Open Interest is mostly used to confirm a trend for a particular futures  contract, For eg, lets look at Reliance 1000 May CALL, the open interest  might tell us that there have been 5 options open in the month of May, a  trader might then wonder does this refer to the number of contracts bought or sold.

*Working*
When a trader buy’s or sell’s an option, the transaction needs to be  entered as either an opening or a closing transaction. If he buy’s 5  RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening  his position in a futures contract, which causes the Open interest to rise  by 5, and then after sometime(within) the month he decides to sell his  contract i.e close his position in a particular contract, then he is  causing the open interest to go down by 5.

Open interest applies primarily to the futures market, it helps the measure  the flow of money into the futures Market. For each seller of a futures  contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract.  Thus a seller and a buyer combine to create only one contract.

A rise in open interest in a futures contract along with its price  indicates bullishness, which means investors are creating long positions  and vice versa.

The open interest position that is reported each day represents the  increase or decrease in the number of contracts for that day, and it is  shown as a positive or negative number.

*Advantages of monitoring Open Interest*
Changes in the Open Interst as mentioned earlier can help a trader  interpret the future trend of a particular contract.

*Open Interest RISING ->* Indicates that the present trend (up, down, flat)  will continue

*Open Interest FALLING->* Indicates that the prest trend(up, down, flat) is  likely to change or is coming to and end.

The Working:
The procedure for a pre-approved loan is largely similar to a regular home loan application — you need to submit the documents asked for to the bank along with the processing fee. These will include — depending on whether the applicant is a salaried individual, self-employed professional or entrepreneur — identity and residence proofs, the latest salary slip, Form 16, past six months’ bank statement, past three years’ income-tax returns (self and business) as well as profit/loss statements and balance sheet, certificate and proof of business existence and so on. However, a desirable income level is not the only criterion. Your repayment capacity, too, is a critical parameter. We take into account the loan-seeker’s income-too bligation ratio. Hypothetically, if the applicant’s income is 1 lakh, his total repayment outgo should not be more than . 55,000-60,000.

Even after your loan is sanctioned, the disbursal will take place only after you identify a property that passes the lender’s due diligence test. There is no typical period within which the loan seeker is required to avail of the disbursement. However, we keep the file open for six months and if the applicant does not act within this period, we send reminders to the individual. The validity period varies with each bank. For instance, State Bank of India, which has been publicising this facility of late, requires the borrower to identify the property within 60 days for the sanction to be valid. “Interest rate, though, cannot be locked-in — the rate prevalent at the time of disbursal will be the effective rate. In the case of a sanction, the validity could range from 1-3 months. Prefer a period of one month. While the interest rate may change at the time of disbursal, the spread over the bank’s base rate will not be altered for the borrower, unless a significant period of time has elapsed.

Benefits For The Borrowers:
Buying a property typically involves a mountain of paperwork — with the builder and, later, with the lender. Availing of a pre-approved loan would mean that at least one part of it is taken care of. The borrower’s creditworthiness is established already and this helps in negotiating on rates with the builders. Secondly, your total transaction turnaround time comes down. Also, banks provide advice to home-seekers on properties that may meet their criteria. Moreover, lenders have tie-ups with builders for various projects. “In the event of the borrower (with a preapproved home loan) finding it difficult to make a decision, the bank may direct him/her to the right kind of project. Thus, if both the loan as well as the project is pre-approved, the processing procedure will be much shorter.

So, if you have identified a good deal which is dependent on how soon you arrange for funds, a pre-approved home loan will come in handy. For the borrower, the key advantage is that he knows his eligibility. Some builders acknowledge those with pre-approved home loans as serious buyers, and this may strengthen your bargaining power when you sit across the table to negotiate. Such schemes also merit consideration in case the bank’s procedure of disbursing the loan is likely to be a long drawn out one.

Tread Cautiously:
However, bear in mind that it is certainly not a win-win situation always. What you stand to lose if you decide to defer your purchase or avail of a loan from another lender is the processing charge. The processing fee is not refunded under any circumstance. In case of HDFC, it is 0.5% of the loan amount or 10,000, whichever is lower. We retain 0.25% of the loan amount or 5,000. Therefore, you need to factor in the uncertainty regarding the actual disbursement while signing up for such loans. Even if you do make the decision within the prescribed cut-off date, the disbursal may be stalled in case the bank does not find the property to be suitable.

I don’t see much value in such schemes, unless you are unsure of the amount of loan that you may be eligible for. The processing fee may have to be forgone in such cases. If no processing fee is levied, you can consider going ahead.

In short, though these schemes score high on utility, they may not be suited for all. You could consider these schemes if you are comfortable with the prevailing rate of interest, the amount required for down payment is in place and you have already narrowed down your search to a particular locality, the size as well as the kind of apartment and the developer. If you are starting from scratch, it would be probably safer to finalise the property before proceeding with the loan-related paperwork.

