Introduction:

Financial statements need to be properly analyzed and interpreted for measuring the performance and position of a firm. This is of immense help to lenders (short-term as well as long term), investors, security analysts, managers’ etc.

Types of Financial Ratios:

Liquidity Ratio:

Liquidity is the ability of a firm to meet its short-term (usually up to 1 year) obligations.

Current Ratio:

Current Ratio = Current Assets/Current Liabilities

Current Assets include cash, debtors, marketable securities, inventories, loans and advances, prepaid expenses.

Current liabilities include loans and advances (taken), creditors, accrued expenses and provisions.

This ratio measures the ability of the firm to meet its current liabilities. Usually, higher the current ratio, the greater the short term solvency of the firm. The break up of the current assets is very important to assess the liquidity of a firm. A firm with a large proportion of current assets in the form of cash and accounts receivable is more liquid than a firm with a high proportion of inventories even though two firms might have the same ratio.

Quick Ratio:

Quick Ratio = Quick Assets / Current Liabilities

Quick Assets imply Current assets less inventories.

This ratio is based on very highly liquid assets and inventories are deemed to be the least liquid of the current assets.

Leverage Ratio:

Financial leverage refers to the use debt finance. Debt finance is thought to be a cheaper source of finance and at the same time a riskier source. Leverage ratios help in assessing the risk arising from the use of debt finance.

Debt Equity Ratio:

Debt Equity Ratio = Debt / Equity

Debt - Long term as well as short term.

Equity - Share Capital plus Reserves and Surplus (Net Worth)

It is generally felt that lower the ratio, the greater the degree of protection enjoyed by the creditors. Generally, incase of capital-intensive industries a higher debt-equity ratio is observed.

Debt Assets Ratio:

Debt Assets Ratio = Debt / Assets

Debt includes Long term as well as short term debt and Assets include total of all assets.

Interest Coverage Ratio:

Interest coverage Ratio = EBIT / Interest charges

This ratio measures the margin of safety a firm enjoys with respects to its interest burden. The higher the ratio, the greater the margin of safety.

Turnover Ratios:

• Inventory Turnover Ratio:

Inventory Turnover Ratio = COGS / Inventory

Inventory implies balance of the stock of goods at the end of the year.

This ratio implies the efficiency of inventory management. The higher the ratio, the more efficient the inventory management.

• Average Collection Period:

Average collection Period = Receivables / Average Sales per day

• Receivables Turnover Ratio:

Receivables Turnover Ratio = Net Sales / Receivables

Fixed Assets Turnover Ratio:

Fixed Assets Turnover Ratio = Net Sales / Fixed Assets

This ratio used to measure the efficiency with which fixed assets are employed. A high ratio indicates an efficient use of fixed assets. Generally this ratio is high when the fixed assets are old and substantially depreciated.

Return on Investment:

Return on Investment = Earnings before Interest and taxes / Total assets

This measures the performance of the firm without the effect of interest and tax burden.

Return on Equity:

Return on Equity = Equity earnings / Net worth

Equity earnings = Profit after tax - preference dividend

Net worth = Share capital + Reserves & surplus

This Ratio measures the profitability of equity funds invested in the firm. This reflects the productivity of the ownership capital employed in the firm.

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Gross Profit Ratio

Gross profit Ratio = Gross profit / Net Sales

Gross Profit implies net sales less cost of goods sold.

This ratio shows the margin left after meeting manufacturing costs and measures the production efficiency.

Net Profit Ratio

Net profit Margin Ratio = Net Profit / Net Sales

This ratio shows the profits lest for share holders as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management.

Net Income to Total Assets Ratio

Net Income to Total Assets Ratio = Net Income (Profit) / Total Assets

This measures how efficiency capital is employed.

Valuation Ratio

Valuation Ratio indicates hoe the equity stock of the company is assessed in the capital market. Market value of equity reflects the influence of risk and return.

Price Earnings (P/E) Ratio

Price Earning Ratio = Market price per share / Earning per share

Market price per share may the price prevailing on a certain day or the average price over a period of time.

Earning per share is profit after tax divided by the number of outstanding equity shares.

The P/E Ratio reflects the growth prospects, corporate  image, risks involved and degree of liquidity of a firm.

Yield

Dividend / Initial price + Price Change / Initial price

(Dividend Yield)                        (Capital gains or Losses yield)

Companies with low growth prospects offer a high dividend yield and a low capital gains yield. Companies with high growth prospects offer a low dividend yield and a high capital gains yield.

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• Day Trading involves taking a position in the markets with a view of squaring that position before the end of that day.
   
• A day trader typically trades several times a day looking for fractions of a point to a few points per trade, but who close out all their positions by day’s end.
   
• The goal of a day trader is to capitalize on price movement within one trading day.
   
