Friday, November 14, 2008

Sensex History

Bombay Stock Exchange trades in Equity, derivatives & debt.
 
The BSE SENSEX (BSE 30 index) is a index composed of thirty scrips, with the base set on April 1979 to be  100. The set of companies which make up the index has been changed very few times in the last twenty years. These companies account for 20% of the market capitalization of the BSE.

Sensex Milestones
1979 Sensex set at 100
1990 Sensex crosses 1000
Jan 1992 : 2000 due to liberalisation policies of Manmohan
Feb 1992 : 3000
Mar 1992 : 4000. Harshad Mehta scam hits.
1999 : 5000 BJP comes to power.
2000 : 6000. Infotech boom starts
2005 : 7000 Reliance brothers patchup
Sep 2005 : 8000
Nov 2005 : 9000
Feb 2006 : 10000
Mar 2006 : 11000
Apr 2006 : 12000
Oct 2006 : 13000
Dec 2006 : 14000
July 2007 : 15000
Sep 2007 : 17000
Oct 2007 : 20000
Jan 2008 : 21000
June 2008 : 14000
Jul 2008 : 13000
Oct 2008 : 10500
Today (13 Nov) : 9536

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Derivatives

Derivatives are financial contracts. They derive their value from an underlying stuff. This stuff can be anything - for example it can be an asset ( stocks, real estate, loans) or index ( interest rate, Sensex, ) or other stuff ( weather conditions, freight rates etc).

Forward ( when traded on exchange, it is called futures), options and swaps are types of drivatives.

Derivatives are used to lessen the financial risk when underlying stuff changes. 

People pay a premium to another party to insure against their asset losing value.

Inflation derivatives are insurance against inflation risk from one counterparty to another.

Freight derivatives are insurance against future freight hikes.

Derivatives offer leverage. Small movements in the price of underlying assets can bring in huge changes in derivative values.

Swaps are insurance against each other risks. Two parties swap each others risk ( they actually swap each others cash flows)

Futures and Forwards
Futures Contract is a contract, to buy something in the future at a price determined in the present.

Forward contract is similar but less standardized and not regulated and not traded on an exchange and do not require a margin to trade.

When the future price is higher than present price, it is called contango. The reverse is called backwardation.

Hedgers trade in futures as they have a stake in the underlying commodity and try to prevent themselves from risk. Specuators have no stake in the commodity and are just trying to make a quick buck.

Options :
Put Options is a contract to sell a futures contract. Call option is an option to buy a futures contract.
Strike price is the price at which these options are exercised.

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Friday, November 07, 2008

More liquidity ratios


Liquidity can be checked with a few more ratios :

Quick ratio / Acid test ratio takes only the most liquid current assets ( cash + A/c receivable), but not inventory and other less liquid current assets.

Quick ratio = Liquid current assets / current liabilities

Tells if a company has enough cash to meet liabilities

If current ratio is significantly higher than Quick ratio it means the company has a lot of low liquid assets.

Cash ratio further refines quick ratio and takes only cash ( not a/c receivable or inventory).

Cash ratio = cash under control / current liabilities

High cash ratio need not be good as it is not productive for a company to hold large cash reserves.

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Following the Warren Buffett Way

Was sp impressed by Buffet's philosophy of investing, have started reading about Balance sheets and investing principles. Will post a few articles, summarising what I read everyday.

Balance Sheet
A balance sheet is a snapshot of the company’s financial position at a point in time.

It is organised in two colums . The left column lists what the company owns. The rigth column lists the sources of funds.

assets = liabilities +  equity

Asset types :
Assets can be current assets, which can be converted easily into cash. ( Invoices due, Inventory etc)

Non current assets cannot be quickly converted to cash. ( Goodwill, patents).


Liabilities
Current liabilities : to be paid in a year
Long term liabilities : due after an year


Equity :
Money invested in the business. When retained earnings are reinvested, the equity goes up.

In the asset side, the accounts are listed from most liquid to least liquid. Ditto forliabilities.

We can estimate the liquidity of a company with a variety of ratios :

Liquidity ratios

Current ratio : Current assets / Current liabilities.

Tells if a company has enough current assets to meet current liabilities.

But a high current ratio is not necessarily good - a company which has a sluggish turnover of inventory or whose customers take a long time to pay it, might have a great current ratio.

To dig deeper, we use the CCC.

CCC - cash conversion cycle states how efficiently cash is rolled over.The shorter the cycle, the more liquid the company is...

CCC = DIO + DSO - DPO
Or take the number of days it takes to convert inventory to sales , add to it the number of days for sales to get converted to cash. Subtract the number of days in which you pay your suppliers.

DIO : Days inventory outstanding

1. Get per day sales ( total sales / 365)
2. Calculate average inventory throughout year  (beginning inventory + ending inventory)/2 
3. Divide average inventory / per day sales tosee number of days it takes for the inventory to turn over.


DSO : Days sales outstanding

1. Get per day sales ( Tot sales /365)
2. Get average invoices due from customers ( Beginning accounts receivable + ending accounts receivable ) /2
3. Divide average invoices due / per days sales to see how many days the company takes to collect on sales

DOP : Days payment outstanding

1. Get per day sales ( Tot sales / 365)
2. Get average bills due  to suppliers( Beginning accounts payable + ending accounts payable ) /2
3. Divide average bills due / per days sales to see how many days the company takes to pay its suppliers.

Cash conversion cycle = Inventory turnover + Sales outstanding - Payment outstanding

CCC = DIO + DSO - DPO

or the company has to convert its inventory to sales, and convert sales to cash and then pay its suppiers.

Increase in DIO would mean a slack demand for company's products.

Shorter CCC means more liquidity and would mean the company is efficiently using resources.Use this in addition with current ratio to check a company's liquidity.

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