READY RECKONER
Ø The pre-approved home loan procedure is largely similar to that of a regular home loan

Ø Documents required include identity and residence proofs, latest salary slip, Form-16, past six months’ bank statement and past three years’ income-tax returns

Ø Even after the loan is approved, the disbursal will take place only after the property passes the bank’s scrutiny

Ø The period during which you have to avail of the disbursal can range from 1-6 months, depending on the bank

Ø The key advantage of obtaining such loans is that the total time taken to close the transaction comes down considerably

Ø However, if your chosen property doesn’t pass the suitability test or you fail to seal a deal before the deadline, you may have to forgo the processing fee

There are many different indicators. Below are some of the most common ones used by traders. You must understand that not all indicators are equally important. You must learn about all of them, observe reactions to them, and then form an opinion on which ones help you in your specific style of trading. And to make it even more interesting, their importance changes with time and market perception.

Consumer Price Index (CPI)
The Consumer Price Index is a measurement of the cost of living as determined by the U.S. Bureau of Labor Statistics. The CPI is a widely followed inflation indicator. It compares relative price changes over time for a fixed basket of goods and services used by consumers. The CPI has the potential to overstate inflation because it does not adjust for the substitution of goods and the rapidly changing prices of new technology. Release schedule: monthly, around the 13th at 8:30 a.m. EST.

Producer Price Index (PPI)
The Producer Price Index measures the average change over time of wholesale prices received by domestic producers for their output. This index has several components: commodity, industry sector, and stage of processing. The U.S. Bureau of Labor Statistics produces the PPI. Release schedule: monthly, around the 11th at 8:30 a.m. EST.

Gross Domestic Product (GDP)
The Gross Domestic Product provides the total value of goods and services produced within the borders of the United States. Real GDP is the most comprehensive measure of U.S. economic activity. The change in output is measured in realterms (inflation has been removed). The U.S. Department of Commerce, Bureau of Economic Analysis releases this information. Release schedule: quarterly, during the third or fourth week of the month following the previous quarter at 8:30 a.m. EST.

M2 Money Supply
This is a measure of the United States’ supply of money, including M1 (currency in circulation, demand deposits, non-blank traveller’s checks, and other checking deposits) plus money market funds, savings accounts, overnight euro dollars, and time deposits under $100,000. The Board of Governors of the Federal Research System provides this information. Release schedule: weekly and monthly.

Employment Reports
The employment reports are the most timely and broad indicators of economic activity. They provide results for two separate sectors. A household survey generates an unemployment rate and a business survey determines non-farm payrolls, average work week, and average hourly earnings figures. The U.S. Department of Labor, Bureau of Labor Statistics provides these reports. Release schedule: first Friday of the month at 8:30 a.m. EST.

Institute of Supply Management (ISM)
The Institute of Supply Management provides the results of a national survey of purchasing managers that includes data on items such as new orders, production, employment, inventories, prices, import orders, and delivery times. A reading above 50 percent indicates expansion and below 50 percent, contraction. This particular report now contains two sections. The first reports on goods and raw materials and the second reports on the purchases of services. Release schedule: first business day of the month for the prior month at 10:00 a.m. EST.

The following measurement tools will help you evaluate a company and determine the value of its stock.

Price-Earnings Ratio
The price-earnings ratio is the most popular measure. It consists of finding a company in which the price-earnings (P/E) ratio is low when compared to similar companies. To find the price-earnings ratio, divide the stock’s current price by its earnings per share:

Price-earnings Ratio = Current Stock Prices/Earnings per Share

Therefore, if a stock is selling for $35 now and its earnings last year were $7.00 per share, the P/E ratio would be 5 ($35 Ö $7.00 = 5). This means that for every $1.00 the stock earns, investors are currently willing to pay $5.00. However, investors also pay for future earnings. If the same $35 stock is expected to earn $9.00 per share next year, then the P/E ratio would be 3.89 ($35 Ö $9.00 = 3.89).

The idea is to find stocks with a significantly lower P/E ratio than other stocks in their sector. The P/E ratio cannot always be calculated if the company suffers a loss or breaks even, as there would be no earnings to compute. Expectations of popular stocks can be so high that they may sell for prices way above the market value.

Cash Flow
Cash flow is an important measure of a business for investors because it is a way of determining a company’s ability to pay dividends and more. Generally, cash flow is defined as the net income of a business plus depreciation and the value of other non-cash assets.

Companies must have cash to keep going. They need money to pay for all the goods and services they use, as well as making capital improvements and paying operating costs (wages, raw materials, gas for company cars, electricity, etc.). Companies with a high-level debt have to pay a significant amount in interest to service that debt. If an opportunity suddenly appears, perhaps to buy a strategically located piece of land or another firm that would help the business, cash-poor companies may not have the money to make the deal.

Most important, perhaps, is that during hard times, a company with a cash cushion is likely to have a higher probability of making it through. Companies that have enough cash to survive the down periods are in a good position to make clearheaded judgments and keep their enterprise afloat.

Price-Earnings- to-Growth Ratio
The price-earning- to-growth (PEG) ratio is used to determine a stock’s value while taking into account earnings growth. The calculation is as follows:

PEG Ratio = Price/Earnings Ratio

Annual EPS
Growth PEG is a widely used indicator of a stock’s potential value. Many consider it to be a stock’s potential value. It is favoured over the price-earnings ratio because it also accounts for growth.

Keep in mind that the numbers used are projections so they can be less accurate. Also, there are many variations when using earnings from different time-periods (for example, one year versus five years). Be sure you know the exact definition your source is using.

