How does deferred tax affect corporate balance sheet?


To understand the deferred tax, it needs to be noted that there are two separate financial reports that the organisation prepares every financial year at the outset in terms of accounting policies followed by companies.

Those two reports are:

Balance sheet and income statement as per the provisions of income tax.

The main motive for the creation of two different reports is the difference in the reporting requirements under the companies act and the income tax act.

In other words, as the company follows different reporting provisions for preparing financial statements as per the companies act and the income tax act, there are chances of difference. These differences lead to differences in tax. The methodology to inspect such differences and how to account for the taxation of such differences can only be understood by grasping the deferred tax meaning with clarity. 

So, without any further ado, let us dive right in.

What is deferred tax?

Let us start with the generic definition of deferred tax by understanding it with the help of examples.

Generic Definition

IND AS-12 Income Taxes defines deferred tax as ‘A future tax that arises due to the future recovery of the carrying amount of assets or settlement of the carrying amount of the liabilities that are recognised in an entity’s balance sheet.’ 

The tax effect of scheduling variations is known as deferred tax.


        A machine Costs Rs. 100 for tax purposes, depreciation of Rs. 30 has already been deducted in the current and prior periods. The remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. In this case, the tax base of the machine is Rs. 70.

        Trade receivables have a carrying value of Rs. 100. The related revenue has already been included in taxable profit. The tax base of the trade receivable is Rs. 100.

Understanding in-depth the concept of deferred tax

Depreciation rates and methods differ between the income tax act and the companies act. Companies act to prepare a balance sheet as per the companies act while paying tax based on computation stated in the income tax act. 

Thus, there are chances that there exists a difference between the book value and the carrying value as per the income tax act. 

Deferred tax refers to an asset or liability entry in a company’s balance sheet which is either due or paid in excess due to temporary differences as per accounting and tax value. If an organisation has paid advance taxes or received a tax credit that can be used in the future, it will fall under assets. 

Similarly, when an organisation is liable to pay additional taxes in the future, it will be considered a liability. Every business prepares two different financial reports for each financial year, i.e. an income statement and a tax statement. 

Deferred tax arises when there is a gap between the two due to differences in guidelines regarding the preparation of both these statements.

Types of Deferred tax

There are two types of deferred tax asset (DTA) and Deferred Tax Liability (DTL). 

Deferred tax arises from timing differences, which cause tax obligations to accumulate and become due in different years. The differences between book tax and actual income tax lead to the creation of a deferred tax liability or asset. 

Numerous transactions can result in temporary differences between pre-tax book income and taxable income, resulting in deferred tax assets or liabilities. Deferred tax liability or deferred tax asset is an important part of the year-end financial closure because it affects the company’s tax outflow.

Further, Deferred Tax is mainly classified into two types:

1)  Deferred Tax Asset.

2)  Deferred tax liability.

Deferred tax asset

A deferred tax asset is created in the case of a company when the tax amount has been carried forward due to a discrepancy in an organisation’s income statement. Because of this, its corresponding tax statement has not been recognised in the company’s books of accounts and is recorded as deferred tax assets. 

It also occurs when the company has paid additional tax to the department. Deferred tax assets are recorded as an asset on the balance sheet and offset the company’s future tax liabilities. 

It is created due to timing differences between the company’s book profits and taxable profits. In cases when a company pays its tax liability in advance or for another period or is conducting its tax liability for a subsequent period in a particular, fiscal year.

Deferred tax liability

Deferred tax liability is a tax disclosed in the balance sheet that is due in the current period but has yet to be paid. The liability is postponed due to a timing difference between when the tax was accrued and when it is due to be paid. 

When there is a difference in numbers between an organisation’s income statement and tax statement, it requires that tax be accumulated in a specific year. Eventually, the company becomes liable to settle it in a subsequent fiscal year. This means that the tax will become due in the future.

If a business must pay tax on a financial transaction that has not yet been completed, the tax is deferred until the transaction is completed.

What is the Timing difference?

The company calculates its taxable profit based on provisions as stated in the Income Tax Act and gets its book profits from financial statements prepared in respect of compliance with the Companies Act’s standards. 

