analysis – Dutch Uncles

Decoding ‘Goodwill’ From A Company’s Annual Report

Aakash Sharma — Mon, 18 Oct 2021 10:35:11 +0000

Goodwill is generally used to determine the reputation and creditworthiness of a company, that is, the business’ performance relative to others. But, when people find “goodwill” in business reports and documentation while doing their fundamental research, they are often confused with the term’s usage. Since it is recorded under ‘Assets’, does it mean that the firm expects a future cash influx? In essence, what is the goodwill representative of a company?

For investors, this type of goodwill is known as “accounting goodwill” and plays a vital role in decision making during a merger or acquisition project. This signifies that whenever any company acquires another business, goodwill may come into play.

Business value includes intangible assets such as brand, customer loyalty, and resources for the management team. When a company buys or takes over another business, it accepts its property, plant, and equipment, as well as its intangible assets such as brand value and recognition.

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The amount the buyer pays in addition to the book value of these perceptible assets is recorded as a distinct asset called goodwill.

Goodwill in the financial statements

Because goodwill is an elusive asset, it is recorded on the balance sheet as a noncurrent asset. A noncurrent asset is a long-term asset like fixed assets such as property, plant, and equipment. The goodwill entered in the books may not realise any cash profit in the future. Thus, a company’s valuation should be calculated using the book value method based on its total assets.

For example, if the company’s total assets are shown to be $1 billion on its balance sheet, and the goodwill value is $200 million, the net asset value is $800 million, and the net asset value per share is adjusted accordingly.

A vital conclusion that you can draw from this is that if it increases year on year, that does not mean that the company’s reputation in the market has improved. It only means that the company is involved in numerous take-overs and mergers.

In addition, a decline in goodwill does not necessarily mean that the company’s reputation has deteriorated from year to year. It just means that the corporation is gradually writing off the goodwill from its balance sheet.

Looking beyond the annual report

As we have established, goodwill is an intangible asset of a company that plays a phenomenal role in enhancing its earnings. It is a factor that gives a company an edge over the competition. It could be brand value, usability, product buying habits or customer loyalty. Goodwill reflects elements that you cannot measure. Hence, these are not a component of the company’s yearly report.

The value of such financial goodwill can be more than the equivalent of all company assets combined. Number crunching is essential, but the most critical factor in your investment decision is not a number. It is something that must be felt and analysed. New and seemingly revolutionary products in the market that make things easy for the masses are most commonly the multibaggers of the future. Some of today’s biggest companies, including Facebook and Amazon from the west, and Zomato, Paytm, and Zerodha from India, among others, are live examples of multi-baggers that rose from the space of easing public needs.

If you search in the estimates, you will not find the entire genuine commercial value there. Try to investigate a business with the potential of its intangible assets. Try to look for the channel of the company, the contentious influence it has over others. The annual report might state a company’s past and prospects, but it cannot ascertain its fate.

The post Decoding ‘Goodwill’ From A Company’s Annual Report appeared first on Dutch Uncles.

Volatility Index (VIX): All You Need To Know

Aakash Sharma — Tue, 05 Oct 2021 03:35:10 +0000

The National Stock Exchange (NSE) launched the India VIX volatility index in 2010 as a niche product in the Indian securities market. The Chicago Board Options Exchange (CBOE) first used the concept of a volatility index, from which the Indian VIX originated.

The high values of VIX reflect the heightened fear of volatility that leads the market; that is why it is also called the fear index. That is why market downfalls are either preceded or immediately followed by a spike in the VIX. On the opposite, when the VIX index is below 15, it implies that the downturn in the market is fundamentally limited.

The three most important aspects of India VIX are the following:

- It tells investors the market behaviour.
- It shows the greed and fear sentiments of the market.
- It describes the market sentiment in terms of volatility.

Many people wrongly assume that VIX can tell if a market will go up or down. But what India VIX means is the volatility of a market. Volatility can be either on the up-side or the downside of the market.

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India VIX - the name itself is self-explanatory in that it is the index of market volatility.

India VIX volatility index

India VIX can help you identify if the market will remain choppy or not. A choppy market is a condition where prices vary rapidly periodically, either towards a downturn market or for an upward movement.

A choppy market can be recognised by rectangular chart patterns where prices fluctuate rapidly, and trade movement seems complicated. This may occur due to the investor’s expectations of a catalyst, or the cost fall due to reactions to new events.

To put forth a simplified definition of this index, we can say that India VIX measures the volatility of NIFTY 50 stocks for the upcoming 30 days in the market. It is calculated based on the buy-sell price of NIFTY options.

Options are the derivative products where the buyer holds a right to execute the ‘option’ of either buying or selling shares at a specific pre-determined price (also known as the strike price) during a pre-determined period.