Beta
Beta is a measure of a stock’s relative price volatility to the S&P 500. For example, a beta of 1 indicates that for every one-point move in the S&P 500, the stock would move 1.0. A beta of 1.5 indicates that a one-point move in the S&P 500 would move your stock 1.5.

Book-to-Bill Ratio

The book-to-bill ratio describes the technology industry’s demand to supply, or the number of orders on a firm’s “book” compared to the number of orders filled.

This ratio measures whether the company has more orders than it can deliver (greater than 1), the same number of orders that it can deliver (equals 1), or fewer orders than it can deliver (below 1). This monthly figure is used frequently for companies in the technology and chip (semiconductor) sector.

Price-to-Book Ratio
The price-to-book ratio is used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value. (Book value is simply assets minus liabilities) .

A lower price-to-book ratio could mean that the stock is undervalued. It could also mean that something is fundamentally wrong with the company. As with most ratios, however, be aware that it varies considerably by industry.

This ratio also gives some idea of whether you are paying too much for the stock, when the amount that would remain if the company went bankrupt immediately is considered. This is also known as the price-equity ratio.

To read the full report: EUROPEAN CRISIS

• They tend to be illiquid – investors are not free to take out capital at will.
• They tend to be exempt from many of the regulations and taxes imposed on other investment vehicles.

• They tend to be flexible and to speculate in a wide variety of instruments.

• They tend to use leverage, that is, to borrow in order to boost returns.
• Their managers tend to be extremely well paid. They reap sometimes outlandish amounts, even when they don’t succeed. These fees are quite controversial.

*Strategic allocation is typically the first stage in the investment process. Based on the investor’s long-term objectives, an initial portfolio is build. It is the backbone of any investment strategy. This often forms the basic framework of an investor’s portfolio. This is a proportional combination of assets based on expected rates of return for each asset class. For example, if stocks have historically given a return of 12% per year and bonds have returned 6% per year, a mix of 50% stocks and 50% bonds would be expected to return 9% per year. Strategic asset allocation generally implies a buy-and-hold strategy. Strategic asset allocation defines the boundary of risk, and it is these boundaries that help control
portfolio risk.
*
Constant-Weighting Asset Allocation

*Strategic asset allocation has its drawbacks as it entails a buy-and-hold strategy even if a change in the value of assets causes a drift from the initially established policy mix. This has driven the wealth managers to resort to the constant weighting asset allocation. This strategy helps you to continuously rebalance your portfolio. For example, if gold was declining in value, you would purchase more of it to maintain its weightage and if its value increased you would sell it. There are no hard-and-fast rules for the timing of portfolio rebalancing under strategic or constant-weighting asset allocation. Most wealth managers are of the opinion that the portfolio should be rebalanced to its original mix when any asset class moves more than 5-7% from its original value.
*
Tactical Asset Allocation

*Over the long run, a strategic asset allocation strategy may seem relatively rigid. There are investors who constantly want to seek returns out of market opportunities that arise. Hence, investment managers find it necessary to go in for short term tactical calls. Such tactical calls create room for capitalisng on unusual or exceptional investment opportunities. This is like timing the market to participate in the fluctuations and volatility that arise due to market conditions. While a strategic asset allocation is revisited once in six months, tactical asset allocations are visited every month. Tactical calls are on an ongoing basis. For example, shifting a part of the portfolio from large cap stocks to mid cap stocks to take advantage of the environment is a tactical call. “We restrict our tactical calls around 10% of the total portfolio and rest of the money is strictly governed by strategic allocation,” said a wealth advisor with a foreign wealth manager. Tactical allocations being opportunistic in nature, wealth managers prefer to maintain clear time-based and value-based entry and exit points to ensure better risk management.
*
Guided And Optimised Allocation

*This can be seen as the advanced version of tactical asset allocation. When tactical asset allocation aims to take advantage of temporary situations in the market, the concept of guided and optimised allocation believes in squeezing the last drop out at all times. By very nature, it is meant for a bit aggressive investor. Here 75% of the clients’ portfolio could follow the original asset allocation, while 25% of the portfolio will explore opportunities where there could be chances of making higher return. So, investing in gold futures for a quick buck, or short-term corporate deposits offering higher rate of interest and such other opportunities remains on investors’ lookout. Here you must continuously stay tuned with the financial markets. The strategy further demands you to take into account transaction costs as the investors turn hyper active in search of higher returns.
*
Dynamic Asset Allocation

*For aggressive investors who want to ride momentum at times, managers recommend dynamic asset allocation. So, if the stock market is showing weakness, you sell anticipating a further fall. If it is going up, you buy anticipating a further rise. Here you constantly adjust the mix of assets as markets rise and fall. This is the opposite of constant-weighting strategy. As the entire portfolio is available for action, amateur investors may turn hyper active. Especially in the high volatile times, acting on all types of information can lead to high transaction costs. Also, the tax treatment of the returns turns to disadvantages if you churn your portfolio too much. In times of high volatility, when the markets may not move up or down much, dynamic asset allocation is not advisable for naïve investors. Depending on the type of investor you are, asset allocation could be active or passive. However investors should choose one keeping in mind their age, long term goals and risk taking capacity in mind.

