Money Market

Markets in which “Money Market Securities” are traded. Short-term interest-bearing assets with maturities of less than one year.

Treasury bills

What is a Treasury Bill?

Treasury bill is a short term debt instrument issued by the Government of Sri Lanka under the Local Treasury Bill Ordinance No. 8 of 1923 (as amended) when it raises domestic public debt for budgetary purposes.

Who Issues Treasury Bills?

As an Agent of the Government of Sri Lanka, the Public Debt Department of the Central Bank of Sri Lanka (CBSL) issues the Treasury bills and repays maturity proceeds on maturity.

  

Authority to Issue Treasury Bills

In terms of annual borrowing targets specified in the Appropriation Act which is approved by the Parliament annually, the Government of Sri Lanka is authorized to issue Treasury bills.

What Benefits Can An Investor Derive by Investing in Treasury Bills?

• It is an absolutely risk free investment, since it is issued by the sovereign government. Hence, they are called gilt-edged securities meaning that they are covered by gold.
• You can get the highest rate of interest since the yield rates are determined in the market.
• Since these bills are tradable in the secondary market, you can obtain instant liquidity by selling them in the market.
• All receipts of maturity proceeds and capital gains are fully repatriable.
• You could also have a joint investment with some other person or persons. Hence, it is a very good way to share your investments with loved persons.
• You are not subject to further taxation, since a withholding tax of 10 percent is charged at source is the final tax.
• No stamp duty is payable on these bills.
• You can get the best service from the CBSL which maintains your investment in its state of the art, Scripless Security Settlement System and the fully automated Central Depository System (CDS).

What is the Availability of Treasury Bills?

Foreign investors can purchase up to 10 % of the total outstanding Treasury

bills at any given time. Eg. As at April 30, 2008, Treasury bill outstanding

stock was Rs. 340 bn. Accordingly, Rs. 34.0 bn. is available for foreign

investors.

What Types of Treasury Bills Foreign Investors Can Purchase?

• Eligible foreign investors are permitted to purchase Treasury bills issued by the Government of Sri Lanka from direct placement/primary auctions through PDs.
• Foreign investors are permitted to enter into Repo/Reverse Repo transactions with eligible investors only, using Treasury bills purchased under this scheme as collateral.
• Foreign investors are permitted sell Treasury bills in the secondary market at any time.

How Can An Investor Apply for Treasury Bills?

• You can purchase Treasury bills at any time through Primary Dealers (PDs) or Licensed Commercial Banks (LCBs) registered with the CBSL. PDs are the institutions appointed by the CBSL for trading in Government securities. Contact details of these institutions are given below.
• You can purchase Treasury bills by sending bids to the primary auctions through PDs or through direct placements.
• In order to make arrangement for fund transfers, you can advise your own bank to open a Rupee account named “Treasury bill Investment External Rupee Account - 2 (TIERA - 2)” in an LCB in Sri Lanka.
• After completing the transaction, your agent (LCB/PD) will open a security account for you in the CDS maintained by the CBSL. This account is debited /credited simultaneously based on your tradings in the market.

How Can An Investor Collect Maturity Proceeds?

Maturity proceeds relating to Treasury bills are credited on due dates directly to

your account through your agent. The participants of the CDS are responsible to

pay dues to you on due dates.

Treasury Bonds

What is a Treasury Bond?

 Treasury Bond is a medium and long term debt instrument issued by the Government of Sri Lanka under the Registered Stock and Securities Ordinance No. 7 of 1937 (as amended) when it raises domestic public debt for budgetary purposes. 

Who Issues Treasury Bonds?

As an Agent of the Government of Sri Lanka, the Public Debt Department of the Central Bank of Sri Lanka (CBSL) issues the Treasury bonds, pays interest on due dates and repays the principal on maturity.

Authority to Issue Treasury Bonds

In terms of annual borrowing targets specified in the Appropriation Act which is approved by the Parliament annually, the Government of Sri Lanka is authorized to issue Treasury bonds.

What are the Main Features of Treasury Bonds?

Ø      Risk free, gilt edged debt instrument

Ø      Maturities are available with 2-20 years

Ø      It carries half yearly coupon payments and the principal is repaid on maturity

Ø      Yield rates are determined by the market

Ø      Tradable instrument in the secondary market

Ø      Issued in scripless form

What Benefits Can I Derive by Investing in Treasury Bonds

• It is an absolutely risk free investment, since it is issued by the sovereign government. Hence, they are called gilt-edged securities meaning that they are covered by gold
• You can get the highest rate of interest since the yield rates are determined in the market.
• Since these bonds are tradable in the secondary market, you can obtain instant liquidity by selling them in the market.
• All receipts of interest and maturity proceeds are fully repatriable.
• You could also have a joint investment with some other person or persons. Hence, it is a very good way to share your investments with loved persons.
• You are not subject to further taxation, since a withholding tax of 10 percent is charged at source.
• No stamp duty is payable on these bonds.
• You can get the best service from the CBSL which maintains your investment in its state of the art, Scripless Security Settlement System and the fully automated Central Depository System (CDS).

