Deal structure is the binding agreement between companies, which outlines rights and obligations for both the companies. This agreement states about the entitlements and constraints of companies.In other words, deal structure is nothing but terms and conditions of a merger and acquisition. It prioritizes the objectives and the major priorities of both the companies are satisfied. Preparing a merger and acquisition deal is challenging and complicated.Process of deal structure is explained below −Negotiation stance.Latent risks and how they can be managed.Maximum risk can be tolerated.Conditions (negotiations may cancel).Some of the factors considered while preparing deal structure are as follows −Financing ... Read More

What is Comparative Financial Statements?Comparative financial statements provide a comparison between key financial metrics for two consecutive years. It is a very useful tool to check whether the company’s financials are moving in the right direction. It is a document that lists two or more years of financial performance of a company to offer a bird’s eye view of the comparison between two years of financial data. However, some caution must be taken while comparing the items in two financial statements.Analyzing Comparative Financial Statements is not tough as the interpretation of data does not require expert knowledge. However, in the ... Read More

What is Growth Rate?The growth rate of a company is its ability to grow using and investing whatever it has in its operations. The rate is a measure of the capability of a company to have an efficient mechanism of operations that could churns out more profits in two comparable situations.Like most other ratios, the growth rate is not useful when used alone. For the growth rate to be meaningful, two or more companies should be considered from the same industry. The growth rates of companies also depend on the circumstances that are related to the company’s business.For example, if ... Read More

What is DuPont Analysis?The DuPont Analysis is a financial model that offers insight into the basic performance of a company. It breaks down the Return on Equity (ROE) into three key individual metrics to do so. The DuPont analysis is a product of asset turnover, gross profit margin, and operating leverage.Simply put, $$\mathrm{ROE\, =\, Net\: Profit\: Margin\, \times \, Assets\: Turnover\, \times\, Equity \: Multiplier}$$It may be noted here that the ROE of a company is considered as its earning power. Another component that is considered as a part of earning power of a company is the Return on Assets ... Read More

Definition of Earning PowerA company’s ability to generate profit from its operation is known as the company’s earning power. In other words, earning power is a company’s capability to generate profit from operations. The generation of profit is compared against the goods and services offered in a particular industry to check the earning power of different companies. Investors usually check the earning power of a company to see whether a company is worth to put the investment in they want in that company.Earnings power is the company’s capability to derive profits from the invested capital in it by the investors. ... Read More

What is Earnings Yield Ratio?Earnings Yield is the reciprocal of Price-Earnings, and it is expressed as a percentage. Earnings yield is the earnings per share divided by the market price of each share multiplied by 100. Earnings yield ratio offers an insight to the earning power of a share. If the earnings yield of a share is 5%, it means that there is an earning of Rs 5 per 100 rupees of shares owned by an investor.Earnings yield offers investors to check the future earnings of not only shares, but also of bonds, debentures and bank fixed deposits etc.For example, ... Read More

There are a lot of financial ratios to measure the relationships between different financial items, and they are useful for various types of calculations. Some ratios are more applicable to measure specific tasks and hence these ratios can be specifically applied to measure specific relationships.For the shareholders who are mostly interested in investing their money in profitable stocks, the following are the ratios that have proved to be most useful.Net Working Capital RatioWorking capital shows a company’s capacity to pay its liabilities with its current assets. Working capital measures the liquidity of a company. In other words, working capital is ... Read More

What is Profit?Profit is the difference between revenues and expenses, and it is the ultimate aim and output of a company. Profit is the fuel that propels businesses. A company must earn enough profits to sustain and grow. In order to make an expansion too, a company must earn enough profits so that it can accumulate earnings and invest them in an expansion project. Investors and lenders invest money in a company to get profitable returns. Without profit, no company can last for a long period of time. So, it is an item no company should avoid.However, it is inappropriate ... Read More

Although Profit After-Tax (PAT) and Net Asset seem to be the same, there is a difference between the two. PAT is related more to the operational efficiency of a firm while net assets are related to the value of assets.The two terms, however, can be misleading. So, in order to make it simpler, let us check the meaning of the two terms in detail.Profit After-Tax (PAT)PAT is the amount a company retains after paying all the non-operating and operating taxes, expenses, and liabilities. This is the profit that is distributed among the shareholders of the company. Alternately, a company may ... Read More

What is Return on Investment?The profitability ratio related to investment is Return on Investment (ROI). Return on Investment is the ratio that is sometimes expressed as Profit After Tax (PAT) divided by Investment. The investment represents the pool of funds accumulated by components invested by shareholders and lenders.So, the most common assumption of ROI is given as follows −$$\mathrm{ROI\, =\, \frac{PAT}{Investment}}$$However, it is incorrect to use PAT in measuring returns on Income because PAT is the residue income of shareholders. It is not the overall amount of funds invested by the lenders and general shareholders.Also, PAT is affected by a ... Read More