Liquidity refers to the ability of a company to convert its assets into cash within a very short period of time. That is why those current assets which can be converted into cash are called liquid assets.
For an investor liquidity means how quickly securities can be bought and sold in the market without losing a much value of it.
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Market capitalization refers to a company’s total capital consisting of its total outstanding shares. It is calculated by multiplying total number of outstanding shares by market price of each share.
It is also known as ‘market cap’ of a company.
From the above given definition, following formula can be derived:
Lets suppose, 5 years ago a company named XYZ Limited issued 100,000 equity shares of INR 10 each. At present, the market value of each share is INR 15.
Thus, the market cap of XYZ Limited is = 100,000 × 15 = INR 1,500,000.
This figure is used to measure the total worth of a company.
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Net sales (also known as net revenue) is the actual amount of sales done by a company in a given period of time. It is the amount of sales left after subtracting the amount of sales return, discount and allowances for damaged goods from gross sales.
The amount of net revenue is shown on the income statement of company. This value is used to calculate gross profit, operating profit and net profit for a company.
Net sales = Gross sales – (Sales return + Discount on sales + Allowance for damaged and missing goods)
Let’s suppose, XYZ ltd reports gross sales of INR 1,00,000, sales return of INR 10,000, discount on sales of INR 15,000 and allowance of INR 12,000 for financial year 2016 – 2017.
Net revenue for XYZ ltd for the financial year 2016 – 2017
= 1,00,000 – (10,000 + 15,000 + 12,000) = INR 63,000.
The stated value of an asset or a security is called nominal value. Nominal value of a security is the par value at which it is issued. That is why it is also known as par value.
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Operating profit is the excess of net revenue over COGS and operating expenses of a company. Operating expenses include selling, general and administrative expenses. These expenses are not directly associated in production of goods or services.
It refers to that amount of profit which is remained after deducting both direct and indirect expenses however, accounts for interest and taxes. For this reason, it is also known as EBIT (Earnings before interest and tax).
EBIT is the difference between gross profit and operating expenses of a company. Therefore, the formulas which can be used in calculation are:
Net revenue – (COGS + Operating expenses)
Or
Gross profit – Operating expenses
Cost of goods sold (COGS) = Opening stock + Purchases – Closing stock
From the figures given in income statement of XYZ ltd, EBIT can calculated as:
Gross profit = 75,000
Operating expenses = 22,000
Operating profit = 75,000 – 22,000 = 53,000
This figure is used in the calculation of net profit and operating profit margin.