What Types of Treasury Bills Foreign Investors Can Purchase?

• Eligible foreign investors are permitted to purchase Treasury bills issued by the Government of Sri Lanka from direct placement/primary auctions through PDs
• Foreign investors are permitted to enter into Repo/Reverse Repo transactions with eligible investors only, using Treasury bills purchased under this scheme as collateral.
• Foreign investors are permitted sell Treasury bills in the secondary market at any time.

How Can An Investor Apply for Treasury Bills?

• You can purchase Treasury bills at any time through Primary Dealers (PDs) or Licensed Commercial Banks (LCBs) registered with the CBSL. PDs are the institutions appointed by the CBSL for trading in Government securities. Contact details of these institutions are given below.
• You can purchase Treasury bills by sending bids to the primary auctions through PDs or through direct placements.
• In order to make arrangement for fund transfers, you can advise your own bank to open a Rupee account named “Treasury bill Investment External Rupee Account - 2 (TIERA - 2)” in an LCB in Sri Lanka.
• After completing the transaction, your agent (LCB/PD) will open a security account for you in the CDS maintained by the CBSL. This account is debited /credited simultaneously based on your tradings in the market.

Financial Statement Analysis Ratios

Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. To compare the company’s performance, position and stability we have used several ratios. According to the financial aspects of the business we have categorize the ratios as below.

1. Profitability Ratios - measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.

2. Return on investment - performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

3. Liquidity Ratios - measure the availability of cash to pay debt.

4. Efficiency Ratios - used to analyze how well a company uses its assets and liabilities internally.

5. Gearing Ratios - measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

http://en.wikipedia.org

Gross Profit Rate

Gross margin, Gross profit margin or Gross Profit Rate is the difference between the sales and the production costs excluding overhead, payroll, taxation, and interest payments. Gross margin can be defined as the amount of contribution to the business enterprise, after paying for direct-fixed and direct-variable unit costs, required to cover overheads (fixed commitments) and provide a buffer for unknown items. It expresses the relationship between gross profit and sales revenue. It is a measure of how well each Rupee of a company's revenue is utilized to cover the costs of goods sold.

It can be expressed in absolute terms:

Gross margin = Net Sales - Cost of goods sold + annual sales return

or as the ratio of gross profit to sales revenue, usually in the form of a percentage:

Gross Profit Margin = (Revenue-Cost of goods sold)/Revenue

However in an insurance concern Gross Profit Margin is calculated by dividing underwriting results by the net earned premium.

While net earned premium is the result of gross written primium  net of premiums ceded to re- insurers, underwriting results reflect the net earned premium after deducting insurance cliams, transfers to long term ins fund etc.

Formula for Gross Profit Rate

Gross Profit Rate (Year 2009)          =          Gross Profit  * 100

                                                                        Revenue

Gross Profit Markup

The mathematical relationship between Gross Profit Markup and Gross Profit Margin can be expressed as follows:

Gross Profit Margin (GM) = [Markup/(1 + Markup)]

Thus markup can be defined as an amount added to a cost price in calculating a selling price.

Thus;

Gross Profit Markup = Gross Profit/ Cost of Sales

However in an insurance concern Gross Profit Markup is calculated by dividing underwriting results by the net result of net earned premium minus underwriting resuls.

Gross Profit Markup                         =          Gross Profit  * 100   

                                                                      Cost of sales                          

                                                        =          Gross Profit   *   100

                                                                     Net Revenue- Gross Profit

Operating Profit Rate

In business, operating margin, operating income margin, operating profit margin or return on sales (ROS) is the ratio of operating income (operating profit) divided by net sales, usually presented in percent.

It is a measurement of what proportion of a company's revenue is left over, before taxes and other indirect costs (such as rent, bonus, interest, etc.), after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, such as interest on debt. A higher operating margin means that the company has less financial risk.

Operating Profit Rate                        =          Operating Profit    *   100

                                                                        Net Revenue

Net Profit Rate

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue

Net Profit Rate                                  =          Net Profit    *   100

                                                                        Net Revenue

.

Return on Investment (Return on Capital Employed) (BPIT)

ROCE compares earnings with capital invested in the company. It could be considered as one of the key profitability ratios of an insurance company. However this comprises two components, namely Profit Before Earnings and Tax (PBIT) and Capital Employed.

