Capital Employed/ Proprietor Fund/ Owner’s Equity/ Networth etc. similar terms

Ratio Analysis and its formulas are very important for any Accounts or Finance Student. But before plunging into the various ratios i.e. comparing of one element in terms with another, let me discuss few terms in Finance which has always kept me rolling my eyes while learning it. 

These terms seem similar with very little change or no change at all i.e. different names for one term.

Note: One more thing is that Accounting and Managerial Accounting will have little difference in the formulas and I am going to focus more on the Management Accounting. So if you find more detailed formulas elsewhere then don’t scratch your head as it is probably accountancy formulas.

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Here we go

1.     Owners’ Fund / Net Worth / Shareholders’ Fund/ Proprietor’s Fund

All of these are same. Thank God!!  It shows the value or worth of the owners or the shareholders of the company after deducting all the liabilities.

*** When we talk of TOTAL LIABILITIES it doesn’t mean the whole Liability side of Balance Sheet but it means the whole Long term and Short term Liabilities.

Formula: 

1)      Total Assets – Total Liabilities      OR

2)      (Equity+ Preference + Reserves  and Surplus) OR

3)      (Equity+ Preference + Reserves  and Surplus)- Misc/Prelim Exp

2.     Owner’s Equity / Shareholder’s Equity

It is what is available for the Equity Shareholders

 
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Shareholder’s Fund – Preference Shares – Pref Dividend

3.     Proprietary Ratio / Equity Ratio / Net Worth Ratio/ Shareholders’ Equity Ratio

This ratio shows the capital structure of the company. It is used to see how much of the Asset is contributed or invested by the capital (in percentage). Higher rate is considered risk free or better. Extreme high would also be considered inefficient usage of debt financing

Formula:

1)      (Shareholders’ Equity  / Total Assets ) x  100

2)      (Shareholders’ Equity  / (Total Assets- Intangible Asset) ) x  100

Example:  If Equity Ratio is 60% then 60% of the assets of the company is contributed by Equity rest from other capital and/or borrowed funds.

4.     Capital Employed

Capital Employed is to see how much capital is invested by the company to reap the profits or for the working of the company

Formula:

1)      Total Asset – Current Liabilities OR

2)      Shares Capital + Long Term Loans – Misc Exp OR

3)      Fixed Assets + Working capital

I hope this article helped you.  You can give your feedback and even rate the post now. Thankyou

DRISHYA.V.P

CHECK OUT THIS LINK TO LEARN THE SECRETS OF SUCCESSFUL TRADING

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How Does Net Cash Accrual impact the Working Capital?

This is a conceptual question but often people get perplexed and instead of logically thinking about the concept they try to find the formula for Net Cash Accrual. So get the concepts cleared first!

Two Accounting Method: Cash and Cash Accrual Method

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Small firms and businesses mostly follow Cash Method i.e. recording every transaction in cash when the transaction actually happens.

EXAMPLE: Anita sells a furniture in the month of March and amount received in April. In her books, she will record cash received in the month of April. It will show income in April even if no Sale happened and no income in the month of March even after the sales

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In cash method, non-cash items like Depreciation, Goodwill etc are not accounted for. Also, prepaid expenses or losses cannot be amortised over the period of time i.e. if B buys stationery worth Rs.10,000/- for the whole year or more, it will show Rs.10,000 in 1 month and not distribute the amount over different months.

On the other hand in Cash Accrual Method,

–           timely depreciation is shown

–          Prepaid expenses or losses can be amortised. Eg: Every month Rs.1000 can be shown in the expenses

–          Bills payable or receivable are shown when the credit purchase or sale happens and not wait for the actual transaction (i.e. the date of receiving or paying the amount). So if the sale happens in March, it is taxable in the previous year even if amount is received in April

So choosing either of the method will give you different profit and different presentation of your cash flow amounts.

Net Cash Accrual Method not only shows how much Sale actually happened but also the Cash in Bank, Receivables and Payables, Non-cash Items like Pre-paid Expenses (which can be monthly written off)

So over all it shows a detailed picture of Working Capital and WC will increase if all the positive balances are added.

Hope this article helped you.

-D.V.P

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FAIR VALUE, FACE VALUE, NOMINAL VALUE, MARKET VALUE, REAL VALUE, BOOK VALUE

Confused with several terms

These are some terms often used in Accounting and Finance. Many really understand the difference or simply get confused between the jargons. So, this is a little article trying to uncomplicated and give you a better understanding of the terms.

Face Value/ Nominal Value/ Par Value

Face value is the price of the security at the time of its Issue.  It doesn’t change over the time.  And guess what? Nominal Value and Par Value are just another name for it

Market Value

It is the price listed in the exchange or the price at which it is traded in Market

Book Value

It is the price calculated by the company and recorded in their books. They deduct all debt and arrive at a price or value. For shares it is calculated as: (Total Shareholders’ Equity – Preference Shares)/Number of Outstanding Shares

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In terms of Assets, Book value is what investors look at to know how much a company is worth if it ceased its operation today. All the tangible assets – Debt gives you Book Value. More the value better the position of the company.

Fair Value

It is rightly valuing or estimating the price of an asset or share or services. It is used by the investors to get a clear picture of prices which may otherwise be overpriced or under-priced by the market. A company calculates its fair value annually and in case of takeovers or mergers shares/assets are bought at the fair value. It is individually calculated based on various factors such as demand-supply, risk factors, returns, actual utility, etc

Bond fair value is formula based to calculate the present value of future cashflows.

Real Value

Real value is when the price is corrected for the inflation rate.

I hope this article helped you.

-D.V.P

Enterprise value (EV)

When you are asked to value a company for any reasons like merger, acquisition, buyout or simply a valuation, etc the Enterprise value of a company has a significant place which every analyst looks for.

More believe it that EV provides a much precise value of a company though it is more of a theoretical value. When a company buys another company, it takes over its’ Debts. This debt is lightened when the company receives the Cash of the acquired company. That is the reason why Cash and its equivalent are reduced in the Enterprise value. It shows the value to buy the company deducting the amount that would be received.

Hence the formula:

EV = Market Capitalization( total public share value) +Minority Interest+ Preference Shares +Debt – Cash and Cash equivalent

 

-D.V.P

24^th September 2012

 

For students looking for Finance Mentor/Guide

Hello guys,

For all those newbies to finance, here is something for you. Recently, I stumbled upon this website called myfinmentor.org. This is a online platform with an aim to assist finance graduates in making good career decisions. Through this platform, they intend to bridge the industry-academia gap. They have several industry professionals (mentors) on board who provide one-on-one mentoring sessions, pass info about various job opportunities in their respective companies, give a flavour of their profiles and a lot more to prospective candidates (mentees).

 

Think, This can be useful to you in case you plan to pursue a career in finance. This could help you not only understand career /profiles better but would bring you closer to right people and help build a relevant network. All of their services are completely free and it’s a not for profit organization. Do have a look at the website whenever you have time and visit their facebook page too.

 

Website – www.myfinmentor.org

 

Page – www.facebook.com/myfinmentor