After deduction of all expenses, including taxes, the net profits of a company are split into two parts — dividends and ploughback. Dividend is that portion of a company’s profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves. The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.

Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its

ploughback figures. Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.

Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company’s reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.

As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.

Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders’ funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares. The higher the reserves, the greater will be the value of your shareholding.

Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according tothe company’s books of accounts. The company’s books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities) . If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders’ funds. If you divide shareholders’ funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.

Book Value per share = Shareholders’ funds / Total number of equity shares issued

The figure for shareholders’ funds can also be obtained by adding the equity capital and reserves of the company. Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn’t reflect the current market value of the company’s assets. Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company’s shares. It can, at best, give you a rough idea of what a company’s shares should at least be worth. The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as: Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend. The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback. Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company’s shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company’s share and its earnings per share:

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company’s EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.

P/E ratio is a reflection of the market’s opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.

For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20. On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.

Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios. To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.

All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions? The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company’s future prospects.

If it is low compared to the future prospects of a company, then the company’s shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don’t summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company’s future indicates sharply declining sales and large losses.

5. Dividend and yield*

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends — capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.

It is illogical to draw a distinction between capital appreciation and dividends. Money is money — it doesn’t really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment — he doesn’t really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations. Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company’s shares. This relationship is best expressed by the ratio called yield or dividend yield:

Yield = (Dividend per share / market price per share) x 100

Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.

Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each. If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares. Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.

6. Return on Capital Employed (ROCE), and 7. Return on Net Worth (RONW) *

While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders’ funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:

1. Return on Capital Employed (ROCE), and

2. Return on Net Worth (RONW).

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company’s efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites. Return on capital employed Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.

The operating profit of a company is a better indicator of the profits earned by it than is the net profit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company’s business. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.

ROCE is a better measure to get an idea of the overall profitability of the company’s operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company’s efficiency, financial viability and its ability to earn returns on shareholders’ funds and capital employed.

*8. PEG ratio*

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company’s share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company’s future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS  (earnings per share) of the company.

As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.

The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

India VIX, a volatility index based on the S&P CNX Nifty index option prices, rose after a recent steep slide. The index rose 1.11% to 20.98. The index had witnessed a steep fall in the previous three trading sessions after the government tabled the Union Budget for 2010-2011 in the parliament on Friday, 26 February 2010. India VIX is a measure of the market’s expectation of volatility over the next 30 calendar days. Typically, volatility surges ahead of a major event such as the Budget. It falls after the event.

The market drifted lower in early trade on profit taking after last three days’ strong gains triggered by the finance minister’s pledge to cut fiscal deficit in the Union Budget 2010-2011 late last week. The market recovered from lower level in morning trade. However, the intraday recovered proved short-lived. The Sensex hit a fresh intraday low in early afternoon trade. The market once again cut losses in mid-afternoon trade as select index pivotals rebounded from lower level.

Food price index rose 17.87% in the 12 months to 20 February 2010, faster than the annual rise of 17.58% in the previous week, government data released today, 4 March 2010 showed. The fuel price index was up 9.59%. The primary articles index rose 15%. Higher inflation is likely to add pressure on the central bank to raise interest rates in April 2010.

The latest hike in petrol and diesel prices will further increase headline inflation. Higher inflation will put further pressure on interest rates which in turn may impact corporate and consumer confidence. However, Prime Minister Manmohan Singh on Monday tried to allay fears of fuel price hike stoking inflation. He said the direct effect on the Wholesale Price Index (WPI) will be no more than 0.4%.

Food prices will be keenly watched in coming weeks for the second and third round impacts of the fuel price rise. Market men see a 25 basis points hike in the repo and reverse repo rates each by the RBI at the April 2010 policy review.

Congress president Sonia Gandhi has reportedly signaled her support for a move to raise taxes on fuel in last year’s Budget. The Congress president has reportedly praised finance minister Pranab Mukherjee for a well-balanced budget and said growth is the engine of the Budget

Prime Minister Manmohan Singh had earlier ruled out rolling back a price hike in fuel prices despite pressure from his main allies, saying populist policies would hurt the economy in the long-term. Petrol prices rose about 6% and diesel prices by 7.75% after the government increased factory-gate taxes and import duties on the fuels as part of last week’s 2010-11 union budget 2010-11, which stressed fiscal prudence to cut a wide deficit

Coming back to equities, the market breadth, indicating the overall health of the market, was strong. Telecom shares gained on fresh buying. Banking shares were mixed ahead of a meeting of bankers with the Reserve Bank of India tomorrow, 5 March 2010 to discuss the implementation of the base rate. Auto stocks declined on profit booking. Software pivotals slipped on reports top IT firms are mulling salary hike for the financial year 2010-11, which will impact profitability.

Business activity among Indian service companies grew at its fastest pace in 17 months in February 2010, climbing for the third straight month as both output and new orders increased, a survey showed on Wednesday, 3 March 2010. The HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 60.9 in February 2010, its highest since September 2008, and compared with 59 in January 2010. The business expectations sub-index rose for the second straight month to 73.1 in February 2010, its highest in four months. It stood at 66.6 in January 2010.

