Wednesday, 19 October 2011


Cash Flow Statement

Widely known as CFS it accounts for the amount of cash entering and exiting any company in the span of accounting period. It’s an add-on to the balance sheet and income statement and is widely used by investor s to analyzed loan paying capacity and short term liquidity and viability of the firm. The cash flow is broken down and analyzed as operating, investing and financing activity which helps us in determining health of the company.

The Cash Flow in these activities had different implications for the firm. Most important is the operating cash flow because it signifies the core strength of the company. It includes: 
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Other Current Assets
Notes Payable
 
(generally due within one year)
Accounts Payable
Wages Payable
Payroll Taxes Payable
Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities
It depends on the business model. Investment companies or banks will have different kind of operating asset which will include loans, interest earn as it will be part of their operations. The biggest take away from operating cash flow is by comparing it with income statement. If operating cash flow is more than income it means company basic operation is good and its getting into better shape, if operating cash flow is net than income statement then somewhere down the line operations is facing certain problem and one should look into the matter.
Investment cash flow is the investment that the company is doing in acquiring certain assets, plant and machinery, giving loans, buying security, lands and R&D. such investment has future implication and it is one of the core reason behind the difference between operating cash flow and income statement. It includes
Financing activating or financial cash flow includes how the company is financing its activities. It talks about the debt and equity of company.  This cash flow thus gives guideline about current state of the company. It includes holders' equity accounts, such as:

A change in balance sheet will be shown in cash flow statement as such


A change in this 
balance sheet category
...is reported in this section 
of the cash flow statement
Current Assets*
Operating Activities
Current Liabilities
Operating Activities
Long-term Assets
Investing Activities
Long-term Liabilities
Financing Activities
Stockholders' Equity
Financing Activities
      *This refers to current assets other than Cash.

For details on How to Prepare one can visit the link.

An Example of cash Flow



Tuesday, 18 October 2011

HISTORY OF UAE- The Truce Oman

The Truce Oman/The Trucial States
The history of UAE goes long back. But critical turnaround started in 1820. The east India Company was being bogged down pirates in Middle East affecting their trade routes. As a result they forced the shaykhs on the coast to stop piracy. This whole story started in 1798. The history maintains that The Qawasim were arch-rivals of the Al-Busaids who were based in Oman and who also sought to assert their control over this part of Arabia. In 1798, the British signed an agreement with the Al-Busaids in an elaborate attempt to keep the French out of the area and so strengthen Britain's claims to paramountcy in the Indian sub-continent. However, this deal with the Al-Busaids made Britain part of the enemy as far as the Qawasim were concerned. This meant that British East India Company ships were fair game and were attacked and pillaged at every opportunity by the Qawasim. This stretch of coast soon came to be known in Britain, India and beyond as the Pirate Coast and the Royal Navy reacted accordingly by launching campaigns and raids against the Qawasim in 1805, 1809 and 1811. Unfortunately for the British, the locals knew the area too well and could quickly escape only to regroup elsewhere.
In 1819, the British decided to try and end the piracy in this area once and for all. A large fleet was dispatched from Bombay and by 1820 it had destroyed and captured every Qawasim ship that it had come across and occupied all the major forts in the area, even going so far as occupying Qawasim hideouts in Persia itself. With the successful outcome of this operation the British imposed a General Treaty of Peace on nine Arab sheikhdoms in the area and installed a garrison in the region. The sheikdoms included:


