Is your balance sheet analysis correct? Factors to look for before investing in equity

balancesheet analysisInvesting in equity is probably the best bet if you have a reasonable risk appetite and adequate staying power to continue with your investment. Investing in stocks is any day a great investment option as the returns are much higher than bank deposits. But investing in equity is an informed decision making. You need to put in a lot of thought before you buy stocks. Unless you are aware and have weighed all the future prospects of the growth of the stock, it could take you for a ride given that stock market is highly volatile and subject to bullish and bearish movements.

But then, you don’t have to be too afraid if you equip yourself rightly with the tools and techniques of analysis. Yes, you read it right, analysis is the key.  Equity investment is NOT speculation but a well analysed decision and there are ways of analysing and valuing the company to make the right choice to park your funds.
And what better way to do business valuation than a balance sheet analysis. The financial statements drafted and certified by the appropriate authority is the most authentic source of information available for you to know the financial details of the company.
But it is not as easy as it sounds. Reading a balance sheet does require technical expertise and some calculations to make sense out of the numbers provided to us. But just take a chill pill, because, you need not have to be a number cruncher to be able to do this. Sit down with a balance sheet and calculator and sincerely try to understand the statements. It will eventually start making sense to you. I am giving you some points to keep in mind, while doing the analysis, to ensure that your balance sheet analysis is adequate and serves the purpose for you.

1. Begin with the end in mind.

Now that’s Stephen Covey quote. But it is apt here! The purpose of balance sheet analysis is to be able to pick the right stock. Precisely, finding the intrinsic value of the shares of the company that are most likely to appreciate in the future and add to our capital investment. Therefore it’s imperative to pick the most relevant details to craft out the ratios and averages to determine the share value.

2. Picking up the right ratios for determining asset performance.

Now, there are two jargons here. Ratio’s and asset performance.

Asset performance means how much return on the assets the company is able to generate in a particular financial year. That determines how the revenue generated can be spread over the average fixed assets of the company. If the company is capital intensive, then your fixed assets number could be huge and a major determining factor in determining asset performance.

But if you are still wondering why we need to analyze the asset performance, it is to find out how efficiently the company is utilizing its fixed assets. That’s a precursor to understanding what they will do if you and I give them more resources in the form of investment in the company shares.  The more the company is productive in utilizing its assets in sales generation, better is the company’s performance. If the company is capital intensive and has more fixed assets, Investors should look for high fixed asset turnover ratios and preferably greater than 1, to start with. For other companies, return on total assets would be ideal as an indicator to asset performance.

3. Determining the working capital position.

Working capital position is most crucial in valuing a business. It determines the company’s efficiency in both inventory as well as accounts receivable. The operating cycle of the company is that which quantifies the time taken by the company to convert stock into accounts receivables and realize it to bring in cash into the business, this will determine the managerial efficiency of the company. Managerial efficiency may be qualitative and not measurable from balance sheet directly. But if you find the operating cycle of the business to be favorable then be rest assured that the company is in safe hands and in turn your money.

4. Watch out for Intangible Assets.

The non physical assets present in the balance sheet like goodwill could possibly confuse you if you don’t rightly deal with them. Goodwill could be a purchased goodwill and are usually deducted in calculating the tangible net worth. Look out in the notes to financial statements as these are not apparently disclosed in the statements.  

Hope this write-up gives you a fair idea about how to go about reading the balance sheet.With time and consistent quest for knowledge. you are sure to become a wise investor. Let me know how your experience was, analyzing the financial statements.

Tax reforms and Economic growth in US – here are my 2 cents…

The main key to economic growth of any country is boosting direct and indirect investment. Most of the fast growing developing nations like India and china have shown direct and strong correlation between their high investment levels and economic growth. But policies of the Government of US seem to have been a straight contrast. They aim at improving consumption instead of investment and employment opportunities which is a self devastating move that only pulls down the pace of economic growth.

