IRR is the rate at which the NPV of your expected cash flows from an asset equals the cost of the asset. E.g if you are taking debt @10% to fund an asset and the expected cash flows when discounted at 10% equal the cost of the asset then the IRR is 10%. ROI could be greater or less but generally the ROI should be greater than the IRR for you to be investing in the asset.
Also that’s why you may find companies with increasing earnings but ROI which is less than the IRR ( or the cost of capital), in which case they are not good capital allocators and should be looked at cautiously.
Another fundamental difference b/w NPV and IRR is that IRR assumes capital is reinvested at IRR value which can be different from cost of capital, whereas NPV assumes reinvestment is done at cost of capital. So for eg cost of capital is 10% and while calculating NPV for a project, implicit assumption is that reinvestment is done at 10% which is CoC. However of for same project if IRR comes at 15%, then it assumes reinvestment done at 15%.
Can any one please help me in understanding the leverage concept. Leverage is like a double edge sword. How can I find out if a particular company is using leverage or not in order to increase the profits. Or are they able to take the benefits of leverage successfully. Which components , ratios in Financial statements we should look for.
Basically I want to understand how to know if a company is using leverage or not and if yes are they doing it effectively ?
Leverage is simply using debt in addition to equity as a part of the capital structure of the company. To know if a company is using leverage, look for debt in liability side of company’s balance sheet. A debt/equity ratio is a good measure of leverage.
If return on equity is higher than return on capital employed then leverage is helping equity owners.
another way is to look at interest cover. if interest cover i.e. earnings before interest divided by interest expense is rising, then leverage is helping because a rising ratio means earnings are rising faster than interest expense so leverage is helping.
How do you guys calculate if a company is paying debts aggressively or not. If they are interested and very much focused on reducing the debt or not ?
If suppose the company holds 100 crore debt at 10 % interest , so it should pay 10 crores as interest expense for this year…but if the management decides to do the pre payment , for ex. they pays 20 crores instead of 10 crores.
So is their any way we can get to know from financial statements that if a company is doing pre payment of loans and is looking to become debt free.
Is there any website where I can see share holder pattern changes Q on Q ? I am keen to know promoter holding increase/decrease, though it is great to know trusted investors/MF/FPI pattern changes for a given company. I usually follows screener and ratestar. Screener, I could not see the data and ratestar do not have any comparison with last quarter and not able to easily see which year/quarter data is given.
Dividend yield is calculated by dividend per share upon current mkt price . Say a share cmp is 100100 and it declared 2 rs dividend the yield will be 2% .
Dividend yield safeguards the downside risk say a good reputed company yield comes in range of 3.
5% to 5% you can roughly estimate that its downside risk is very limited and invest in it.