NIFTY Options are derivative instruments wherein the underlying asset is NIFTY. Like NIFTY 50 Futures, NIFTY Options also have a lot size of seventy-five, different strikes and multiple expiry periods.

Options are derivatives similar to Futures. Unlike Futures contracts, your income/loss does not decrease as NSE NIFTY increases or decreases. Using NIFTY Options, India VIX can also give you an idea of annualised change in NIFTY 50 in the next 30 days.

India VIX Values

You can compare the high, low, and current values of India VIX to get an idea of market volatility.

- Low India VIX means low fear
- High India VIX means high fear

The fear here is not indicative of a fall in the market. It shows that the market can have volatility which can either be upbound or low bound.

For example, assume that for one year, India VIX has the highest value of 23, the lowest value at around 9, and the current VIX value of 12. By comparing these three values, we can say that the market currently has less “fear” of volatility as the value is closer to the low weight. In such a case, the probability of a choppy market is also less.

VIX and Equity markets

As the above chart displays, there is an inverse relationship between NIFTY and India VIX. Depending on the market, the VIX fear factor is looked for negative volatile connotations. Since low VIX values are associated with long-term market growth, stable VIX growth will follow any market adjustment.

The VIX is an essential indicator for measuring the perception of market risks. A sharp rise in the VIX ascertains that market fluctuations have increased significantly. Usually, this means that the value of NIFTY Options increases, and the volatility forecast rises simultaneously. This could be a good chance for long-term investment experiments on NIFTY stocks.

The historical correlation falls between (-0.80 and -0.85), indicating a strong negative correlation. This can help you trade a popular range for the VIX.

For example, VIX usually attains a minimum value in the range of 10-12. If VIX has remained at this level for a long time, it can indicate an unfavourable fluctuation triggered by political or industry events. In such a case, VIX can rise sharply and NIFTY can sink. It can therefore be a good opportunity for short traders and position holders.

On the other hand, the usual high value of VIX ranges between 26-29. You can use these levels as an indicator of bottoming out of the Nifty, and you can appropriately initiate long positions around these levels.

At its heart, VIX reflects fear, and the market always co-varies negatively with fear. That is the gist of the link between VIX and the NIFTY index. You can check India VIX here on the NSE India website.

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PEST Analysis: Market Research for Businesses

Aakash Sharma — Thu, 24 Dec 2020 12:25:10 +0000

Precise planning and calculation are necessary for undertaking any task- PEST Analysis

Precise planning and calculation are necessary for undertaking any task, be it going on a road trip or starting a new business. And for planning, some tools always come in handy to give the best possible outcomes. This method can be used to examine the situation you might find yourself in the future and attain a decision in a particular time frame. One such tool that is extremely important for planning any business, or in fact, for any activity that can be deemed necessary is PEST Analysis.

Let’s get into the details of what PEST analysis, how to do it, and how it benefits you in setting up your business.

What is PEST Analysis?

Let’s make it clear in the very beginning, PEST analysis has nothing to do with the harmful animals and plants that are often found on grasslands and farms. PEST is an acronym that stands for Political, Economic, Social, and Technological factors that an entrepreneur must keep in mind while setting up her/his business. These factors are critical to be analysed as these have decisive power of influence over any business’s organizational decision making and running.

Similar to PEST analysis is SWOT analysis – it is the analysis of Strengths, Weaknesses, Opportunities, and Threats of a business.

PEST analysis is done as a part of an external examination when conducting a strategic market analysis or research. It takes into account the various macro-environmental factors that need to be considered for a company. In simple words, it is a strategic tool to understand market growth or decline, business conditions, operational potential, and direction.

Components of PEST Analysis

As mentioned above, PEST is the acronym for the political, economic, social, and technological factors of the business industry. Naturally, these four elements form the components of the analytical process. They are explained below:

Political

In political factors, the government’s intervention in the economy and functioning of businesses is considered.

For example, political issues that impact businesses primarily include tax policies, labour laws, environmental laws, trade barriers, taxes, and political stability.

Political matters may include goods and services that the government intends to provide or provide. Moreover, government policies also impact a country’s health, education, and infrastructure industries.

Economic

Economic factors affecting a business majorly consist of economic growth, exchange rates, inflation and interest rates. These factors have a plausible impact on the functioning of businesses work and their decision-making processes.

For example, interest rates affect a company’s capital expenditure and its growth and expansion. Exchange rates can impact the value of exports and supplies and the value of imports.

Social

Social factors include facets of cultural and moral awareness, population growth rates, age limits, occupational outlooks, and safety protocols. Strong trends in social factors affect a company’s demand for its products and business.

For example, an aging population could mean a smaller and undesirable workforce, which will end up increasing labour costs. Moreover, businesses adopt different management strategies to keep up with emerging societal trends, like increasing racial and gender diversity in the workplace.