Because of the differences in tax accounting between financial statements and tax returns, there are permanent and temporary variances in tax expenses on the income statement.

The timing difference is the difference between the book and taxable income or expense, and it can be either of the following:

Temporary difference

Differences between pre-tax book income and taxable income that will eventually reverse or be eliminated are known as temporary differences. 

Transactions resulting in transitory differences are recorded in financial and tax accounting at different periods. Rent income is one example of a timing difference.

Permanent difference

The permanent difference is the difference between book and tax income that are unable to be reversed in a subsequent time. 

In other words, the difference between tax expense and tax payable is caused by an item that does not reverse over time. 

A company incurring a fine is an example of a permanent distinction.

When is deferred tax recorded? Or, How is deferred tax asset/liability created?

Deferred tax is recorded in an organisation’s books if chances of reduced or increased tax liability in the future are more likely to occur than not.

There are different occasions when Deferred Tax asset or liability is recorded in the books of accounts:

Different Methods to Calculate Depreciation

Deferred tax is created when there is a difference between the depreciation calculated as per the Companies Act ’13 and the provisions prescribed in the Income-tax Act, 1961.

This can be understood better with an example:

Company X calculates depreciation on a Straight-line basis, whereas Income tax follows the Written Down Value Method. 

The cost of machinery is Rs. 1,00,000. The estimated life of the machinery is five years as per the Companies Act. 

The depreciation shall be 20,000 for each year as per the Companies Act and 25,000 as per Income Tax Rules. 

Since depreciation is higher as per IT rules, the tax liability for that year will be less. But the depreciation will be adjusted for subsequent years, eliminating any difference between the two depreciation figures by the end of 5 years. 

This difference creates a future liability for the company, thereby creating a deferred tax liability. 

Different Rates of Depreciation

If there is a difference in the rate of depreciation as per the Companies Act and as per the IT rules, such a situation leads to the creation of a Deferred tax Asset or Deferred tax Liability.

For instance, If a company has assets worth Rs. 1,00,000 on which depreciation is calculated at 10%, whereas the rate is 15% as per Income tax rules. 

The Income-tax rate is assumed to be 30%. The company will record depreciation as Rs. 10,000 in its income statement and Rs. 15,000 in its tax statement. 

This will lead to the creation of a temporary difference of Rs. 5,000, and the company will create deferred tax assets in its books for Rs. 1,500 (5000*30%).

Gross Loss

When an entity realises a loss for a financial year, it allows the entity to carry forward such loss and set it off with any subsequent profits. 

Thus, allowing it to reduce the tax liability for subsequent periods. This leads to the creation of deferred tax assets.

How to calculate deferred tax?

Deferred tax is the difference between the gross profit of the Income statement and the tax statement.  It can be calculated as:


Particulars As per Income Statement (Rs.) As per Tax Statement (Rs.)
Gross Profit 1,00,000 1,00,000
Depreciation 20,000 25,000
Gross Profit after depreciation 80,000 75,000


The tax liability as per the Tax statement will be 30% on Rs. 75,000, i.e., Rs. 22,500 and as per Income statement will be 30% on Rs. 80,000 i.e., Rs 24,000. 

This will create a deferred tax liability of Rs. 1500. 

What is the accounting treatment for deferred tax? 

The accounting treatment for deferred tax is quite simple; we need to recognise the deferred tax asset or liability in the balance sheet through the statement of profit and loss.

In doing so, we need to create a deferred tax asset or liability as to the case by debiting the profit and loss statement in case of deferred tax liability and crediting the account of profit and loss in case of deferred tax assets.

Let us understand the accounting treatments by an example:

Suppose a company has computed a Deferred tax asset of Rs. 50, then accounting entries will be;


Deferred Tax Asset A/C.                             Dr.                      Rs.  50

               To P&L A/C.                                            –    Rs. 50


And, if the company has computed a Deferred tax liability of Rs. 50, then accounting entries will be;


P&L A/C.                                                      Dr.         Rs. 50    

               To Deferred tax Liability A/C.              –        Rs. 50

 It should be noted that both the deferred tax asset and deferred tax liability are created due to the temporary difference between the book carrying value and the tax base. 