European stocks were lower Thursday as investors adopted a cautious stance ahead of key meetings of the Bank of England (BOE) and European Central Bank (ECB). As per market expectations, both the BOE and ECB are widely expected to keep rates at record lows. Key benchmark indices in UK, Germany and France were down by between 0.09% to 0.37%.

On Wednesday, Greece announced further austerity measures designed at getting its fiscal deficit down to levels acceptable to the rest of Europe. Ongoing worries about Greek debt are expected to be one reason for the European Central Bank policymakers to keep rates on hold on Thursday.

Asian shares were trading lower Thursday as Wall Street’s tepid performance Wednesday failed to inspire markets, but shippers were up in Japan and mining plays were supporting Australian stocks. Investors were cautious ahead of the influential US jobs data for February 2010 on Friday, 5 March 2010. The key benchmark indices in Hong Kong, South Korea, Singapore, China, Japan and Taiwan were down by between 0.26% to 2.38%.

Wall Street ended little changed on Wednesday, 3 March 2010 as worries about bank regulation and a setback for drug company Pfizer offset signs of improvement in the labor market and services sector. The Dow Jones Industrial Average was down 9.22 points, or 0.09%, to 10,396.76 and the Nasdaq Composite Index fell 0.11 point at 2,280.68. However, the Standard & Poor’s 500 Index was up 0.48 points, or 0.04%, at 1,118.79.

The Beige Book survey of economic conditions released Wednesday by the Federal Reserve gave mixed signals about prospects for the US economy. The economy again improved modestly in February, the survey said, but loan demand remained weak and there were no signs of improvement in the labor market.

Meanwhile President Barack Obama’s administration moved to rein in America’s largest banks Wednesday, sending Congress new rules blocking mega-mergers and barring investments seen as too risky. With Obama’s presidency still dominated by the economic fallout from the banking crisis, the Treasury sent lawmakers proposed new rules that would prevent financial firms from becoming “too-big-to-fail.”

The rules would ban government-insured banks from mergers and takeovers if the new company would hold more than 10% of the sector’s debt, according to the proposals. Banks would also be barred from trading in stocks or other, sometimes risky, financial instruments for their own benefit — so-called proprietary trading. The Obama administration was forced to pump hundreds of billions of dollars into the US financial sector to cover losses from complex financial investments linked to the subprime mortgages.

Trading in US index futures indicated a flat opening of US markets on Thursday, 4 March 2010.

Closer home, Finance minister Pranab Mukherjee’s budgetary proposals last week offered a progressive cut in fiscal deficit over the next three fiscal years, changed personal tax rates lifting disposable incomes in the hand of individuals and reduced surcharge on corporate tax for domestic companies to 7.5% from 10%.

The Finance Minister in his budget speech on Friday, 26 February 2010 said the government aims to introduce the Goods and Services Tax (GST) and implement the direct tax code from 1 April 2011. The peak rate of excise duties has been raised to 10% from 8% as a first step towards the winding down of fiscal stimulus measures. However, the service tax was retained at 10%. The government has estimated Rs 40000 crore from disinvestment for FY 2010-11. It has estimated Rs 35000 crore from sale of third generation telecom auctions.

The finance minister has raised personal income tax slabs which will result in increase in disposable incomes which in turn may boost consumption. The minimum alternate tax (MAT) has been raised to 18% from 15% of book profits. The fiscal deficit is pegged at 5.5% of GDP for 2010-2011, lower than an estimated 6.8% for the current fiscal year. The planned expenditure will rise 15% in 2010-2011. The increase in non-plan expenditure is only 6% for 2010-2011.

The finance minister said the government also aimed to reduce the deficit further to 4.8% of GDP in the year starting 1 April 2011, and to 4.1% in the year from 1 April 2012. He said there is a need to review stimulus and move towards fiscal consolidation and review public spending.

A thrust on the infrastructure sector augurs well from a long-term growth perspective. The Finance Minister has provided Rs 1.73 lakh crore for infrastructure development in 2010-2011, which accounts for over 46% of the total plan expenditure for the year.

The stock market has applauded the Union Budget 2010-2011 due to its thrust on infrastructure development, government’s pledge to reduce fiscal deficit over the next three years, a smaller-than-expected 2% hike in excise duties, and reduction in taxes for individuals which will boost disposable income. The Finance Minister has assumed a modest GDP of about 8% and inflation of about 4.5% for 2010-2011.

The Finance Minister plans to tighten his belt on non-plan expenditure that includes heads like subsidies and administrative costs etc. He has forecast a small 6% growth in non-plan expenditure. The budget projects an 11% reduction in the government’s subsidy bill for 2010-11, driven essentially by a massive drop in petroleum subsidies and some decline in fertiliser subsidies.

However, any sharp surge in crude oil prices will result in higher oil subsidies. The Finance Minister has provided only Rs 3108 crore towards oil subsidy for 2010-2011 and also indicated that he will not issue bonds this year as well. This means that he is either assuming that crude oil prices are going to remain very low or he is making an implicit assumption that the Kirit Parikh Committee report in some form will be implemented. It may be recalled that the Kirit Parikh Committee has suggested freeing of auto fuel prices and raising kerosene prices by Rs 6 a litre and cooking gas Rs 100 per 14.2-kg cylinder.