The treaty did not prevent these princes and sheikhs from continuing to attack each other, which they did with gusto and much to the consternation of the British. In an attempt to reign in the worst excesses of dynastic and tribal rivalry the British imposed a new treaty in 1835. It was named the Maritime Truce and its intended aim was to keep traffic moving in the Gulf region. It was revised in 1839 to include the forceful banning of slavery. In 1853, the truces were upgraded still further to become the Treaty of Peace in Perpetuity. Under which, the British assumed all responsibility for arbitrating in any disputes between the Sheikhs of the area. It was this final truce that gave this part of the Gulf its name for the next 120 years.
The sheikdoms permanently allied themselves with the United Kingdom by the Perpetual Maritime Truce of 1853, upon which they were administered as princely states of British India. The treaty signed between the shaykhs and the British. The region is given the name of 'Trucial Coast'. The treaty involved a maritime truce, and British assistance to cooperation between the shaykhs. But, finally in 1873 The Trucial Coast became administered by the British.
In the 1890's the British sought to formalise many of their agreements made with Sheikhs and rulers throughout the Gulf region. The reason for this was a way of forestalling renewed interest in the region by the Russians and the French. It is unclear how serious these intentions would have been followed through but for the British their links to India were to be maintained at all costs and the Trucial rulers were to be no exception to this rule. The British would provide protection for the Sheikhs in return for promises by these rulers that they would have no dealings with any foreign rulers without the express permission of the British.
This promise of protection served the rulers in one crucial aspect just after the end of The Great War. At this time in history Ibn Saud was busy uniting the interior of Arabia and sweeping all before him. The British promises of protection made Ibn Saud hesitate and ultimately bypass this region from his series of conquests. In return, this part of the British Empire was to be an extremely quiet and peaceful one. Exactly the way the British wanted it to be.
Despite the formal protectorate status of this stretch of coast the British didn't make much of an effort to control the domestic and commercial activities of these sheikhdoms. As far as the British were concerned, as long as the lines of communication with India were secure, this area was of little strategic or commercial importance. They therefore left the rulers to themselves without any British Political Agent being appointed until the outbreak of the Second World War.
British stakes and interest in the area were to be increased with the discovery of oil. It also had the effect of renewing competition and rivalry between the various sheikhs of the area as they each tried to maximise their territories in the hopes of receiving more wealth from oil.
One interesting anecdote is the way the British tried to resolve these border difficulties by sending a British diplomat out on his camel to ask local village heads, tribal rulers and Bedouins which sheikh they owed allegiance to. However, even this attempt failed, so the British set up a Trucial States Council in 1951 under the direct chairmanship of the British Political Agent in Dubai. This council was the direct ancestor of the present day UAE Supreme Council.
British links to the coast were to remain extremely limited for most of their history with one another. The Indian based British Steamship Line served British, Indian and local traders in the region firstly by serving Linagh but after 1903 transferring their port of call to the up and coming hub of Dubai. The only official British facilities were not to be built in the area until 1932 when Imperial Airways built a rest house in Sharjah for passengers and crew en route between London and India.

Oil and the New Beginning
The discovery of oil was to change the strategic and economic significance of this imperial outpost. The first oil concession was from the poorest of the sheikdoms, Abu Dhabi to the British owned Iraq Petroleum Company in 1939. However, the Saudis would lay claim to the area of this first concession and relations between these states would sour considerably. It was only when Trucial Omani troops, commanded by British officers, drove the Saudis out of the disputed area that the matter was settled. This held up production for some years in this sector, but the importance of these fields were to be eclipsed when an enormous reservoir of oil was discovered off the shore of Abu Dhabi by an Anglo-French consortium. Exports began in 1962 and Abu Dhabi quickly became the leading sheikhdom in the region. Dubai was also fortunate enough to discover some oil, however the other sheikhs were not so lucky and they quickly beat a path to their oil rich neighbors.
The newly found wealth was beyond the financial understanding of the sheikh of Abu Dhabi as he spent his money foolishly and unwisely. In addition, he openly admitted that he did not trust banks and, most worryingly of all for the British, that he distrusted foreigners and foreign companies. The British conspired with his brother and the other sheikhs to have this troublesome ruler removed in 1966. This bloodless coup was to be the last major political undertaking by the British in the area.
In 1968, the British announced that they would completely withdraw from the Gulf region by the year 1971. This sent the Trucial rulers into a frenzied series of negotiations with each other and with the other British protectorates; Qatar and Bahrain. The British tried to join these areas into a single autonomous country but the respective rulers could not agree on boundaries or political representation in the new grouping. Bahrain and Qatar were particularly aggrieved and left to become independent nations. The Trucial sheikhdoms were prepared to enter a federation with Abu Dhabi and Dubai (in that order) as having the heaviest political weighting, representation and most importantly of all for the smaller sheikhdoms, the heaviest financial obligations. With this formula the United Arab Emirates was formed in December 1971.
Overall Timeline
1820: The British force the shaykhs on the coast to stop piracy.
1853: A treaty signed between the shaykhs and the British. The region is given the name of 'Trucial Coast'. The treaty involved a maritime truce, and British assistance to cooperation between the shaykhs.
1873: The Trucial Coast becomes administered by the British.
1892: A new agreement, the shaykhs gives the British effective control over foreign matters. The British offers military protection in return.
1931: Oil is discovered, and national consciousness increases. Bahrain later joins the neighbouring Trucial States and Qatar in the Federation of Arab Emirates.
1952: The seven emirates establish a Trucial Council.
1960's: Emerging problems between the British and the emirs, connected to the interests of developing the oil industries and preserving traditional culture. Shaykh Shakbut of Abu Dhabi was the most conservative in this matter, and also in control of some of largest oil reserves.
1966: Shaykh Shakbut is overthrown, and Zayed bin Sultan an-Nahayan becomes new ruler of Abu Dhabi.
1967: The Trucial States Council is formed, aiming at better coordinating matters between the shaykhs.
1970: Independence is given to the emirates.
1971 September: Bahrain and Qatar becomes independent states.
— December 2: Abu Dhabi and Dubai forms a independent union, inviting the other shaykhs to join. All remaining but Ras al-Khaimah accepts.
1972 Ras al-Khaimah joins the new federation of United Arab Emirates. 