These temporary differences are temporary.  Thus, the impact of such differences is eliminated over some time. Ind As 12, “Income taxes”, amounts of deferred tax asset or deferred tax liability are not required to be discounted to their present value. 

While doing deferred tax calculation, the time value of money is ignored and thus, the timing difference gets reversed.

Let us understand the above accounting with the help of a complex example:

HIMATSINGKA CO. Private Limited posted a profit of Rs 7500 including the provision for bad debts amounting to Rs. 200.

For income tax, bad debts are allowed in the year when it is written off.

Hence the taxable income of HIMATSINGKA CO. Private Limited would be Rs 7700 (7500 + 200) resulting in a tax liability of Rs. 2310, assuming a tax rate of 30%.

If bad debts would have been allowed as a deduction for tax purposes, the tax would have been (7500 – 200) * 30 % i.e., Rs. 2190. 

Hence the company will recognise a tax asset of Rs. 120 (2310-2190) and would pass the below entry in their books of accounts:

Deferred tax asset a/c Dr……               Rs. 120

To Profit & amp; Loss account a/c ……. Rs. 120

How is Deferred Tax Asset different from Deferred Tax Liability?

The deferred tax asset differs from deferred tax liabilities on several factors. To ease the understanding of such factors, here is an all-encompassing comparison chart provided for the same.

Serial No. Parameter Deferred Tax Asset Deferred Tax Liability
1. Requirement When the profit as per books of accounts is less than the profit as per income tax provisions, a deferred tax asset is required to be created. When the profit as per books of accounts is more than the profit as per income tax provisions, the deferred tax liability is required to be created.
2. Basis The creation of a deferred tax asset is subject to the principles of prudence. The Creation of deferred tax liability is subject to the provisions of Minimum alternate tax (MAT).
3. Journal Entry Deferred Tax Asset A/C. Dr.                           

 To P&L A/C

P&L A/C. Dr.

To Deferred Tax Liability A/C.            


4. Disclosure It is disclosed under the head of non-current assets in the Balance sheet. It is disclosed under the head of non-current liabilities in the Balance sheet.


The company may owe or have a balance with the tax authority which arises due to the reporting differences. Deferred tax is an important balance sheet item that helps investors to gain knowledge about the tax position of the company.

Deferred tax represents the negative or positive tax balances of the Company. 

Deferred income taxes affect the Company’s future cash flows, that is, if it is an asset, the future cash outflow of tax will be less, and if it is a liability, there will be more future cash outflow.

Current liabilities: Meaning, Types and Essential insights for investors

A liability, in general, refers to an unfulfilled or underpaid obligation between two parties. 

A financial liability is an accounting obligation that is defined by previous company transactions, events, sales, asset or service swaps, or anything else that could provide economic benefit at a later period.

Liabilities are categorised as current or non-current depending on their timeliness. Current liabilities are short-term (due in 12 months or less) and non-current liabilities are long-term (12 months or greater). 

They can be a future service owed to others (short- or long-term borrowing from banks, individuals, or other entities) or an unresolved obligation from a past transaction. 

The most prevalent liabilities, such as accounts payable and bonds payable, are usually the greatest. 

These two line items will appear on most organisations’ balance sheets because they are part of continuous current and long-term operations.

Liabilities are an important part of a business since they are utilised to fund operations and big expansions. 

They can also improve the efficiency of corporate transactions. When a wine supplier sells a case of wine to a restaurant, for example, it usually does not require payment when the items are delivered. 

Rather, it bills the restaurant for the purchase in order to expedite the drop-off process and make payment easy for the eatery. The restaurant’s outstanding debt to its wine supplier is classified as a liability. The wine supplier, on the other hand, views the money owing to it as an asset.

To understand the topic in-depth, let us look at the fundamentals of current liability meaning.

What Are Current Liabilities?

Current liabilities are a company’s short-term financial obligations that are due within a year or during a normal operational cycle. An operating cycle is time it takes for a company to buy inventory and convert it to cash through sales. A current liability is money outstanding to suppliers in the form of accounts payable.

Current liabilities are typically settled with current assets, which are assets utilised within a year. Current assets include cash and accounts receivables, or money owed by customers for purchases. The current assets to current liabilities ratio is an important metric for determining a company’s ability to meet its debt obligations on schedule.

Accounts payable is a big current liabilities item on a company’s financial statements that includes unpaid supplier invoices. Companies try to arrange their payment dates such that receivables are collected before supplier payables are due.

Customers may be required to pay within 30 days if a company has 60-day terms for money outstanding to its supplier.

Types Of Current Liabilities

The following is a list of some of the most frequent current liabilities found on balance sheets:

Accounts payable

Accounts payable (AP) is the word used to describe a company’s short-term debt obligations to creditors and suppliers. It’s included under current liabilities on the balance sheet. The entire amount due to suppliers or vendors for unpaid invoices is referred to as accounts payable.

Vendors typically offer payment terms of 15, 30, or 45 days, which means the buyer receives the materials but can pay for them later. These invoices are recorded in accounts payable and serve as a vendor’s short-term loan. Allowing a company time to pay an invoice allows it to gain income from the sale of supplies while also better managing its cash flow.

 Suppliers prefer shorter periods because it helps their cash flow to be paid sooner rather than later. Suppliers will even give companies discounts if they pay on time or early. For example, a supplier may offer terms of “3%, 30, net 31,” which indicates a company receives a 3% discount if it pays 30 days in advance and owes the entire amount 31 days afterwards.

Companies, on the other hand, may employ accounts payable to increase their cash flow. Companies may strive to extend the terms or stretch the time required to pay their suppliers’ payables in order to improve their cash flow in the short term.

Accrued Expenses

Costs of expenses that have been documented in accounting but not yet paid are known as accrued expenses. Accrued expenses are recorded using the accrual method of accounting, which means they are recorded when they are incurred rather than when they are paid.

Because accrued expenses are short-term financial commitments, they are listed in the current liabilities part of the balance sheet. Companies will often pay them with short-term or current assets, such as cash.

The following are some examples of incurred expenses:

  •  You ordered certain supplies from a vendor but have yet to get an invoice to pay for them.
  • Payments of interest on debts that are coming due soon.
  • Warranty on a service or product that has not yet been paid in full.
  • Taxes on real land and personal goods that have accumulated over time.
  • Federal, state, and local taxes owed.
  • Employee earnings, bonuses, and commissions that have accumulated for a period. that will be paid at a later date, such as the next period. 
  •   Tax Payable

Companies owe many forms of taxes, which are reported as short-term liabilities. The following are some of the most typical taxes owed: 

  • Taxes owed to the government that hasn’t been paid yet
  • Unpaid payroll taxes that have been deducted from an employee’s pay
  • Sales taxes payable are the taxes collected from their customers and paid to the government.

Short-term debt

The total of debt payments due within the next year is referred to as short-term debt. When assessing a company’s financial health, the amount of short-term debt versus long-term debt is critical. Consider the situation where two companies in the same industry have the same total debt. 

However, if a company’s debt is primarily short-term, it may face cash flow problems if it does not earn enough revenue to satisfy its obligations.

Also, if capital is likely to be scarce in the coming year, the corporation may fail to pay its dividend or, at the very least, not increase it. Dividends are cash payments made by firms to their shareholders in exchange for their stock ownership.

A corporation can also issue commercial paper, which is a short-term debt product. The debt is unsecured, and it’s usually used to fund short-term or current commitments like accounts payables or inventory purchases.

Short-term debts might include bank loans used to increase a company’s capital. Overdraft credit lines for bank accounts and other short-term loans from a financial institution may be reported separately, but they are still short-term debts. A current liability is also the portion of long-term debt that is due within the next year.

Dividends to be paid

Current liabilities also include the dividends issued by a company’s board of directors but not yet paid out to shareholders.

Payroll Liabilities

Payroll liabilities that are due within the year may be the responsibility of the company. Medicare payments withheld for employees are examples of these liabilities.

Benefits from the employer, such as payments to a retirement plan or health insurance premiums, may also be considered current liabilities.

Unearned Revenue

Money received or paid to a corporation for a product or service that has yet to be delivered or provided is known as unearned revenue. 

Because it is a sort of obligation owing to the consumer, unearned revenue is recorded as a current liability

Unearned money is recorded as revenue on the income statement once the service or product has been supplied.

