Investing in shares and equity can be a difficult task. Reading balance sheet & profit and loss accounts can be a more difficult task. Here are 7 terms which will help you taking better investing decision

1. 7Financial Terms worth
knowing before investing in
Shares!

2. TERM
01 Business Cost
Example- Vada Pav King Ltd. is into the business of making Vada Pav. The expense of
Vada Pav making company incurs in its regular operations are its Business Cost
Expenses on potatoes, onion, oil, spices, gram flour
and pav
✓
Expenses on kerosene or cooking gas to make vada
and electricity to light the shop✓
Salaries to employees involved in making &
distribution of vada pav
✓
Rent paid for the shop
✓
Expense of advertisement & Sales management
✓
Raw Material cost
Power & Fuel cost
Employee Cost
Rent Cost
Sales Cost

3. Profit & Loss Account shows the
financial performance of the
company during a specific period of
time usually a quarter or year. It
summarizes the revenue, costs and
expenses incurred to calculate net
profit or loss. It also shows the
ability of a company to generate
profit by increasing revenue and/or
reducing costs
For example
Annual Result (period of 12 months) – for
the year ending 31st Mar 2014
Quarter Result (period of 3 months) – for
the quarter ending 30th Jun 2014
TERM
02 Profit and Loss

4. Shows the financial position of the
company at a specific point in time. It
summarizes a company's assets,
liabilities and shareholders' equity
which give investors an idea as to
what the company owns and owes,
as well as the amount invested by the
shareholders.
Balance sheet
Most of Financial Companies follow
Financial year from 1st April to 31st March
Time
Balance Sheet TERM
03

5. Net Profit Margin is an indicator
of overall profitability of the
business i.e. how efficiently it
is converting its sales into
profits based on its pricing
power and control over its
costs.
Calculate Formula
ProStock Example
Net Profit Margin = Profit After Tax/Net Sales*100
TERM
04 Net Profit
Margin
Particulars Vada Pav King (%)
Net Profit Rs 30
Net Sales Rs 150
Net Profit Margin 30/150*100 20
In this case Net Profit Margin is 20%

6. Earnings Per Share is that portion of
company’s profit for one Share, out of
total number of shares of company. It’s
tells the return earned by company on
one share value.
The Earnings Per Share is a useful measure
of profitability as investors usually look
for companies with steadily increasing
earnings per share. Growth in EPS is an
important measure of management
performance because it shows how
much money the company is making for
its shareholders.
Calculate Formula
ProStock Example
Earning Per Share = Net Profit / Number of
Company’s Shares
TERM
05 Earning Per
Share
Particulars Vada Pav King (Rs )
Net Profit Rs 300
Number of Shares
Outstanding
10
Earning Per Share 300/10 30
In this case Earning Per Share is Rs 30

7. Price to Earning Ratio tells how much are
investors willing to pay for a stock
based on its current earnings.
It tells, how many years it will take to get
back the investment by company
profits.
Calculate Formula
ProStock Example
Price to Earning Ratio = Current Share Price/Earning
Per Share
TERM
06 Price Earning
Ratio
Particulars Vada Pav King
Current Share Price Rs 450
Earning Per Share Rs 30
Price to Earning Ratio 450/30 15
In this case it will take 15 years to recover the
investment of Rs 450 from the earning of Rs 30

8. Book Value Per Share indicates the level of
safety associated with each common
share after removing effects of
liabilities.
Tells ,how much an investor can realize in
the event of closing down the company.
This can also be compared with current
stock price to decide about under/over
valuation of the stock.
Calculate Formula
ProStock Example
Book Value Per Share = (Shareholder’s Equity –
Preference Stock)/Weighted Average Number
of Shares Outstanding
TERM
07 Book Value
Per share
Particulars Vada Pav King (Rs )
Shareholder’s Equity 60
Number of Shares
Outstanding
1
Book Value Per Share 60/1 60

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