An Interesting Fact
Until 1969, the Indian Rupee remained the de-facto currency of the Trucial states as well as the other Gulf States such as Qatar, Bahrain and Oman until these countries introduced their own currencies in 1969, after the great devaluation of the Indian Rupee.

Friday, 18 February 2011

When The Desert Speaks: Part-1


Today I would like to write about UAE, the land which has a diverse and multicultural society with large expatriate population. In my 3 months of tenure at Dubai I have seen variety of things like Skyscraper, belly dancing, malls, auto fests and sand storm.......which has invigorate me to write about UAE.
Some of Key findings of UAE:
  • Full name: United Arab Emirates
  • Population: 4.8 million (UN, 2010)
  • Government Type: Federation with specified powers delegated to the UAE federal government and other powers reserved to member emirates
  • Head of state: President Khalifa bin Zayed Al-Nuhayyan
  • Head of government: Prime Minister Muhammad Bin Rashid Al-Maktum
  • Capital: Abu Dhabi
  • Largest city: Dubai
  • Per capita GDP: $38,900
  • Population: 19%Emiratis, 81% Foreigner
  • Major Export: crude oil(45%), natural gas, dried fish and dates
  • Major Imports: Machinery and transport equipment, chemicals and food.
  • Area: 77,700 sq km (30,000 sq miles)
  • Major language: Arabic
  • Major religion: Islam. 95% muslims, 5% others
  • Life expectancy: 77 years (men), 79 years (women)
  • Internet domain: .ae
  • International dialling code: +971
  • Border: Sharing land borders of 867 km with Oman and Saudi Arabia
  • Sea Border: Sharing sea borders of 1318Km with Iraq, Kuwait, Bahrain, Qatar and Iran
  • States: It consists of seven emirates, which are Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain
  • Unemployment rate: 4.2%
  • Inflation : 3.9%
Political Analysis:
  • Strong implementation of policies, but relations with Iran over disputed Gulf islands, remain problematic.
  • Nuclear deal with the US.
  • Improving foreign relationship will increase growth in business.
  • Absence of democracy may become an issue.
Economy & Business:
  • The UAE economy contracted by 0.7% in 2009. The economy is expected to expand by 1.3% in 2010. Bilateral trade between UAE and china can give further growth opportunity to UAE. As per prediction two country will trade around $100billion by 2015.
  • The UAE has high quality infrastructure; however, restrictions remain for foreign investors.
UAE has present itself as business friendly nation and it does not levied any tax on capital gain or salaries and corporate has shown immense interest for corporate relocation and investment. Free trade zones have also been legalized in multiple locations to reduce trade laws and allow new markets to take hold. However, foreign investors do not receive the same treatment as national companies. Complete foreign ownership is restricted under the country’s laws. At least 51% of a business must be owned by a UAE national, and projects must be managed by a UAE national or have a board of directors with a majority of UAE nationals. This restrictions affects the FDI Inflow of country.


While the country has a strong market for telecom related services, its poor level of science education is a problem.
The UAE has a high mobile penetration rate of more than 212 mobiles for 100 people. Till 2008, Etisalat is the only player and there was a monopoly in the market. Du just entered in 2008 and in a year it has market of 15%. Even though having high penetration of mobiles the level of education system is hinders the growth of mobile segment. Due to liberalized labor policies, the country has a skilled workforce from all parts of the globe. Dubai has seen a major rise in the influx of foreign labor due to the growth opportunity in UAE.