• Unlike investors, a day trader may hold positions for only a few seconds or minutes, and never overnight.

What day trading really means.

The term “day trading” is a widely misused and misunderstood term. Real day trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight. This is really the safest way to do day trading because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks.

Unfortunately, many people who claim to be “day trading,” hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital. When day trading currencies, the term “day trading” changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as “overnight” trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.

Day trading can be further subdivided into a number of styles, including:

• Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.
   
• Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

Advantages of Day Trading

• Zero Overnight Risk: Since positions are closed prior to the end of the trading day, news and events that affect the next trading day’s opening prices do not effect your portfolio.
   
• Increased Leverage: Day Traders have a greater leverage on their trading capital because of low margin requirements as their trades that are closed in the same market day. This increased leverage can increase your profits if used wisely.
   
• Profit in any market direction: Day trading often will utilize short-selling to take advantage of declining stock prices. The ability to lock in profits even as markets fall throughout the trading day is extremely useful during bear market conditions.

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Swing Trading takes advantage of brief price swings in strongly trending stocks to ride the momentum in the direction of the trend.

• Swing trading combines the best of two worlds — the slower pace of investing and the increased potential gains of day trading.

• Swing traders hold stocks for days or weeks playing the general upward or downward trends.

• Swing Trading is not high-speed day trading. Some people call it momentum investing, because you only hold positions that are making major moves.

• By rolling your money over rapidly through short term gains you can quickly build up your equity.

How does Swing Trading work?

• The basic strategy of Swing Trading is to jump into a strongly trending stock after its period of consolidation or correction is complete.
   
• Strongly trending stocks often make a quick move after completing its correction which one can profit from.
   
• One then sells the stock after 2 to 7 days for a 5-25% move. This process can be repeated over and over again. One can also play the short side by shorting stocks that fall through support levels.
   
• In brief a Swing Trader’s goal is to make money by capturing the quick moves that stocks make in their life span, and at the same time controlling their risk by proper money management techniques.

What are the advantages of Swing Trading?

• Swing Trading combines the best of two worlds — the slower pace of investing and the increased potential gains of day trading.
   
• Swing Trading works well for part-time traders — especially those doing it while at work. While day traders typically have to stay glued to their computers for hours at a time, feverishly watching minute-to-minute changes in quotes, swing trading doesn’t require that type of focus and dedication.
   
• While Day Traders gamble on stocks popping or falling by fractions of points, Swing Traders try to ride “swings” in the market. Swing Traders buy fewer stocks and aim for bigger gains, they pay lower brokerage and, theoretically, have a better chance of earning larger gains.
   
• With day trading, the only person getting rich is the broker. “Swing traders go for the meat of the move while a day trader just gets scraps.” Furthermore, to swing trade, you don’t need sophisticated computer hook-ups or lightning quick execution services and you don’t have to play extremely volatile stocks.

We believe that the Swing Trading method is a better way for the individual investor to attain superior investment results through short-term trading in the stock market. This trading strategy has been carefully designed for the needs of the individual investor who does not have the resources that institutions and professional money managers may have.

With the TradersEdgeIndia.com daily Swing Trading Picks Newsletter signals there is no database to download and maintain; there are no charts or indicators to analyze; no expensive software to buy, install and program. Our daily guide conveniently provides accurate entry and exit signals delivered to you daily over the Internet. Nothing could be simpler!

How to Swing Trade?

To fully understand what swing trading really is, you first need to understand what up/down trends are.

Up Trend: Simply put an uptrend is a series of higher highs and higher lows. In other words, an uptrend is a series of successive rallies that extend though previous high points, interrupted by declines which terminate above the low point of the preceding sell-off. Often the high of the last “swing” in the trend will serve as support for the next low. These areas are circled.

Down Trend: Simply put a downtrend is a series of lower highs and lower lows. In other words, a downtrend is a series of successive declines that extend though previous low points, interrupted by increases which terminate below the high point of the preceding rally. Often the low of the last “swing” in the stock’s trend will serve as resistance for the next high. These are circled.

Long Swing Trades: Once an uptrend has been identified a swing trader looks for buying opportunities in that stock. This can be identified when the stock experiences a minor pullback or correction within that uptrend. The swing trader then activates a trailing buy-stop technique. If prices break out above the trailing stop loss, you will be stopped out and long in the trade. If prices decline, your buy-stop will not be touched.

Short Swing Trades: Once an downtrend has been identified a swing trader looks for selling opportunities in that stock. This can be identified when the stock experiences a minor rally within that downtrend. The swing trader then activates a trailing sell-stop technique. If prices break down and fall below the trailing stop loss, you will be stopped out on the short side. If prices rally, your sell-stop will not be touched.

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