Terms you must know before fundamental analysis module.

1. Asset:-

Anything which we own is called an asset. 
Example:- Bank balance, House, Car, Pen, Book, Furniture.

In other words, your money is your asset. And, everything you buy with the cash becomes your asset as well. Vice versa, everything which you can sell and convert it into CASH is an asset. 

For companies, their assets are CASH in Bank account, Building, CASH yet to be received from goods sold, manufactured goods, raw material, Land, machinery, Intellectual Property etc. 

 

2. Current Asset:-

Cash in the bank account is the company's current asset. 

And, anything which a company can convert into cash within a year will also be put in a category of current asset. For example- Sellable good/final products, payment to be received for goods/products sold from distributors.

 

3. Fixed Asset:-

Companies own lands. They need to set up plants and offices. Similarly, they buy machines to manufacture, vehicles for transportation and other tools for their specific use. 

Without land, machines, vehicles and tools, they can't run their operation. So, assets which can't be liquidated while the company is operating will be called a fixed asset. 

Fixed asset gives value in the long term. It appreciates and depreciates both per its nature and price mechanism.

 

4. Intangible Asset:-

A fifty-years-old food company named BADUR launched grapes juice (1 ltr pack at 100 Rs). A newly formed food company XOLO also launched grapes juice(1 ltr pack at 95 Rs. 

Which one will you buy? XOLO - which is 5% cheaper in price or BADUR, which is 50-yrs-old. 

Well, most of you will buy BADUR since it has brand recognition and goodwill. 

BRANDING and GOODWILL is an asset. It is creating value. The way other assets like money, land, the machine creates value for companies. 

But, it physically doesn't exist. Every asset which physically doesn't exist is called an intangible asset. 

But, something to always remember as a finance student is companies in its financial statements does not record that value of intangible assets. But, it will be certainly used in our fundamental analysis class to understand the competitive advantage of a company over others in the same sector. 

 

5. Liability:-

You bought a house worth one cr.  You put 30 lac INR from your saving and took house loan of 70 Lac INR. In this case, your house is certainly your asset, but you got a loan on your head—a loan which has to be paid in future. 

Debts are liabilities in your personal finance. 

Companies do take loans to fund their operation and expansion. 
On behalf of the government, companies have to collect taxes from the customers when they sell their product or services. They later have to deposit it. 

In short, liabilities are either the loan you have taken or any promise to pay later.

 

6. Current Liability:-

Any liability which needs to be settled within one fiscal year is called current liability. 

Generally, companies will pay their current liability with the help of current asset. And, this is important to remember, especially when you are going to analyze the strength of a companies financials. 

Few examples:-

• Companies may buy raw material with a payment cycle of a few months. Which means, they will buy now and pay later. But, this has to be paid in the same year. It is essential for the liquidity of the vendor who is supplying. 
• Employees need to be paid a salary every month. 
• Taxes have to go every month or quarter. 
• Debt taken with a promise to pay within a year is a current liability as well. 

 

7. Non-current Liability:-

Any liability which companies don't have to settle within a year. 

Companies take long term loan. Loan period could be as long as even 20 years. The loan could be structured in such a way that every month, the company has to pay interest. And, lump-sum re-payment of the capital can be paid in part over the next 20 years. 

So, interest will be current liability buy the long term loan will be a non-current liability. 

A company can plan for retirement benefits for its employees. Now, the money will be paid only on the retirement of the employee. But, companies have to keep a record of it and consider it a long term liability. 

In short, it is essential to understand and keep a note of everything a company has to pay back in the long term to avoid a situation where they have to back off from their promise to pay any party.

 

8. Account receivable:-

In business, it is a common practice to give goods or services on credit to its reliable clients. And account receivable is the outstanding amount a client owes to the company. And, it is part of the current asset. As within a year account receivable will get converted into CASH.

Let's understand it from an example of why it is essential to learn about it:-

Tata Motors is a reputed vehicle manufacturing company in India. Gati is a courier company which uses its vehicles to transport goods and parcel from one city to another city. Every month, they need 50 new truck. 

Tata motors will be more than happy to fulfil this requirement. However, they would like to do some background work. 

1) Tata Motors would like to check the credit-worthiness of Gati. 
2) Tata Motors would like to negotiate payment terms.  (period, late fees, interest)

And obviously, TATA motors have to do it for all the clients they have. So, it becomes essential for us to while doing fundamental analysis that we study about the quality of account receivable one company is managing for themselves. 

 

9. Account Payable:-

Companies operate to provide either goods, services or both to a set of customers.

And, most of the time, every company is a client to many other companies as well. They are dependent on the speciality of other companies to run their operation. They call them Vendors.

TATA Motors is a car manufacturer. One of the raw material for the car is steel. Tata motors need a regular supply of steel. Tata Motors can directly approach and negotiate with a steel company for its requirement or can invite specialised steel procurement companies to give them steel the best possible price. 

Again, like account receivable, they would like to negotiate terms to pay with their steel vendors. 

Account payable is the amount which Tata motors will have to pay in the short term against the steel which has been already delivered to them in this case. 

And, TATA Motors would never want to lose the right vendor. So, they must record all the account payable at a place and manage its cycle correctly. 

Account payable is a kind of current liability. While doing fundamental analysis, we will be mostly using account receivable and account payable together to make a good liquidity understanding of the company. 

 

10. Working capital:-

Current Asset - Current Liability = Working Capital

Company A has current asset of 100 Cr and current liability of 80 Cr. Working Capital of the company is 20 Cr. 

Company B has current asset of 100 Cr and current liabilities of 120 Cr. In this case, the working capital of company B will be -20 Cr. 

Company B is indeed facing issues paying its debtor. They will have to solve this issue by taking different measures. 

A positive working of company "A", tells us about their short term financial health and operational efficiency. 

While doing fundamental analysis as an investor, you may undoubtedly want to compare two companies within the same sector on their operational efficiency and short term financial health parameters. 

 

10. Market capitalisation and free-float market capitalisation:-

(Market capitalisation = the Total number of share * Market price of the stock.)

(Free-float market capitalisation = No. of share available to trade at market * Market price of the stock.)

Let's take an example. Below is the screenshot from NSE website for Reliance Industries on 13th March 2020.

On this date, Reliance Industries market capitalisation is 7.08 Lac Crore and Reliance Industries free-float market capitalisation is reported as 3.57 Lac crore by NSE. 

 

Stock exchange asks shareholding pattern from the company and its promoters. They also ask if some shares are locked in, which will be not available to trade in the secondary market. 

Generally, in four categories, companies keep locked in shares are reported which are not available to trade in the market. 

1) Promoters holding.
2) Government stake.
3) FDI 
4) ESOPs which will be vested in future.

So, exchange use this information and publish free-float market capitalisation along with total market capitalisation. 

From the investors perspective, it is vital to know the total market capitalisation. However, knowing both will be critical for traders who trade on a clue from volume data.