Tuesday, May 31, 2011

Balance Sheet

One of the readers of my blog wanted to know what a Balance Sheet is and how it can be used to gauge a company’s financial position. Well, here we go. In this article we will cover just that.
So, lets gets started!!!

What is a Balance Sheet?

A balance sheet, also called a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement are used to identify/gauge a company’s financial status or position. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

How the Balance Sheet Works

The balance sheet is divided into two parts that must equal each other, or balance each other out. The main formula behind balance sheets is:

Assets = Liabilities + Shareholders' Equity

This means that assets, or the monetary means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.

It is important to note that a balance sheet is a snapshot of the company’s financial position at a single point in time.

What is an Asset?

Assets are what a company uses to operate its business. Some examples of assets are bank balance, factory building, cash to be received in return for services offered etc.

Types of Assets:

Basically there are two main types of assets:
Current Assets
o Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes include cash and cash equivalents, accounts receivable and inventory.
o Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks.
o Cash equivalents are very safe assets that can be readily converted into cash; U.S. Treasuries or Reserve Bank of India Bonds are examples of this type.
o Accounts receivables consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until they are paid off by the clients.
o Lastly, inventory represents the raw materials, work-in-progress goods and the company’s finished goods.
o Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm caries none. The makeup of a retailer's inventory typically consists of goods purchased from manufacturers and wholesalers.

Non-Current Assets
o Non-current assets are assets that are not turned into cash easily, are expected to be turned into cash within a year and/or have a life-span of more than a year.
o They can refer to tangible assets such as machinery, computers, buildings and land.
o Non-current assets also can be intangible assets, such as goodwill, patents or copyright.
o While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life. For ex: A machine bought for Rs. 10 lakhs last year may not be worth the same this year. This year it may be worth only Rs. 9 lakhs and this 1 lakh decline in value is the depreciation

What is a Liability?

Liabilities are what a company has to pay in order to operate its business. Some examples of liabilities are, loan EMI, cost of raw materials, employee salary etc.

Types of Liabilities:

Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.
Current liabilities are the company’s liabilities which will come due, or must be paid, within one year. This is includes both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.

What is Shareholders' Equity

Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder’s equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.

A Sample Balance Sheet:

Below is an example of a balance sheet:

As you can see from the balance sheet above, it is broken into two sides. Assets are on the left side and the right side contains the company’s liabilities and shareholders’ equity. It is also clear that this balance sheet is in balance where the value of the assets equals the combined value of the liabilities and shareholders’ equity.

Another interesting aspect of the balance sheet is how it is organized. The assets and liabilities sections of the balance sheet are organized by how current the account is. So for the asset side, the accounts are classified typically from most liquid to least liquid. For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations.

Analyzing the Balance Sheet

Now that we know how a balance sheet looks and how it is organized, the next step is to analyze a company’s balance sheet. Doing so, would give us a fair idea of how the company is performing and how strong it is financially.

We use financial ratios to analyse and gain insight into the company and its operations.

Ratios like “debt to equity ratio” can show us a better picture of the company’s financial condition and its operational efficiency.

What are Financial Ratios?

A financial ratio is a relative magnitude of two selected numerical values taken from a Company’s Financial Statements. There are many standard ratios that can be used to evaluate the overall financial condition of a company. Financial ratios can be used by managers of a firm or shareholders (both current and potential) or banks or anyone else to gauge the financial strength of the company. They can be used also to compare the strengths and weaknesses of two or more organizations.

For Ex: If I were to buy a banking stock from the Indian stock market, I can compare the financial ratios of a few of the country’s leading banks like ICICI, HDFC, SBI etc and then choose the one which I feel has the most impressive financial background and strengths.

Types of Ratios:

There are many different types of financial ratios that can be calculated based on their purpose. They include:

1. Liquidity Ratios – Ability of the company to pay off debt
2. Activity Ratios – How quickly a firm can convert its non-cash assets to cash assets
3. Debt Ratios – Ability of the firm to repay long-term debt
4. Profitability Ratios – To Measure the firms use of its assets and control of its expenses to generate an acceptable rate of return
5. Market Ratios – To Measure the investor response to owning a company’s stock and also the cost of issuing stock

You can visit each of these articles and understand them better.

Note: These articles contain extensive explanations reg. each of these ratios and you can understand them better by reading them.

