Basics - Part 3

QWhat is debt-equity ratio?

A

Debt-equity ratio is a measure of leverage, indicating proportion of company's total capital contributed by secured and unsecured debt. A high debt-equity ratio, generally 2:1 and above, is not considered favourable for companies. Also, this ratio varies from industry to industry.



Debt-equity ratio = Secured + Unsecured debt

Shareholders Funds


E.g.: As on 31st March 2010, company had secured loan of Rs. 70 crore, unsecured loan of Rs. 30 crore, shareholders funds (equity and reserves) of Rs. 200 crore.



Debt-equity ratio = 70 + 30

200



Debt-equity ratio = 0.5:1

Source: sptulsian.com

QWhat is EPS?

A

EPS or Earnings per share, is the net profit earned by the company divided by the number of outstanding equity shares. If any preference dividend is declared, it is subtracted from the net profit.

Eg: A company earned net profit of Rs. 100 crore for FY10. It has 5 crore outstanding equity shares. No fresh issue of equity shares was made during the year, implying that the weighted average number of equity shares outstanding during the period is 5 crore.

EPS = Net profit earned during the period

Weighted average number of equity shares outstanding during the period

EPS = 100 / 5

EPS = Rs. 20

Source: sptulsian.com

QWhat does ‘pari passu’ mean?

A

Pari passu is a Latin term commonly used in legal documents meaning ‘equal in all respects’ or ‘in the same degree or proportion’.

For example, if issue of new shares is said to rank pari passu with the existing shares, then the rights associated with both the existing as well as the new shares are exactly the same.

Source: sptulsian.com

QWhat is meant by ‘Right of first refusal’?

A

Right of first refusal, abbreviated as ROFR, is the right of a person (investor) or company to purchase something before the offering is made available to others. If an investor /PE fund plans to exit the company, it is obliged to give the promoters or existing shareholders, an opportunity to buy the shares held by the PE before selling the same to a third party.

There are other rights for minority shareholders, such as:

Tag along right - contractual obligation which protects a minority shareholder in case the majority / promoter is selling out. Minority shareholder can compel stake sale of his stake along with the majority / promoter.

Drag along right – contractual right with minority shareholder to force the majority shareholder / promoter to join in the sale of the company. If minority shareholder is selling-out, it can compel majority shareholder / promoter to compulsorily offer their stake as well.

Source: sptulsian.com

QWhat is Commercial Paper?

A

Commercial paper is a money market instrument issued normally for tenure of 90 days. It is a short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee.