An investor should keep monitoring its tax payout in the profit & loss statement and compare it with the tax payout in the cash flow statement to check whether the tax being factored in P&L is being paid out as cash tax to govt authorities or not.
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Company runs a business with a objective to make profits (not saying they donât have non-financial objectives). To run the business they need capital (equity share capital here).
Profits earned every year belongs to equity shareholders. Management (who manage the company on behalf of shareholders) takes a decision which in itâs opinion to the best of interest of shareholders to distribute these profits.
- Retain in business- by investing in something which can make more money for shareholders like fixed asset say.
- Distribute to shareholders- by way of dividend or by reducing the number of owners so that everyoneâs share goes up. This is called buy back. Meaning if there were 10000 shares earlier, management buys back remove 1000 shares from capital. Eventually number of shares goes down to 9000.
Answer to your questions:
- Open market purchase is a method of buy back. Buy back in India can happen either through a. tender process b. open market (book building, stock exchange) c. odd lot shareholders.
- The percentage of shareholding of promoter may or may not change. If promoters tendering their share for buy back in same proportionate shareholding will remain in same proportion. If promoter do not tender percentage shareholding goes up. In open offer through stock exchange promoter can not participate.
Escrow account is used for buy back where promoters are supposed to deposit in terms of cash, bank guarantee etc. Yes it technically it reduces market cap as outstanding shares reduced. But consequently EPS also increases signalling market to adjust market cap up wards.
SEBI mandates to use at least half the amount originally intended for the buyback, subject to certain exceptions such as the stock price ( i.e. volume weighted average price) moving over the maximum buyback price during the buyback period. In addition there has to be explanation regarding buy back price calculation along with special resolution.
Promoters are not saying they will buy at 80 rupees, thatâs a price range with a date range. They may not even buy desired quantity eventually. Example Reliance Industries.
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Three reasons.
- Increasingly companies are doing buybacks as a substitute for dividends after a tax change in 2016. buybacks through tender offer (using exchange platform) allows promoters to participate in buybacks thus promoter gets a cashflow just like a dividend. Buybacks using open market operation may not allow promoter to sell shares without clashing with some insider trading rules. Buybacks through tender offer ensure that promoter can maintain his/her % ownership ratio post buyback which may be difficult in a open market buyback.
- If the volume of shares to be purchased is high relative to average daily trading volume, buying from open market can drive the price higher and company may not be able to buy required number of shares within the specified time frame. Buyback through tender offer is at a fixed price with a fixed record date which will not affect regular market liquidity.
- Buyback is a transaction between company and its shareholders. A higher buyback price will help participating shareholders at the expense of non-participating shareholders. Since promoters generally participate in such buybacks, it is usually at a premium to market price. Another reason for a higher-than-market price is that market price can move up post announcement of buyback. If the market price is higher than offer price on the record date, investors will not tender their shares and buyback will not serve its purpose. So buyback is usually at around 20% premium to market price at the time of announcement. If a company pays too high a price, usually the exiting shareholders benefit at the expense of staying shareholders.
Company owns the shares post buyback not promoter. Such share are extinguished post buyback and total outstanding shares will decrease along with market cap of the company.
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Thanks for ur reply@nabil ,ok let if company not paying tax or as per rules, then how could i find out reasonsâŚ
The Reasons for not paying the taxes can be found out in the
- Notes to financial Statements in the Annual Reports
- Asking management in the Con Calls.
- Or by reaching out to the IR teams via email/phone.
- Scuttlebut
Thanks
Hello,
I am new on this website.
I am looking for threads for learning reading/ interpreting balance sheet.
I couldnât find them.
Can anyone pls give me link or tell me how to find these threads?
I donât think there are active threads that discuss about Balance Sheet / Financial Statement Analysis. There are a few, but they are either inactive or dead. You could just search for âBalance Sheetâ in the search bar.
Personally, I always found the following useful:
- Romancing the Balance Sheet by Anil Lamba
- How Warren Buffet Interprets Financial Statements by Old School Value
- Ratio Analysis by WallStreetMojo
- A Primer on Financial Statement Analysis by Aswath Damodaran
Any standard textbook on Accounting/Financial Statements could be useful as well, but they would contain a lot of stuff unnecessary for investing purposes.
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Statement analysis is a core investing skill. I donât think you will find a thread to learn that here. You can refer to the book below.
Dear Yogesh.
The below is a much easier read for non finance people and also recommended by Prof Bakshi. It is written by his colleague who teaches at MDI. The authorâs profile is here: https://www.mdi.ac.in/faculty/detail/15-sandeep-goel/
Thanks Dineshssairam & Yogesh.
You can start with the following tutorials -
You can get basic and advanced tutorials from http://www.investopedia.com/university/all/basics/
These are more than enough to get anyone started. Once you understand the basics, you can move on to using them practically.
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Sir how much can we pay price to book to a good managemet promising good growth
Can someone please explain to me with example how to calculate the total capital employed part of calculating roic. Im a newbie and cant find a way to figure out this part
Capital Employed is (Equity + Reserves + Preference Shares + Debt). Sometimes, Cash is also deducted from this. So (Equity + Reserves + Debt - Cash) is the âCapital Employedâ in the business for the current year.
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Please bear with my rant here, because I donât believe in directly using any of the conventional Price Ratios (P/E, P/B, PEG etc). âBook Valueâ is nothing but the difference between the Assets and Liabilities of a company. To put it simplistically, the Book Value of a company is its Net Assets. If the company has debt or other liabilities, I usually offset it with Current Assets first and then Fixed Assets, to arrive at Net Assets. So in order to interpret a P/BV Ratio, understand what the Net Assets of a company represents. For a manufacturing firm, this may be Inventory or Plants and Property. For BFSI firms, this may be short or long term loans.
A low P/BV could only mean two things:
-
The companyâs Net Assets have little to no potential, have liquidity concerns and possibly other risks, like credit risk, attached to them (Ex: High NPA Ratio in Banks).
-
The companyâs Net Assets are actually good, but the investors are valuing them at far lesser than their intrinsic value for some reason (Ex: Real Estate is usually reported at Book Value in the Balance Sheet, but is actually worth much more in Market Value)
If it is case #1, then the low P/BV is probably deserved. If it is case #2, it could potentially be a good investment opportunity, so you should investigate further. There is no âidealâ P/BV Ratio, but anything above 3 warrants justification for a company with no moat/brand. If a company has a moat or brand value, it can have exorbitant P/BV, in which case it would make very little sense to consider it in your research.
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Hey. I have 1 qty of IOC. Recently they issued bonus rights share. But I still own the same 1 qty and the share price has fallen more than 50% as a result. Can someone explain?
Sir if price to book or 3 for a good managed companies (microcap with growth and high roes and dividends) is reasonable,can we use price to sales tool.if we can what is reasonable price to sales value for high quality company
How is MAT credit accounted/utilised ?
Can anybody tell me how to calculate cost of capital on screener.in?
Is it already there or do I need to create it?
IIRC, Screener does not have the Beta of the stocks included. So you cannot calculate the Cost of Capital in Screener.