As per reports, the finance ministry has budgeted only Rs 14,954 crore cash compensation for the three state-owned oil marketing firms (PSU OMCs) for 2009-10 against their demand of Rs 31,000 crore for selling cooking fuel below the cost. Additionally, the three PSU OMCs will make a revenue loss of around Rs 14,000 crore on retail sale of petrol and diesel in the current financial year, which will be fully met by the upstream companies – ONGC, Oil India and Gail India.

Earlier, PSU OMCs were given oil bonds to make up their revenue losses, but on Friday, the Finance Minister made it clear that the government was against continued fuel subsidies and would not give oil bonds.

Though the Finance Minister said that the government will implement the Direct Tax Code from 1 April 2011, there is no clarity on actual changes in direct taxes from 1 April 2011. Further, there is also uncertainty with regards to rates under the new GST. One really does not know what the Central GST rate will be in April 2011. States also will charge State GST on the same base as that of Central GST. So the States will have a big say in fixing the rate. It has also to be a revenue neutral rate (RNR) which therefore will involve a lot of arithmetical exercise involving all the taxes which will be subsumed in the GST. It is most uncertain what it will be.

Going ahead, the key triggers for the stock market are structural reforms such as decontrol of petrol and diesel prices, targeting of food subsidies, and financial sector reforms such as increase in foreign direct investment in insurance sector.

Finance Minister Pranab Mukherjee on Wednesday said India’s economic recovery is still being driven by public spending and is not yet broad-based, further clouding the debate on the timing of rate hikes by the central bank.

The economy is likely to do better in the quarter to March than the three preceding quarters, Finance Secretary Ashok Chawla said on Friday, 26 February 2010. The economy grew a slower than expected 6% annually in the December quarter, data showed on Friday.

The manufacturing industry in February 2010 grew at its fastest pace in 20 months, expanding for the third month thanks to expanding output and new orders, a survey showed. The HSBC Markit Purchasing Managers’ Index , based on a survey of 500 companies, rose to 58.5 in February, its strongest reading since June 2008, from 57.7 in January. A reading above 50 means activity is expanding.

Exports rose an annual 11.5% in January 2010 to $14.3 billion, the third consecutive rise after 13 straight months of decline, the government said on Tuesday. Imports rose 35.5% from a year earlier to $24.7 billion. The trade deficit stood at $10.4 billion in January compared with $5.4 billion a year earlier. Exports for April-January, the first 10 months of the 2009/10 fiscal year, were down 17.8% at $131.9 billion from the same period in the previous year.

The BSE 30-share Sensex was down 28.31 points or 0.17% to 16,971.70. The index fell 111.96 points at the day’s low of 16,888.05 in afternoon trade. The Sensex rose 24.95 points at the day’s high of 17,024.96 in early trade.

The S&P CNX Nifty was down 7.85 points or 0.15% to 5080.25

The market breadth, indicating the overall health of the market, was strong. On BSE, 1721 shares advanced as compared with 1173 that declined. A total of 77 shares remained unchanged.

The BSE Mid-Cap index rose 0.78% to 6,693.93 and the BSE Small-Cap index rose 0.81% to 8,430.32. Both these indices outperformed the Sensex.

Sectoral indices on BSE displayed mixed trend. The BSE Metal index (up 1.56%), the BSE Realty index (up 2.50%), and the BSE Consumer Durables index (up 1.62%), outperformed the Sensex.

The BSE Oil & Gas index (down 0.63%), the BSE IT index (down 1.03%), ands the BSE Teck index (down 0.67%), underperformed the Sensex.

The total turnover on BSE amounted to Rs 5221 crore, higher than Rs 5037 crore on Wednesday, 3 March 2010

Among the 30-member Sensex pack, 16 gained while the rest slipped. Hindalco (down 1.35%), HDFC (down 0.74%), and ONGC (down 0.44%), edged lower from the Sensex pack.

Telecom shares gained on fresh buying. India’s second largest cellular services provider by sales Reliance Communications surged 2.12% to Rs 164.10 and was the top gainer from the Sensex pack. India’s largest cellular services provider by sales Bharti Airtel rose 0.07%.

The Centre on 25 February 2010 issued notices inviting bids from private telecom players to participate in the auction of radio frequency spectrum for third generation (3G) telephony. The schedule calls for the process to end on 10 April 2010. The government also said auction for spectrum for broadband services will also be held two days after the process concludes for 3G spectrum.

3G or third generation telecom services allow faster connectivity than what is available now, and will enable applications such as internet TV, video-on-demand, audio-video calls and high-speed data exchange.

Realty shares gained after the Finance Minister while presenting the Union Budget 2010-11 said pending projects will be allowed to be completed within a period of five years instead of four years for claiming a deduction on profits. The norms for built-up area of shops and other commercial establishments in housing projects is also proposed to be relaxed to enable basic facilities for their residents.

DLF (up 1.99%), Unitech (up 3.49%), Indiabulls Real Estate (up 3.99%), HDIL (up 1.83%), Omaxe (up 1.75%), and Parsvnath Developers (up 2.29%), gained.