Technological

Technological factors comprise technical aspects that impact a company’s activities like R&D, automation, and technological transformation.

For example, technological changes in an industry can affect a company’s existence in the market, the minimum level of costs, and influence the hiring decision. Technological changes also impact costs, quality, and innovation in a business.

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The best part about the PEST analysis is that it doesn't require anything that you can't find sitting right on your study table-a pen and a sheet of paper.

Why is PEST analysis critical?

As we have already established, immense planning and analysis go into setting up a business. And a plethora of parameters need to be checked off the lists to ensure a safe, reliable, and impactful landing of a new business in the market.

And, well, PEST analysis is one such tool to help in the process because it:

Helps assess the suitability of your business strategy for the wider environment and stimulates strategic thought process,

Considers all external impacts affecting your organization,

Pushes for a more transparent and more insightful decision-making process, and

Enhances the planning, marketing, organizational transformation initiatives, sales and development, project management, and research methodologies.

As PEST analysis gives a greater understanding of your company and business proposition, it leads to more effective long-term strategic planning. It leads to heightened attention to potential threats and dangers while providing insights for valuable business opportunities.

Political Factors

(Politically influenced factors that could impact the store)

Municipal Permissions
Opening/Closing Timings
Goods Delivery Permissions
Permissions for selling particular goods (essential medicine, liquor, etc.)
Environmental impacts by your store (if any)
Funding for your opening your store
GST rates and policies

Social Factors

(Social dispositions, behaviours, and trends that influence your organization and target market)

Business contribution to the community
Employee health
Leisure time for labourers
Customer relations and general behaviour
Trends and awareness
The sensibility of community ties
Population in the area

Economic Factors

(Overall economic forces that could impact your business)

Growth rates
Seasonal business
Demand in the area
Labour costs
Raw material costs
Capped monetary investment

Technological Factors

(Technology that can impact the way you produce, distribute, and market your products and services)

Competitors technology
Online transactions
Telephones and communication
Automation
Email services to customers
Digital Presence (website/application)

These are just examples of what might impact retail stores’ setting in the political, economic, technological, and social senses.

After you have done the PEST analysis, you need to ask the right questions that originate out of each of the four columns:

Political Factors: What is the government’s policy or political party that can hamper or boost your business? Is the political climate stable, or will it change?

Economic Factors: What financial factors will affect your business in the future? How are you doing financially now? How does this affect sales and prices?

Social Factors: How do customers believe, value, and relate to your sales practices? What role do cultural rules and human behaviour play in your business?

Technological Factors: What technologies and inventions are available or ongoing? How will this technology impact your business?

You need to analyse and consider the PEST analysis outcomes and plan with the possibilities of how potential changes are affecting the company in the future.

To get the most out of PEST analysis, you should collect suggestions and reviews from multiple sources and people. Gathering other people can be difficult, inconvenient, and expensive when you work with a large or dispersed team. Various technologies, such as video conferencing, networking, and brainstorming platforms, can help address these challenges.

Who can use PEST analysis?

PEST analysis can be used for any business or even event management purposes. As it helps establish the external factors that could impact decisions, it gives a detailed overview of a fool proof plan.

It can be used by new businesses, as shown in the above example. It can, and is, also be used by conglomerate companies that produce a wide range of products, like Reliance Industries or Disney, to maintain inter-departmental coordination and research for further growth. College students can even use it to organize fests and events to understand better the impacts of such events on society, the college, and the students.

You can also use it to analyse an organization’s internal structure to identify strengths and weaknesses in the company’s internal law, economic outlook, climate, and technical framework. The results of this analysis may facilitate change or adaptation in areas considered below average.

Thus, PEST analysis can be used at any organizational level in any suitable scenario.

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PEST can be used to analyse an organization's internal structure to identify strengths and weaknesses in the company's internal law, economic outlook, climate, and technical framework.

Applications of PEST Analysis

After the process is completed, the application is a critical part of the procedure. You can use PEST analysis to identify and utilize existing business environmental conditions. It can also identify current or future challenges to plan on how to manage these challenges effectively.

PEST analysis can be combined with other business strategy analysis forms, such as SWOT analysis, to obtain more complete results. Comparing these completed analyses provides an excellent foundation for making correct decisions.

Shortcomings & Limitations

Depending on PEST factors’ dynamic nature, many of the elements analysed can change within an hour or a day. Some factors are based on assumptions and may not be accurate. The data collected is too large; it must be used with caution. Its accuracy cannot always be ascertained again because it is obtained from multiple outside sources.

Nevertheless, PEST aspects impact strategic business decisions like marketing activities, product development, and research projects. And the analysis helps entrepreneurs make better business decisions and improve efficiency by studying the factors that can affect their business.

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