In 1st part of “when The Desert Speaks” I have touched some of the aspect of UAE. In my second part I will do the PESTEL analysis of UAE to find more about mysterious desert land. C

Tuesday, 15 February 2011

Rating Stocks : A summary

We are always fascinated with rating things around us. Ratings give an overview that helps us in making critical decisions. In finance while dealing with stocks we use rating systems to help stakeholder’s in deciding their future actions. A Rating system may be three-tiered: "overweight", "equal weight" and "underweight", or five-tiered: "buy," "overweight," "hold," "underweight," and "sell".

On Suggestion Of Siddarth,Making language crispier 
The whole story below can be further summarized as:
Buy: You should Buy the stocks
Overweight : I will suggest you to Buy the stocks
Equal Weight : I cant suggest you anything actually
Underweight: It's not a good proposition, My advice will be to sell the stocks
Sell : You should sell the stocks

For details and better understanding, Read Further
The term underweight has been defined as a situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and under weighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark.
If a stock is deemed "underweight" the analyst is saying they consider that the investor should reduce their holding, so that it should "weigh" less. For example, if an investor has 10% of their stocks in Retail, 25% in Manufacturing, 50% in Hi-Tech, and 15% in Defence, and the broker says that Retail is "underweight", then they are implying that a smaller percentage of the stocks should be in Retail.
The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
The term overweight has been defined as a situation where a portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so will allow the portfolio to achieve excess returns.

Overweight is an over sophisticated method of saying 'buy'. It gets its roots from portfolio allocation theory, which theorizes that you can increase your return and decrease your risk by allocating your assets among various types of assets. Investment advisers have usurped the term to make themselves become sophisticated investment advisers in tune with the latest buzz words so to speak.
If a stock is recommended to be "overweight", the analyst opines that the stock is a better value for money than others. For example, an investor holds 15% of his/her investment in Technology stocks then, the investor's stock portfolio is 5% overweight in Technology stocks. Suppose further that the investor is advised by his broker or financial advisor that Technology should be "overweight" then, the investor is being advised to hold more investments in Technology, as a percentage, than the weight of that asset in the index/market. i.e., more than 10% by value of Technology shares in this example.
A type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.

The Rydex S&P Equal Weight Exchange Traded Fund, for example, provides the same exposure to the smallest companies in the S&P 500 as it does to corporate giants such as General Electric and Exxon.
Equal weighting differs from the weighting method more commonly-used by funds and portfolios in which stocks are weighted based on their market capitalizations. Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds and, as a result, they usually have higher trading costs.

Carrying forward the above example will mean in case of equal weight the broker advises that Technology should be "equal weight" in which case, the recommendation is to hold 10% by value of Technology shares.

Buy and sell are stronger word than overweight and underweight. Buy has an exact definitions varying by brokerage, but in general this rating is better than neutral but worse than strong buy. Same goes for sell whose exact definitions vary by brokerage, but this rating is generally worse than neutral, but better than strong sell.

Monday, 31 January 2011

Bull Became Bear: What’s next??

Once a sanguine country it seems INDIA is moving to a zone of uncertainty.  The uncertainty is about the economic condition, Inflation, profits of companies driven by corruption, attempts of global recovery and foreign investor having bad experience at INDIA. A recent survey that concluded India to be most over regulated country and poor infrastructure apart from 7 cities is INDAI is finding it difficult to be an economic aphrodisiac anymore.  Despite having an increased per capita income that touched $1000 marks (Rs 46,492) India has seen its propensity of consumption decrease to 0.6 resulting in many MNC wondering what they should do to make INDIA consume more.
The mood is evident from the recent slump in INDIAN Sensex. Sensex fell by 10.6 % in month of January, 2011 and slipped to its lowest since Oct 2008 to a figure of 18327. Weak global market and anti-government protest in Egypt is being attributed to be major factors along with common concerns about Inflation end below expected performance of key companies like Infosys. One of the major reasons that can be added to this is dip in FDI by 26 per cent during January-November 2010 to about USD 19 billion from USD 25.5 billion in the year-ago period.
The market that was rising like a star has slumped like anything. One may wonder why this sudden mood of change. Why FDI is dropping down and why all of a sudden there are doubts about us. I read economic times regularly and found various notions suggesting two entirely different view points on INDIA.  When BofA/ Merrill lynch suggested that sensex will remain flat; Goldman Sachs take is that Even as some investors are turning their backs on, and high inflation emerging market will manage to attract investors. In totality we are confused what’s next for us.
I read once that many investors found it difficult to cope up with Indian infrastructure. As a result few investors are still keeping their finger crossed. Recent CITI bank fraud, Satyam embezzlement has lead one to wonder will corruption engulf INDIAN private sector as well. No wonder Sensex is diving down.
I am wondering whats next. I will try to make a prediction and comeback.

