Simple Explanation of Depreciation, EPS, Price to Earnings, Book Value, and Debt to Equity: Even Your Kids Can Understand This!
Meet Ayaan, the Burger seller! ๐ He launched his business with 10L of his own money. ๐ฐ This 10L is equity.
To expand, he borrowed 5L for a new burger-making machine and shop.
So, 15L is the total capital of his business. ๐ผ
Debt to Equity (D/E) Ratio:
Now, calculating the Debt to Equity is simple, since we know the Debt amount (5L) and Equity (10L).
Debt to Equity = Debt / Equity D/E = 5L / 10L = 0.5
Ayaan has 0.5X of debt to his equity in his business. ๐
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Meet Ayaan, the Burger seller! ๐ He launched his business with 10L of his own money. ๐ฐ This 10L is equity.
To expand, he borrowed 5L for a new burger-making machine and shop.
So, 15L is the total capital of his business. ๐ผ
Debt to Equity (D/E) Ratio:
Now, calculating the Debt to Equity is simple, since we know the Debt amount (5L) and Equity (10L).
Debt to Equity = Debt / Equity D/E = 5L / 10L = 0.5
Ayaan has 0.5X of debt to his equity in his business. ๐
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Depreciation:
Depreciation is how we account for the wear and tear of Ayaan's burger-making machine over time.
Letโs say the machine costs 5L and will last 5 years. Each year, Ayaan will depreciate the machine by 1L (5L / 5 years).
Annual Depreciation = 1L
So, every year, 1L is deducted from the machine's value as a cost.
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Depreciation is how we account for the wear and tear of Ayaan's burger-making machine over time.
Letโs say the machine costs 5L and will last 5 years. Each year, Ayaan will depreciate the machine by 1L (5L / 5 years).
Annual Depreciation = 1L
So, every year, 1L is deducted from the machine's value as a cost.
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Earnings Per Share (EPS):
Earnings Per Share (EPS) tells us how much money Ayaanโs business makes for each share of stock.
Suppose Ayaanโs business has 1,000 shares, and his net profit is 1.7L.
EPS = Net Profit / Number of Shares EPS = 1.7L / 1,000 = 170
So, each share earns 170 rupees. ๐
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Earnings Per Share (EPS) tells us how much money Ayaanโs business makes for each share of stock.
Suppose Ayaanโs business has 1,000 shares, and his net profit is 1.7L.
EPS = Net Profit / Number of Shares EPS = 1.7L / 1,000 = 170
So, each share earns 170 rupees. ๐
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Price to Earnings (P/E) Ratio:
The Price-to-earnings (P/E) Ratio shows how much investors are willing to pay for each rupee of earnings.
If Ayaanโs business shares are priced at 1,700 each and EPS is 170:
P/E Ratio = Price per Share / EPS P/E Ratio = 1,700 / 170 = 10
Investors are willing to pay 10 times the earnings per share. ๐
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The Price-to-earnings (P/E) Ratio shows how much investors are willing to pay for each rupee of earnings.
If Ayaanโs business shares are priced at 1,700 each and EPS is 170:
P/E Ratio = Price per Share / EPS P/E Ratio = 1,700 / 170 = 10
Investors are willing to pay 10 times the earnings per share. ๐
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Book Value:
Book Value is the net value of Ayaanโs business if all assets were sold and all debts paid. Itโs essentially the equity.
Book Value = Total Assets - Total Liabilities Book Value = 15L - 5L = 10L
So, the book value of Ayaanโs business is 10L. ๐ผ
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Book Value is the net value of Ayaanโs business if all assets were sold and all debts paid. Itโs essentially the equity.
Book Value = Total Assets - Total Liabilities Book Value = 15L - 5L = 10L
So, the book value of Ayaanโs business is 10L. ๐ผ
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D/E, EPS, Book Value, Depreciation, P/E Recap:
Already explained above, Ayaanโs D/E ratio is 0.5, showing the balance between borrowed money and his own money. โ๏ธ
Summary:
Debt to Equity (D/E): 0.5
Depreciation: 1L per year
Earnings Per Share (EPS): 170
Price to Earnings (P/E): 10
Book Value: 10L
Understanding these terms helps investors evaluate the financial health and potential of Ayaanโs burger business. Good businesses typically show strong metrics in these areas, indicating stability and profitability. ๐
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Already explained above, Ayaanโs D/E ratio is 0.5, showing the balance between borrowed money and his own money. โ๏ธ
Summary:
Debt to Equity (D/E): 0.5
Depreciation: 1L per year
Earnings Per Share (EPS): 170
Price to Earnings (P/E): 10
Book Value: 10L
Understanding these terms helps investors evaluate the financial health and potential of Ayaanโs burger business. Good businesses typically show strong metrics in these areas, indicating stability and profitability. ๐
6/8 ๐#Make #Investing #Simple๐
Bookmark this thread for future use.
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7/8 ๐ #Make #Investing #SimpleBookmark this thread for future use.
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2. โ Large Orders
3. โ Excellent Results
4. โ JV/Acquisitions
5. โ HNI Buying
6. โ Promoter Buying
One can try Sovrenn.com FREE for 15 days
7/8 ๐ #Make #Investing #SimpleBookmark this thread for future use.
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