I hope this article was useful.

Happy Balancing!!!

Monday, May 23, 2011

Protecting Yourself from Internet Fraud

In the age of the Internet, almost all of us use the online banking facilities for our banks, trading accounts, credit cards etc. With so many of us using the internet, the malicious elements of our society are out there, lurking to take advantage of a mistake by us. So I thought it would be nice if I put in some Do's and Dont's when it comes to using Online Banking.

If you are someone who has heard the terms, Phishing, Identity Theft, Internet Fraud etc then you must read this article.

So, lets get started!!!

What is Internet Fraud?

Internet Fraud is an illegal activity wherein a person in possession of internet banking details of another person, impersonates them to use their funds.

A Simple example would be:

Lets say, I find your wallet on the floor and while scanning it, I see a paper with an id and password. By seeing the Id I realize that it is your Internet Banking id & Password for your ICICI Bank account. I happily login to your account and transfer the money in your account to my account.

This is Internet Fraud...

Why Internet Fraud Happens?

Well, criminals are becoming more and more techie and finding out ingenious ways of stealing money. Most internet frauds result from poor customer awareness. The biggest concern for online customers is the possible theft of their online credentials, especially those relating to net banking.

This often happens without the customers’ knowledge, enabling fraudsters to steal money from their accounts in a recurring manner.

How to Prevent This?


We must be careful and follow certain tips & tricks to ensure that we do not fall prey to such anti-social elements.

Tip 1:

Make net banking passwords difficult to guess, change them regularly. Never share them with anyone.

Tip 2:

Before keying in sensitive information like user id or password, ensure the site is running in a secure mode by looking for the padlock symbol and https in the browser address bar. For example, look at the image below:

Tip 3:

Scan email attachments for viruses before opening them. When you are not sure about the source of an attachment, delete it. Dont have a second thought.

Tip 4:

Install a good anti-virus system on their PCs and ensure that it is updated regularly. There are many free anti-virus softwares available in the market. I am not saying that they are bad, but they might not have the resources of a paid anti-virus software like Symantec or Mcaffee.

Tip 5:

Don’t share your password or CVV details orally with bank executives either in person or on phone. Bank officials will never ask for confidential information like user ID, password, CVV, etc, via mail, SMS or bank initiated phone calls.

Tip 6:

Don’t access bank website from a link provided in an email from any source. Instead, type the address of the bank website in the address bar of browser to access the bank account. Don’t click on any link provided in emails, they may redirect users to a fake/phishing site.



If you see the above link, it says www.icicibank.com but if you take your mouse pointer over it, you can see that the link actually is taking you to a scam website and not the icici website. If this page looks exactly like the ICICI website, you may enter your login details and kabooom, your id/password is stolen and only god can save the cash in your account.

Tip 7:

Never write down user ID, password on piece of paper or store it in your phone for easy retrieval.

Tip 8:

Never use the ‘remember password’ feature provided by browsers to save net banking passwords.

Tip 9:

Don't access Net banking from cyber cafes. If you have to, use the virtual key board to key in details and ensure you log out of the system once you are done. An even better idea would be to clear the browser cache & cookies before you log-off.

Tip 10:

Be cautious while using Net banking from office. Even though your colleagues are all nice people and you respect/trust them, you never know when temptation or jealousy can cause people to do things. Better safe than sorry

Happy Protecting your Money!!!

Friday, May 20, 2011

25 Paise Coins are History

Well, to be honest, this news might be irrelevant to most people (including me) but still it is good to know about the monetary developments in our country. So, here we go!!!

What happened to the 25 Paise coins?

Actually speaking nothing has happened yet. The Reserve Bank of India has declared that Starting June 30 2011, 25 paise coins will no longer be a legal monetary tender in India. This essentially means that, there will no longer be items priced as Rs. 7.25 or Rs. 7.75/- after June 30th 2011.

The bottom line is: 25 paise coins are worthless by end of June and you cannot use them as a legal money tender in India

Why did the Government do this?

Probably because the prices of goods in India have risen so high that a 25 paise doesn’t make much value or sense to be used as a legal currency. There was a line that I read in a news article on the reaction of someone about this 25 paise coins…

“Even beggars don’t accept 25 paise coins, so why should we use the coins?”

Well, that’s the biggest driving factor, 25 paise has literally no value in todays economy.