 PBIT

In an insurance concern PBIT is noramlly equivalent to the profit from operations (the numerator of the ratio).

Capital Employed (share holder funds)

In the denominator we have net assets or capital. Capital Employed in general is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.

ROCE uses the reported (period end) capital numbers.

Formula for ROCE (Return on Capital Employed)

ROCE (Return on Capital Employed)               =          PBIT                       *   100

                                                                                                Capital Employed

Return on Equity

Return on Equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth.

ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.

High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate.

ROE         =            Profit after I,T & PD x 100

                                    Equity

Return On Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

ROA                 =                 Net Profit* x 100

                                                   Total Assets

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

EPS – Earnings Per Share

The EPS formula does not include preferred dividends for categories outside of continued operations and net income. Earning per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

The portion of a company’s profit allocated to each outstanding share of common stock earning per share serves as an indicator of a company’s profitability. 

EPS     =          Earnings (Profit)

Weighted number of equity shares in issue

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.  However, data sources sometimes  simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Price Earning Ratio – P/E

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple", or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation, a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of years, which can be interpreted as "number of years of earnings to pay back purchase price", ignoring the time value of money. In other words, P/E ratio shows current investor demand for a company share. The reciprocal of the PE ratio is known as the earnings yield. The earnings yield is an estimate of expected return to be earned from holding the stock if we accept certain restrictive assumptions (a discussion of these assumptions can be found here).

P/E Ratio            =         Market price per share

                                               EPS

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price.  In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Quantifies the relationship between DPS (dividend per share) and market price per share.

Dividend Yield                =       DPS (Dividend Per Share)

                                                         Market Price Per Share

Dividend yield is a way to measure how much cash flow you are getting for each rupee invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.

Note that dividend yield changes because of two things. First, the stock price goes up (yield drops) or down (yield increases). Second, the company increases the dividend (yield increases) or cuts the dividend (yield drops). However, note that the yield being paid at the time we purchase the stock is what we investment will earn from dividends as long as you hold the stock, regardless of what the share price does. Dividend yield is an important part of your rate of return on an investment. If we purchase a stock that goes up by 8% in a year while paying a 3% dividend, then we've earned 11% on your money.

Dividend Cover

This show how many times over the profits could have paid the dividend. For example, if the dividend cover is 3, this means that the firm's profit attributable to shareholders was three times the amount of dividend paid out.

Dividend Cover   =             Pat  - Prefereance Dividend   

                                                 Ordinary Dividend 

Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out. The higher the cover, the better the ability to maintain dividends if profits drop. These needs to be looked at in the context of how stable a company's earnings are: a low level of dividend cover might be acceptable in a company with very stable profits, but the same level of cover at company with volatile profits would indicate that dividends are at risk. 

Because buyers of high yield shares tend to want a stable income, dividend cover is an important number for income investors. 

 

The inverse of this ratio is the proportion of earnings that belong to ordinary shareholders which are distributed to them. This is known as the dividend payout ratio.

A company who has a dividend cover ratio of 1.0 pays out all earnings in dividends. This means that should earnings fall, the company might be forced to cut annual dividend payments. If the company has financial reserves, it may be able to make the annual payment from these cash reserves in the short term.

Many firms use annual dividend payments as a signal to shareholders and the market of confidence, so in the short term, directors will be reluctant to reduce payments, unless the firm is in trouble.

Dividend Payout

The dividend payout ratio measures the percentage of a company's net income that is returned to shareholders in the form of dividends. 

          Dividend Payout =                       Ordinary Dividend       

                                                        Pat - Prefereance Dividend

The Dividend Payout Ratio is a model for Cash Flow Measurement used by investors to determine if a company is generating a sufficient level of cash flow to assure a continued stream of dividends to them. It is also a measurement of the amount of current net income paid out in dividends rather than retained by the business.

The Dividend Payout Ratio Formula (Cash Flow Measurement Formula) is relatively straightforward: Divide total annual dividend payments by annual Net Income plus Non-cash Expenses minus Non-cash Sales.

Calculating the Dividend Payout Ratio for one year provides a very unreliable indication only. A better approach is to run a trend line on the ratio for several years to see if a general pattern of decline or increase emerges.

This ratio is useful in projecting the growth of company as well. Its inverse, the Retention Ratio (the amount not paid out to shareholders in the form of dividends), can help project a company’s growth.

Measuring Liquidity

Current Ratio

Current Ratio      =                                Current Assets        X 100

                                                             Current Liabilities           

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies  within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaid as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.

Quick Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

  Quick Ratio       =         Current Assets   - Inventory     X 100

                                                         Current Liabilities              


The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength.