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Showing posts with the label Understand Finance

Interest Rate and DSEX

Interest rate acts like gravity on asset prices. The higher the rate, greater the gravitational force. Bangladesh market is no different. It’s a universal law. Looking at last 144 months of data, you can see negative correlation between short term risk free rate and equity index.  Animated Line Chart - Interest Rate vs DSEX Short-Term Risk Free Rate vs DSEX This interactive chart represents the dynamic relationship between short-term risk-free rates and the DSEX. Source: Bangladesh Bank and DSE

Why Interest Rates Are Rising in Bangladesh

Treasury yields are rising in Bangladesh. The rise in yield of short-term treasury securities is much more pronounced than the rise in yield of long-term treasury securities.  For instance, the yield of the 182-day T.Bill went up to 10.40% from 3.89% two years earlier. You can think of this yield as a return on treasury securities.    Animated Line Chart - 182 Days Treasury Bill Yield Bangladesh 182 Days Treasury Bill Yield  Animated Line Chart with Traces Bangladesh Treasury Yield Curve (%) Select Month: Source: Bangladesh Bank In the treasury market, the government issues treasury securities to borrow money from institutions, the general public, and sometimes the central bank. Against the borrowed money, the government provides a return on the m

The Illusion of Dividend Yield

If you are choosing stocks to invest in, one of the indicators you may look at is dividend yield.  When you are calculating dividend yield, you put the expected dividend per share in the numerator and the price you are going to pay in the denominator. A proxy for the expected dividend per share is the last-year dividend per share. You can expect that a stable company may payout the same or a higher dividend at the end of this financial year.     So, you calculate the dividend yield, and a few stocks come out as very attractive, but you need to breakdown the high dividend yield and find reasons.   You can get a high dividend yield from a stock in two ways. Think about what’s in the numerator and denominator. Either the company continues to pay an increasing dividend and the price remains the same, or the company pays the same or a lower dividend relative to previous years’ dividend but the price of the stock drops significantly.     Let’s think of the second situation. You expect the co

Regression to the Mean

‘Sports Illustrated Jinx’ is an urban legend that states that an athlete whose picture appears on the cover of Sports Illustrated magazine is doomed to perform poorly the following season. Overconfidence and the pressure of meeting high expectations are often offered as explanations. But as Daniel Kahneman explained in his book "Thinking, Fast and Slow", "There is a simpler account of the jinx: an athlete who gets to be on the cover of Sports Illustrated must have performed exceptionally well in the preceding season, probably with the assistance of a nudge from luck, and luck is fickle.” Often times, when something extreme happens and the extremity recedes in subsequent events, we look for a cause, but what really happens is a simple rule of statistics, and that is regression to the mean. Let’s say you work in sales. You performed exceptionally well this year, hitting record sales. Your skill had a lot to do with your performance, but luck also pl

How to Interpret Yield Curve

Yield curve reflects the interest rate environment in an economy and the change in yield curve reflects central bank's policy initiatives as well as liquidity situation (available investable money) in the financial system and government's borrowing needs.  Animated Line Chart with Traces Bangladesh Treasury Yield Curve (%) Select Month: Source: Bangladesh Bank (based on monthly weighted average yield published by Bangladesh Bank) It is an important concept to learn to be able to understand the outlook of the economy and assess your investment decision.  A yield curve is a line that plots yields, or interest rates, of bonds of equal risk but differing maturities. For instance, treasury yield curve plots the yields or interest rates of treasury bonds (instrument issued by government to borrow funds from institutions and individ

Understand ROIC Better

ROIC (Return on Invested Capital) is one of the most important indicators to assess a business. It doesn't only tell about the profitability of a business, it also reveals how efficiently the business is allocating its capital. To calculate ROIC, in the numerator, there is NOPAT (Net Operating Profit after Tax), which indicates how much money a business made in a specific period, and in the denominator, there is the cumulative amount of invested capital (debt and equity).   ROIC = NOPAT/Invested Capital The higher the number, better for a business.  Understand ROIC Better by Md Nazmus Sakib How does a business generate a high return? If we break down ROIC, we can get this: ROIC = (NOPAT/Sales) * (Sales/Invested Capital). We can take high ROIC businesses and break their ROICs into these two parts.  NOPAT/Sales indicates NOPAT margin, which measures profit per dollar of sales. Generally, a high margin indicates a differentiation strategy. When a company has a dif

Understanding Capex as an Analyst, Investor, or Business Owner

Have you ever wondered why we stop growing taller after a certain age? In the initial years of our lives, most of our metabolic energy is directed towards growth. This energy adds new cells to our bodies. But as we reach maturity and a certain size, most of our metabolic energy is required for the repair and maintenance of our body cells.  Businesses also move in the same fashion. Replace metabolic energy with capital expenditure (capex), which fuels the growth of a business and also helps maintain production capacity and sales levels. In the initial years of businesses, all the capital expenditure is spent on growth, and as businesses mature, most of the capex is spent on maintaining their size. Understanding capex and being able to differentiate the types of capex can help us assess a business' future growth potential and sustainability. So, let's understand this concept on a deeper level. Understanding Capex You won’t find capex (Capital Expenditures)