Banking shares were mixed ahead of the meeting of bankers with the Reserve Bank of India tomorrow, 5 March 2010 to discuss the implementation of the base rate. India’s largest bank by net profit and branch network State Bank of India rose 0.71%. India’s second largest private sector bank by net profit HDFC Bank rose 0.06%

However, India’s largest private sector bank by net profit ICICI Bank declined 1.21%.

As per reports, with the 1 April 2010 deadline to migrate to the base rate model fast approaching, bank chiefs are likely to raise concerns about the new system and seek an extension of the deadline during their scheduled meeting with top Reserve Bank (RBI) officials tomorrow. The base rate is a function of the cost of deposits.

IT pivotals slipped on reports the three IT majors Infosys, Wipro and TCS are mulling salary hike for the financial year 2010-11, which will impact profitability. According to a media reports, the three IT giants are planning to hike salaries in the 8% to 12% range from 1 April 2010.

India’s second largest software firm by sales Infosys Technologies lost 0.98% and India’s largest software firm by sales TCS slipped 0.90%.

India’s third largest software firm by sales Wipro fell 0.74% and India’s fourth largest software firm by sales HCL Technologies declined 0.40%.

The rupee rose to fresh six week highs on Thursday as strong regional peers boosted sentiment, but marginal losses in the domestic stock market prevented a further sharp upside. The partially convertible rupee was at 45.80/81 per dollar, slightly stronger than 45.82/83 at close on Wednesday. A firm rupee adversely affects operating profit margins of IT firms as the sector derives a lion’s share of revenue from exports.

Index heavyweight Reliance Industries (RIL) fell 0.89% to Rs 1012.90, off the day’s high of Rs 1033.50. The stock halted three-day gains on profit booking. As per reports, RIL has no plans to increase its bid for bankrupt chemicals maker LyondellBasell Industries after creditors rejected a $14.5 billion offer.

Auto stocks dipped on profit booking after the recent gains which came on the back of the government announcing hike in excise duty by 2% to 10% from 8%. This came as a relief as the industry feared a 4% hike. A thrust on infrastructure and higher rural spending also augur well for the auto sector.

India’s largest two-wheeler maker Hero Honda Motors fell 0.27%. The company on Tuesday reported a 16.13% increase in its sales at 3,82,096 units in February 2010 over February 2009, the best-ever reported by the company for the month of February.

India’s largest car maker by sales Maruti Suzuki India fell 1.31%. The total vehicle sales rose 22% to 96,650 units in February 2010 over February 2009. The company has raised vehicle prices by Rs 3,000-Rs 13,000 following increase in excise duty in the Budget.

India’s largest commercial vehicle maker by sales Tata Motors fell 0.07% to Rs 806.95. The stock oscillated in a band of Rs 828.50 – Rs 798.20 in volatile trade. The company’s total vehicle sales rose 58.46% to 69,427 units in February 2010 over February 2009.

India’s largest tractor maker by sales Mahindra & Mahindra rose 0.07%. The company’s total vehicle sales surged 39.51% to 27,894 units in February 2010 over February 2009.

India’s second largest private sector power generation firm by sales Tata Power declined 0.35% to Rs 1329.90. Three bulk deals aggregating 22.50 lakh shares were executed on Tata Power scrip in opening trade on BSE at an average price of Rs 1337.51 a piece.

However, other power generation stocks gained. NTPC (up 0.27%), Torrent Power (up 0.35%), Reliance Infrastructure (up 1.79%), and Adani Power (up 0.89%), rose.

India’s largest non-ferrous metal maker by sales Sterlite Industries India rose 0.08% after the company’s American depository receipt, or ADR rose 2.22% to $17.93 on the New York Stock Exchange on Wednesday, 3 March 2010.

Sesa Goa soared 7.27% as strong demand lifted spot iron ore prices over the past few months. The stock hit a lifetime high of Rs 457.35 in intra-day trade today, 4 March 2010.

Hindustan Zinc surged 5.53% as metal prices rose on the London Metal Exchange on Wednesday, 3 March 2010.

Shipping shares rose after the Baltic dry index, which tracks rates to ship dry commodities, jumped 4.26% to 2,911 in London on Wednesday, 3 March 2010.

Mercator Lines (up 3.60%), Shipping Corporation of India (up 2.23%), Shreyas Shipping (up 1.88%), Varun Shipping Company (up 2.08%), GE Shipping Company (up 1.51%), and Essar Shipping (up 5.26%), edged higher.

The Baltic Dry Index (BDI) is showing signs of recovery in the New Year. During the depth of the global economic crisis in 2008, the BDI shed 90% of its value. In fact, from an all time high of 11,793 on 20 May 2008, the index nosedived to an all-time low of 663 in October 2008 as the global demand for raw materials slumped.

Fertliser shares gained on momentum buying. Zuari Industries (up 15.03%), Coramandel International (up 7.74%), Chambal Fertiliser (up 3.33%), Tata Chemicals (up 3.03%), and Deepak Fertiliser (up 2.27%), gained.

Moser Baer India climbed 5.07% after the government last week in its Union Budget for 2010-2011 offered tax breaks on products needed to set up solar power plants.

