own and manage a salon. Lawyers think that because they are good at putting together a brief, they can run a ten-lawyer law practice.
Small business is the engine of the world economy. Even Mircrosoft and Ford started in someone's basement or garage. However, people all over the world have an idealized and unrealistic view of how to operate a business, and most discount the importance of the basics, including basic accounting skills.
The small-business owner will need to base the business on sound financial and management principles. Business management is a separate skill from doing whatever it is that their business does.
What is their business plan?
What is their break-even point?
How about their plans for book-keeping for the business?
How about analysing and tracking financial information?
How about understanding and handling the complexities of starting, growing and exiting a business?
How to work with the accountant to strengthen the business and make it more profitable and risk proof?
Therefore, learn and be familiar with some of the basic essential knowledge before starting a small business.
Sunday 31 May 2009
Predictions of Corporate Failure
The ability to predict corporate failure will be of interest to many stakeholders such as shareholders, lenders, suppliers, management, employee, etc. For example, banks and other lenders need to monitor loans and creditworthiness of customers, auditors need to assess the going-concern status of their clients and the companies themselves need to assess whether they are in danger of financial crisis.
Major cause of corporate failure is insolvency, which is inability to pay debts when they fall due. There are a number of reasons for a company to experience insolvency.
Major cause of corporate failure is insolvency, which is inability to pay debts when they fall due. There are a number of reasons for a company to experience insolvency.
- One reason is overtrading which leads to shortage of working capital.
- Another is when a company invests heavily and is not able to recover its investment or earn a fair return, owing to changes in the business and economic environment and the company is not able to respond to the changes.
- Loss of major customers is also a reason, and
- Excessive amount of bad debts could lead to insolvency.
Over the last five decades considerable research has been made to determine the extent to which ratio analysis may help predict corporate failure. Often the various key ratios calculated have been done one ratio at a time. They have been grouped on some basis for inter-company comparison or comparison of performance or postion over a period fo time. It is possible to take a combination of a number of key ratios and calculate a score which is compared to a predetermined target or pass mark. When a company scores above the threshold pass mark then it is considered safe. This is referred to as multi-variate analysis or Z-score analysis. A number of models were developed to use key ratios to determine corporate failure. To date the two best-know Z-scores are Altman's Z-score and Taffler's Z-score.
Limitations of Analysis based on Financial Statements
Limitations of Analysis based on Financial Statements
Traditional analysis has certain weaknesses.
The analysis is based on financial statements prepared and presented by the company.
Traditional analysis has certain weaknesses.
The analysis is based on financial statements prepared and presented by the company.
- These statements provide information of the recent past, which may not be very relevant.
- The financial statements could also have been subjected to 'creative accounting'. For example, a revolving loan, which is renewed every three months, may be shown as a current liability when in fact it could be a long-term loan in substance.
- Therefore a comparison between companies may not be completely reliable.
- To make useful inter-firm comparisons the companies selected have to be in the same industry, be similar in size, face similar challenges, etc. It may be near impossible to get a company similar to the one being studied.
Financial statements and the lenders
Financial statements and lenders
The lenders to the company may be trade creditors, banks, debenture holders, etc. They may stipulate different repayment periods and duration of the borrowing may be short, medium or long term.
Consequently, the information required by each category of lenders vary owing to their terms and conditions of the borrowings.
Short-term creditors need information about the creditworthiness of a company. They will need to know the company's liquidity, short-term solvency, profitability and asset utilization. Relevant ratios are the current ratios, acid test ratio, debtor payment period, creditors payment period, inventory turnover and gross profit margin.
Medium-term and long-term lenders are interested in the solvency, gearing, asset utilization, interest cover, cash flow, and cash flow projection. Some medium and long-term loans are secured on the assets of a company, in which case the realisable value (estimated net selling price) will be a useful indication of financial security.
Financial statements are historical statements. Important information such as forecast cash flow and ovrdraft facilities are not provided in published financial statements while current asset composition can alter tremendously over a short period of time.
One should be wary of "window dressing", which is manipulating the composition of current assets and liabilities on the balance sheet date to achieve a satisfactory current ratio or even a liquidity ratio.
The lenders to the company may be trade creditors, banks, debenture holders, etc. They may stipulate different repayment periods and duration of the borrowing may be short, medium or long term.
Consequently, the information required by each category of lenders vary owing to their terms and conditions of the borrowings.
Short-term creditors need information about the creditworthiness of a company. They will need to know the company's liquidity, short-term solvency, profitability and asset utilization. Relevant ratios are the current ratios, acid test ratio, debtor payment period, creditors payment period, inventory turnover and gross profit margin.
Medium-term and long-term lenders are interested in the solvency, gearing, asset utilization, interest cover, cash flow, and cash flow projection. Some medium and long-term loans are secured on the assets of a company, in which case the realisable value (estimated net selling price) will be a useful indication of financial security.
Financial statements are historical statements. Important information such as forecast cash flow and ovrdraft facilities are not provided in published financial statements while current asset composition can alter tremendously over a short period of time.
One should be wary of "window dressing", which is manipulating the composition of current assets and liabilities on the balance sheet date to achieve a satisfactory current ratio or even a liquidity ratio.
Financial Statements and the Investors
Interpretation and Analysis of Financial Statements for the Investors
The investor has to identify changes and trends in the financial statements to help explain some fundamental questiona and raise supplementary questions. For example:
Turnover: Is it Increasing?
If Yes:
The investor has to identify changes and trends in the financial statements to help explain some fundamental questiona and raise supplementary questions. For example:
Turnover: Is it Increasing?
If Yes:
- Is there a corresponding increase in Profits?
- Is there an additional investment in Fixed Assets?
- How is the additional investment Financed?
Investors derive their information from published sources such as annual reports, daily newspaper and magazines. Information contained in the annual reports is outdated, and is useful only for forecasting for the future plans and development. Information in newspapers and magazines may be more current and relevant for evaluating investments, but nonetheless still historical information.
Investors vary in their preferences. Some prefer high dividend pay-out rates and otheres prefer high capital gains: yet others may invest to gain control. Investors have to first establish their preferences.
A fundamental technique used to determine the share price is to study the dividend pay-out trend of the company. Investors who prefer a high dividend pay-out rather than capital appreciation should analyse the dividend policy of the company to decide whether to invest in, hold on to or dispose of, shares. Such investors should use dividend cover and dividend yield ratios to analyse the business. Companies with high ratios are preferred to those with low ratios.
Those who prefer capital appreciation to high dividends should study the PE ratio. The PE ratio relates the current price to the latest earnings per share. The PE ratio published daily in the newspapers compares the current market price of the share to the previous year's earnings per share.
The PE ratio represents the market's perception of a company's future performance in relation to its growth, gearing, risks and dividend policy.
- The value of PE ratio depends on the stock market environment and the industry a company is in.
- The average PE ratio varies from industry to industry. A careful study of the industry average gives an indication of the performance of the company in question.
- Shares with a PE ratio higher than industry averages are generally attractive to investors.
A high PE ratio of a particular share could imply that the company concerned has a high growth potential and is a leader in the industry. Alternatively the shares may just be overvalued. By contrast, a low PE ratio may indicate poor performance or undervalued shares.
Reference: How to Read Financial Statements by Jane Lazar
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