Pareto's Rule of 80 - 20 is very much applicable for the market too.
80% of the profit is made by 20% of the investors (this is what I have always heard) or
20% profit is made by 80% investors.
So its better to be with the 20% in order to make super-normal profits, else invest in Index ETFs or Index Funds.
The purpose of this blog is to share / gain knowledge on the various happening in the world of finance, investing & economics.
Monday, June 29, 2009
Sunday, June 28, 2009
QIPs Impact
What kind of companies are raising capital?. This group is populated by companies who were verge of bankruptcy. The real estate sector has been the major beneficiary of this cheap money rush.
But on the business end, what are they exactly doing with the money. Basically repaying high cost debt. So there is a shift in the capital structure of companies from debt to equity.
If one analyses the performance of real estate sector, the performance of the companies has been propelled by the used of debt financing. In financial management parlance this is called Financial Leverage. This boosted their performance in good times and made them cash starved during the credit crises.
Now the sector is using the money to repay high cost debt. This will reduce their financial leverage. What it will also do is probably reduce the EPS for the shareholder. This is also because the new capital is not going to be invested in new projects but it is only going to restructure the capital structure of the company.
My guess is the dilution is going to be heavy and the sector would be an underperformer for the next 2 years minimum.
But on the business end, what are they exactly doing with the money. Basically repaying high cost debt. So there is a shift in the capital structure of companies from debt to equity.
If one analyses the performance of real estate sector, the performance of the companies has been propelled by the used of debt financing. In financial management parlance this is called Financial Leverage. This boosted their performance in good times and made them cash starved during the credit crises.
Now the sector is using the money to repay high cost debt. This will reduce their financial leverage. What it will also do is probably reduce the EPS for the shareholder. This is also because the new capital is not going to be invested in new projects but it is only going to restructure the capital structure of the company.
My guess is the dilution is going to be heavy and the sector would be an underperformer for the next 2 years minimum.
Importance of Operating Leverage
The concept of leverage is very well evident in todays market. All financial services, media & entertainment sector and a host of other service industries operate on high operating leverage. The biggest component of the fixed cost is salary. In good years this high OL has propelled their results, however in bad times like in 2008, these companies had no option but to cut fixed costs and reduce their break even points.
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