What should we do now?

Practically speaking “Nothing”. But, if you are a coin collector and have hundreds of 25 paise coins lying around, you can give them all in your nearest nationalized bank and get them converted to rupees.

Caution: Banks will accept 25 paise coins only till close of business June 29th 2011. So, if you have any 25 paise coins after that date, you cannot do anything with it.

On a casual note: you can always keep them safely and give your grand children and say, these are the coins we used when we were your age…

Has the Government done this before?

Oh yes. In the last decade, the government has phased out 5 paise, 10 paise and 20 paise coins. Next is the 25 paise which is being phased out now and I guess even the 50 paise coins will be phased out in the near future.

So, if you are someone in your 20’s like me, our children may not get a chance to use the 50 paise coins when they become old enough to ask you for money to buy candy like we pestered our Moms :-)

What will the Government do with all these coins collected?

For now, they haven’t decided anything. They are planning to melt them and then maybe re-cast them into coins of higher denomination, maybe 1 rupee or 2 rupee coins.

Who will be affected by this?

The biggest losers because of this decision by our government are the kids in our country. You can get nice candies for 25 paise even today in the local roadside small shops.

Imagine, a daily wage worker, he cant afford a dairy milk like we can. He cant spend 10 rupees of his income (probably 5 or 10% of his daily salary) on a chocolate. But what he can afford is 25 paise or 50 paise to keep his kid happy. After all, he is a father and he has to keep his kid happy. He can afford to give his kid 50 paise and the kid happily gets two candies for that money.

Now that 25 paise is no longer a valid currency, those kids may get only one kid instead of two because all retailers and manufacturers will have to re-work their pricing strategy to ensure that their prices don’t end with 25 paise.

What am I gonna do?

Well, I don’t have a stash of 25 paise coins that I can exchange in my bank. But, what I will do is, keep the ten or so 25 paise coins I have safely so that I can show it to my son, just like the 5, 10 and 20 paise coins I have.

Happy Coin Collecting!!!

Wednesday, May 18, 2011

NPS Swavalamban Scheme

There was a query from one of our Blog Readers who wanted to know about the NPS Swavalamban Scheme. Since it is a detailed topic in itself, I thought, it would be more useful if I write a separate article instead of just responding to the comment as a reply comment. So, here we go!!!

What is the Swavalamban Scheme?

The Swavalamban Scheme is a sub-scheme under the NPS Scheme which we covered in great detail in our blog. This scheme is applicable to all citizens of India who are in the unorganized sector & meet the eligibility criteria, who join the NPS in the year 2010-2011. Under this scheme, the Central Government will contribute Rs. 1000 per year to each NPS account opened in the year 2010-2011 and for the next 3 years 2011-12, 2012-13 and 2013-14. To benefit the citizens who opened their accounts in 2009-10, the government has declared that, they will also be entitled to the benefit of the Swavalamban scheme, that is if they meet the eligibility criteria.

What is the Eligibility Criteria?

There are two important criteria:

1. The citizen must belong to the unorganized Sector and
2. The citizen must make a minimum contribution of Rs. 1000 and a maximum contribution of Rs. 12000 per annum for both the Tier 1 and Tier 2 accounts taken together.

Though the second eligibility criterion is very simple, the 1st one is a bit confusing, isn’t it?

What is the Unorganized Sector?

For the purpose of this scheme, a person will be considered as belonging to the unorganised sector if that person:

1. Is not in regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government having employer assisted retirement benefit scheme, or
2. Is not covered by a social security scheme under any of the following laws:
       a. Employees’ Provident Fund and miscellaneous Provisions Act, 1952
       b. The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
       c. The Seamen’s Provident Fund Act, 1966
       d. The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955
       e. The Jammu and Kashmir Employees’ Provident Fund Act, 1961

So, if you meet the above 2 criteria and are eligible, you can get Rs. 1000/- for 3 years, which is Rs. 3000/- in all as an extra motivation to invest in this scheme.

Who gives this extra money?

Of course, the Government of India gives …

Why is the Government doing this?

Since this scheme is aimed at being a retirement corpus for the citizens of India, the government has to motivate the people to join it and what better motivation than giving some extra money to the common investor?

What if someone doesn’t meet the eligibility criteria but still applies for it?