P.S : Dubai market fell 6% cause of anti-government protest in Egypt and market across the world is reflecting the sentiment.


Saturday, 29 January 2011

SLR (Statutory Liquidity Ratio) : A summery

SLR (Statutory Liquidity Ratio):
It refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India.
The main objectives for maintaining the Statutory Liquidity Ratio are the following:
1.       Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion.
  1. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.
  2. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds.
However the one theme behind SLR is to force banks in investing less returning securities of government.  In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes and in an emerging economy interest rate change is a common activity. 
The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.
Determination
It is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on their anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities.
Thus SLR Rate = Total Demand/Time Liabilities x 100%
The maximum limit of SLR is 40% and minimum limit of SLR is 24%.  The RBI as per need can ask banks to maintain SLR between these two. At pres the SLR rate of INDIA is 24%.
SLR and G-Sec(Government security)
While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.
These include:
1.     Interest rate increases.
2.     Changes in the prudential regulation of banks’ investments in G-Sec.
Most G-Sec held by banks is long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.
Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporate and resolve liquidity crisis; providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporate.

Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank.
The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.
SLR and News
In November,2008 when RBI reduced the SLR rate by 1% to 24% then economic times reported “A cut in SLR means that the home, car and commercial loan rates will go down. It also means that banks will now have the option of selling Rs 40,000 crore of government securities that until now formed part of their statutory investments. It was increased to 25% in 2009 and then was again reduced to 24%.

Tuesday, 25 January 2011

Corruption as a driving Factor of Economy Vol. 2


In last post i talked about how we feel about corruption. However i ended my post with the benefits from whole corruption industry. Now let us look at it more figuratively. Before that i will like to introduce a term Marginal propensity to consume. And this consumption will be more for the corrupt people. But again on being safer side i will stick with INDIA’s average propensity to consume.
In economic, the marginal propensity to consume (MPC) is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.
Mathematically, the marginal propensity to consume (MPC) function is expressed as the derivative of the consumption (C) function with respect to disposable income (Y).MPC= dC/dY, where ΔC is the change in consumption, and ΔY is the change in disposable income that produced the consumption

This simply means if a person earns Rs 100 extra he spends something around say Rs 50 extra. This Rs 50 extra is someone else extra earning who spends 25 extra and so on. If you see this Rs 100 grows to something more than it is.
In total it increases over all earning and consumption.  Increased consumption means more production and thus more GDP. Now let us go by simple funda of G.P. Also, expense by someone always brings earning to other. So on a whole and extra income of 100 will add on a lot like the following. We know that marginal propensity to consume in India is 0.6 (Down from 0.75).
So for every Rs 100 as a bribe, net increase in national income is:
100 + 100*0.6 +100*0.6*0.6 +100*0.6*0.6 . . . . . .  Infinity = 100/ (1-0.6) = 250
Based on this a total corruption industry generates an income of 0.25/ (1-0.6) =.625 trillion (half of current INDIAN GDP). I understand this figure lacks so many things. Like, Most of black money is saved outside India.  Second Our GDP calculation doesn’t take this black money into account while calculation GDP. For example when a retailer pays to distributor who in turn pays to industry, there are many transactions which are not shown as bill to avoid taxes. These amounts are not part of GDP but a part of our production process. So they don’t officially figures in Income calculation but it contributes to it. Just imagine what would have happened to Indian GDP without corruption.
P.S: This calculation is a wildest simplification with no economic meaning. It is simply an eye-opener. That even though i can’t reach a definite figure, and the figure