So, given that improving investment is the key to economic growth, the next question that comes up is how to improve investment levels in the economy. Here, tax reforms prove vital in bringing about a sea change in economic growth of the nation. A small change in the taxing policy can affect capital, saving, employment, GDP and ultimately the economic growth. At this juncture, a new trend of tax reforms that has set in many states of the US would need a mention. Almost nine states of the US, including fast growing ones like Texas, Florida etc. has shifted to a new tax policy of slicing down their income tax to nil and compensating the same by increasing sales tax.

This policy is in rule in almost all GCC countries (a.k.a Middle East) which is a clever move to improve investment. This is because income tax is a straight penalty to individual savings which turns into investment. When this saving is affected, economic growth is affected too. On the other hand, sales tax is a direct hit on consumption rates that would pull down excess expenditure leading to improved savings in turn leading to investment and economic growth.

Another added advantage to this policy of nil income tax and increased sales tax is that it would create more jobs. This in turn would help in retaining intellectual talent of the country without letting them migrate to other countries for jobs that would recognize their talent and performance both emotionally and financially. Thus improved investment via decline in income tax and corporate tax would pave way for a rich talent base eliminating the need to recruit talents from abroad for higher pay scales.

This strategy has been well capitalized by many of the developing countries who are competing cut throat to lure investments to their countries by announcing many new tax reforms like reduce shareholder tax, lowered corporate tax and allowances to companies investing major amount domestically and so on. Unfortunately, policy makers in US are still only in the process of waking up from their debate as to whether or not to adopt the new strategy of lowered or nil income tax or still stay with hiked tax levels. Some statistics would prove this scenario more clearly. On one side, there is a race that is up and running as to who will join next with the nine states of the US that have boldly announced zero tax on personal income. States like Kansas, Indiana, New Mexico, North Carolina, Oklahoma and so on are in the process of lowering their income tax and corporate tax levels following suite with the nine states.  On the other hand, Governors of states like Illinois, Massachusetts California, and New York etc still believe in old policies and have recently announced a hike in income tax levels.

But what needs serious consideration is that the US economy is too slow in economic growth when compared to other trading partners. Experts and economists have also emphasized innumerous number of times that if and only if The US plans tax reforms to improve its investment to more than 50 %, its growth would double. But the current statistics says that Americans are far ahead of all countries in consumption and are almost 15 to 20 percent lower than almost every developed country as far as investment is concerned. So, serious tax reforms are the need of the hour to bring about drastic changes in investment levels of the US economy. Some of the reforms that are advisable are discussed below:

  • Firstly lowering or bringing down income tax levels to zero and in turn compensating this by increasing sales tax.
  • Ensuring that the increase in sales tax is not on necessity goods like milk or meat and rather on luxury purchases like car or purchase of property and so on.
  • Reducing corporate income tax levels considerably to encourage investment domestically.
  • Reducing taxes on exports that would improve economic growth and increasing taxes on imports to cut consumption.
  • Reducing shareholder taxes which would encourage investment.
  • Providing special allowances and tax concession for companies investing domestically and luring foreign direct investment into the country.

Such drastic tax reforms are sure to bring about a radical improvement in investment levels in turn leading to a doubled up pace in economic growth of the USA Smile

Are you an LGBT couple planning to marry? – Find the details about tax and its implications for same sex marriage

The slicing down of certain clause of the Defense of Marriage Act (DOMA) by the US Supreme Court recently, has been the talk of the town since this has surely proved to be highly beneficial for lesbians and gays. With around 12 states of the US and the Washington DC approving same-sex marriages as legal, these recent changes in DOMA has been termed by many renowned news magazines as one of the greatest shift in the civil rights in the history of the United States.

Further, it is a great move towards reduction of contradicting laws in different states in USA and a step forward in bringing together the vast population.  The   Supreme court clearly ordered that if individuals of same sex are legally married in any state that permits same sex marriages, then the federal government also need to treat them as married for tax purposes irrespective of whether the state they currently live in, supports same-sex marriages or not.