If someone doesn’t qualify for this benefit but still claims falsely that he/she is eligible and applies for this scheme, the government reserves the right to reclaim the money credited to their account along with interest & any penalties for providing false information.
Hope this covers enough info about the Swavalamban Scheme. If you need any other info, you know what needs to be done…

Just leave a comment and I will see what I can do.

Happy Retirement!!!

Tuesday, May 3, 2011

RBI Hikes Rates

The much expected RBI Rate hike exercise is complete and has caused a massive fall of over 300 points in the Indian stock market.

Well to be honest, I am not amused by this development, but nonetheless it is important news and has to be addressed just like other finance news that has been addressed in the past, in my blog.

So, lets get started!!!

Why did the RBI hike rates?

Well, the reason for the frequent rate hikes has been the inflation. The RBI as the monetary authority of india, has the responsibility of keeping our inflation at a stable rate and since inflation has gone up significantly over the past 2 years, they are taking steps to curb the Inflation.

An interesting statistic:

RBI has hiked rates 8 times since March 2010 and this is the 9th time.

What are the rates that RBI Hiked?

Repo Rate – The rate at which the RBI lends loans to banks was hiked by 50 basis points to 7.25%

The Reverse Repo Rate is pegged as usual at 100 points below the Repo Rate – i.e., 6.25%

Savings Bank Deposit Rates have been hiked by 50 basis points to 4%

Is this good news?

Well, to be honest, it depends.

If you are a loan customer, then it is bad news because all the EMIs on your floating rate loans are going to go up.

If you are a deposit customer, then it is good news because all your fresh deposits are going to earn you a higher rate of interest.

How are people reacting to this rate hike?

The market has crashed by over 300 points in response to this rate hike. The banking sector has bore the brunt of this hike. If you are curious and ask me why, the answer is:

1. Since the rates on deposits are hiked, the profits earned by banks might be affected
2. Even though the rates on loans are hiked, which might increase the banks revenue, the point to note is that, not all loan customers may be able to afford the hiked rate of interest. There may be many loan defaults and in turn losses to banks

As an investor, a company’s profit is the main criteria to buy/sell its shares. Since the above two points mean that, the profits of banks may be affected, investors have started selling bank stocks and in turn their shares are down heavily…

Some statistics:

1. ICICI Bank – down Rs. 32 or 2.8% from the days open price
2. HDFC Bank – down Rs. 52 or 2.3% from the days open price
3. State Bank of India – down Rs. 110 or 4% from the days open price
4. Bank of Baroda – down Rs. 26 or 2.9% from the days open price
5. Punjab National Bank – down Rs. 52 or 5% from the days open price
6. Axis Bank – down Rs. 46 or 3.6% from the days open price

As you can see, the country’s 6 major banks have lost anywhere between 2 to 5% of their share price in a single day because of this announcement

Will Inflation be curbed because of this rate hike?

The honest answer would be – let us wait & watch and hope for the best. Usually rate hikes help curb inflation and that is what the RBI has tried here. How effectively it would help curb inflation is something that time would have to tell.

Is 4% too much?

Some market experts have a feeling that 4% rate of interest on the savings account deposits is too much. Even though it might be good news for savings account holders, the question here is, whether this is too much or not.

During my career, I have worked in the United States and am currently working in Singapore. The rate of interest on savings accounts here is less than 0.5%. The rate of interest on fixed deposits itself is less than 4%. This has both pros and cons. Though my bank deposits are going to earn me a miserable rate of interest, I don’t pay exorbitant rate of interest on my loans.

A simple comparison:

The EMI on a home loan in India is approximately Rs. 1000/- for a loan of 1 lakh


The EMI on a home loan in Singapore is approximately S$400/- for a loan of S$100,000. This is for a foreigner like me. A local citizen of Singapore would get a loan at a even lesser rate.

Let me not divert too much away from the topic.

If you ask me, yes 4% is a bit too much. Where does this 4% come from? The interest other loan customers pay the bank. So, by making loan customers (again you and me) pay more for loans, the banks are offering a higher rate of interest on deposits. Which in turn is making loans costlier and more difficult to pay for the common man.

So definitely this 4% is a bit too much only.

But as always, there isn’t a thing either you or me can do about this. So the best thing for us is to, avoid taking loans and enjoy the higher rate of interest on our savings accounts.

Happy Saving folks!!!
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