Sulzer India was locked at upper limit of 20% after the company said its Swiss parent plans to acquire the remaining stake of the company and delist its shares from the stock exchanges. The announcement was made during trading hours today, 4 March 2010.

Titan Industries rose 3.80% after the company’s managing director Bhaskar Bhat told the media today, 4 March 2010, that the firm plans capital expenditure of about Rs 100 crore in the financial year 2010-2011.

Cals Refineries clocked the highest volume of 1.51 crore shares on BSE. Suzlon Energy (1.14 crore shares), Unitech (91.03 lakh shares), ARSS Infrastructure (85.38 lakh shares) and IFCI (62.43 lakh shares) were the other volume toppers in that order.

ARSS Infrastructure clocked the highest turnover of Rs 656.15 crore on BSE. Tata Power (Rs 313.58 crore), Tata Motors (Rs 140.45 crore), Sesa Goa (Rs 139.78 crore) and Tata Steel (Rs 110.72 crore) were the other turnover toppers in that order.

Cash inflation is an excessive increase in the money supply of a given economy, which results in a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services. In either case, it is measured as the annualized percentage rate of change of a price index such as the CPI.

Mainstream economists believe that high rates of inflation are caused by high rates of growth of the money supply.Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the “monetarists” argued that money supply dominated all other factors in determining inflation, while “Keynesians” argued that real demand was often more important than changes in the money supply.

Deflation :

Deflation is the opposite of inflation. Therefore, under the usual contemporary definition of inflation, ‘deflation’ means a decrease in the general price level. Alternatively, the term was used by the classical economists to refer to a decrease in the money supply; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.

Controlling Inflation :

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.

Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

Another method attempted in the past have been wage and price controls (“incomes policies”). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. Many developed nations set prices extensively, including for basic commodities as gasoline. The usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices.

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.

There are a few different ways to calculate the RoA ratio (also called the Return on Investment ratio). The simplest is to divide the net profit during a 12 month period by the total assets. In other words,

Return on Assets (RoA) ratio = (Net profit / Total assets) x 100

If the Net profit of a company is Rs 5 Crores and total assets is Rs 100 Crores, then the RoA will be 5%. Another company may earn Rs 10 Crores on total assets of Rs 100 Crores. Its RoA will be 10%. Needless to say, the higher the RoA the better. Which means the company is able to generate more profits with less or equal amount of investment.

An RoA of 15% is considered the benchmark for profitability. But the figure is different for different industries. Therefore, the RoA should be used to separate the men from the boys within an industry or sector – and not used for comparing across sectors.

Why? Let us take a Bharti or RCom. They need to constantly invest in new equipment and towers for growth. Or, a Maruti or Tata Motors that need to innovate and invest in new models and infrastructure.

Likewise, for power generating businesses like NTPC or Suzlon; airline companies like Jet and Kingfisher; metal producers. Such companies are asset-heavy. Therefore the RoA ratio tends to be 5% or lower.

Contrast these sectors with some asset-light ones like software services or travel services or brokerages. All you need are some furniture and computers and you are in business. Naturally, the RoA ratio is 20% or higher, because the real assets in these sectors are people.

The financial sector, particularly banks, need to constantly borrow money to loan it out again. So the RoA ratio can be as low as 1%. What is a small investor to do? Avoid banks and manufacturing, and only invest in services companies?

Obviously not. That would be putting all your eggs in one basket. Therefore, use the RoA ratio to find out which banks, or auto makers, or steel and power companies are more profitable than their peers in the same sector.

Some prefer to add the interest expenses to the net profit to calculate the RoA ratio. Others add the working capital requirements to the total assets. Which particular formula to use depends on the type of sector being analysed.

There is another formula to calculate RoA:

Return on Assets (RoA) ratio = (Net profit margin x Asset turnover ratio) x 100

where, Net profit margin = Net profit / Sales

and, Asset turnover ratio = Sales / Total assets

Mathematically, the second formula is the same as the first, but gives us a different view of a business. It shows that profitability can be attained in two different ways. The first is by increasing the net profit margin (by reducing costs, or better still, by charging premium
prices – like the Tanishq retail stores of Titan). The second is by turning over your assets many times during the year (a practice followed by discount retail stores, like Pantaloon).

Wish you and your family a very happy and prosperous

New Year 2J1J

Bank is defined as a person who carries on the business of banking. Banks also perform certain activities which are ancillary to this business of accepting deposits and lending. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently.

BANKING OVERVIEW

The major participants of the Indian financial system are the commercial banks, the financial institutions (FIs), term-lending institutions, investment institutions, specialized financial institutions and the state-level development banks, Non-Bank Financial Companies (NBFCs) and other market intermediaries such as the stock brokers and money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place.

HISTORICAL PERSPECTIVES

• Bank of Hindustan, set up in 1870, was the earliest Indian Bank .

• Establishment of three presidency banks under Presidency Bank’s act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras

• In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank carried out limited central banking functions also prior to establishment of RBI

• Resrve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks.

TYPES OF BANK
Banking Segment in India functions under the umbrella of Reserve Bank of India – the regulatory, central bank. This segment broadly consists of:

1. Commercial Banks
2. Co-operative Banks