This victory for equality is not only a civil right gain for the homosexually married couples but also a huge financial benefit for them. A whole chunk of financial profit awaits them after the striking of DOMA. These can be discussed in detail as follows:

Advantage on gift tax

Previously, when homosexual couples transferred gift or assets to each other, they were levied tax which was assessed to 40 percent once the value of accumulated transfers exceeded 5.25 million dollars over their life time. This was never payable by any man-woman couple as per Defense of Marriage Act (DOMA). Now, this is being waived for same sex married couples too.

The retrospective effect

By legalizing same sex marriage for tax purpose, the beneficiaries not only can take advantage on future tax payments but also can claim retrospectively refunds for excess tax paid previously due to Defense of Marriage Act (DOMA).

The state of ceremony stands vital

As per the ruling passed by the Supreme court, the same sex marriage should be considered as legal for tax purposes by the federal Government when the marriage ceremony has taken place in one of the states whose rules declare same sex marriages as legal, irrespective of whether the state they currently live in approves of such marriage or not. In other words, it is the state where the marriage ceremony occurred, that gains importance than the state where the couples live before or after.

Advantage on health tax

Whenever employers covers their same sex married employee’s spouse as part of health insurance, the employee had to pay an extra income tax in order to receive benefits for his or her spouse through his or her insurance plan. This is now saved since they need not anymore pay such taxes on such spousal benefits.

Retirement and Death benefits

The new ruling by the Supreme Court has enabled health and retirement benefits to be applicable to the spouse of same sex married employee after retirement as like any other couple. Moreover, in case of death of one individual among the same sex married couple, the other is eligible for all survivor benefits like social security benefits as it is in case of opposite sex marriages.

Other than these advantages, there are certain important points to be remembered while filing tax returns if you are a same sex married couple using the married filing status. These are discussed below:

    1.  Since same sex marriages are now given the same status as opposite sex marriages, the tax payer who has married in same sex cannot file as head of household. But there is also a clause that provides for this opportunity wherein if the couple is staying away from each other for more than six months during the tax filing year and the proof for the same is provided, then the tax payer can file his or her tax returns under head of household status. In this case, along with the proof for staying away for more than six months from his or her spouse, the tax payer needs to show expense proof for more than half of the house maintenance cost which is the residence for the dependent child for that period during the taxable year.
    2.  Secondly, a very vital point to be noted by all the tax payers who fall under same sex marriages is that, since they are given marital status and treated similar to opposite sex couples, henceforth they cannot claim standard deduction (section 63(c)(6)(A)) if his or her spouse has already itemized the same. This is because the tax payer’s spouse is no more treated as a dependent of the tax payer after the new ruling passed by the Supreme Court.
    3.  If the homo sexually married couple have a legally adopted child who qualifies under section 152(c) for both the parents and in case the parents are filing tax using married filing status, then only one of the parents can claim a dependency deduction for the child in their tax returns. In case, both parents have claimed for a dependency deduction for the same child, then the federal Government would take into consideration only that parent’s filing with whom the child has lived for longer period during the taxable year. And, in case, the child has lived together with both the parents for same duration during the taxable year, then deduction would be approved for that parent whose gross income is higher.

Whether or not this striking down of DOMA by Supreme Court is considered as a civil right of equality, it is definitely a boon to same sex married couples since they gain a lot financially. This is more so especially for old retired couples struggling with their health at one end and managing their tight finance at the other end. They can now save a lot on their health insurance, gift taxes, income tax  and gain other survivor social security benefits. So, the new ruling has paved way to solace for these couples.

Passion through Profession – What does it mean to be?

Does anyone love their job here? Hardly a handful of people love working for others. But I always believed, whatever may be the profession, if one doesn’t love it, then it’s going to be a hard life for them.

I always believed and believe that my passion for life has driven me to explore this journey called life and it has given me exciting thrills and adventures. This blog has been started to share all my experiences with you and will always like to entertain you with my multitude of experiences.

So, Just fill out the form and tell me what profession you are in and why do you chose that? You can share all your ideas and experiences with me and you can expect my support in pursuing your passion as I am a lover of passion..