Interest that must be paid on outstanding debt which also includes long-term debt

Companies may use the account named other current liabilities on their balance sheets as a catch-all line item for all other liabilities due within a year that are not designated elsewhere. 

Current liability accounts might differ depending on the business or government laws.

Example of current Liabilities

The following are some of the highlights from Tata motors Balance sheet for the Year ending March 31, 2022:

For the period, current liabilities totalled Rs. 17,826.9 crores.

Tata Motors owes Rs. 6,102.10 crores in accounts payable to its suppliers, which is short-term debt.

For the time period, Short term provisions were Rs. 608.06 crores.

And other current liabilities were Rs. 11,152.74 Crore.

The total current assets for the year ending were Rs. 15,619.61 crores.

Relationship between Current Liabilities and Current Assets

The components of a firm that constitute the basis of a company’s liquidity are known as current assets. It denotes the assets that an organisation expects to sell, deplete, or use throughout a cash inflow operational cycle. 

These assets become the financial foundation on which a company’s day-to-day operations thrive because they are expected to be liquidated within a year. Debtors, inventories, bills receivable, and other current assets are examples.

As a result, its relationship with present obligations is critical to a company’s operational effectiveness. The cash flow created by current assets is used to pay off current liabilities on the books by fulfilling those obligations. 

The difference between current assets and current liabilities is known as working capital. As a result, the working capital formula is as follows:

Working capital = Current assets – Current liabilities

It denotes the amount left over after a corporation has paid down its present liabilities. Higher working capital indicates that a corporation has sufficient finances to carry out its daily operations without financial constraints.

An effective working capital structure is one in which an organisation derives economic advantages from its current assets before having to pay off its current liabilities. In other words, it must be set up so that dues from sources such as debtors are paid before the company is obligated to pay creditors. 

Creditors are recognized as one of the most important short-term obligations in a company’s records for this purpose.

The calculation of specific ratios is another important component of the relationship between current assets and current liabilities. 

These ratios are regarded by analysts as crucial measurements that enable them to construct a precise picture of a company’s liquidity or short-term financial position.

 Different Ratios Involving Current Liabilities

The influence current liabilities have on a company’s liquidity is one of the key reasons why seasoned investors pay close attention to them. 

Monitoring current liabilities separately from current assets, on the other hand, does not yield meaningful outcomes for investors. It must be considered in the context of current assets, which is why there are ratios that prove the relationship between short-term assets and obligations.

The following are the several forms of current liability ratios:

Current Ratio

Analysts and creditors regularly use the current ratio. The current ratio is used to determine a company’s ability to satisfy short-term financial obligations or debts. 

The current assets to current liabilities ratio, which is calculated by dividing current assets by current liabilities, shows how well a company’s balance sheet is managed in terms of paying off short-term obligations and payables. 

It informs investors and analysts whether a company’s balance sheet contains sufficient current assets to satisfy or pay off its current debt and other payables.

Formula – Current Assets/ Current Liabilities

Example – In Company A’s accounts, the current liabilities list looks like this:

Creditors = Rs. 13,000

Bank overdraft = Rs. 3000

Bills payable = Rs. 4000

Outstanding expenses = Rs. 10,000

The list of current assets is:

Debtors = Rs. 15,000

Inventories = Rs. 12,000

Bills receivable = Rs. 9,000

Prepaid expenses = Rs. 6,000

Cash and cash equivalent = Rs. 8,000

As a result, the Current Ratio is (15,000 + 12,000 + 9,000 + 6,000 + 8,000) / (13,000 + 3,000 + 4,000 + 10.000) or Current Ratio = 50,000/30,000 = 1.6.

A ratio greater than one indicates that a company’s current assets are sufficient to pay off its short-term debts and obligations. As a result, investors should always check and evaluate the current ratio to ascertain the liquidity of a company.

Quick Ratio

The quick ratio is calculated using the same formula as the current ratio, with the exception that total inventories are subtracted first. Because it only incorporates current assets that can be promptly converted to cash to pay down current liabilities, the quick ratio is a more conservative measure of liquidity.

Formula – (Current Assets-Inventory)/Current Liabilities

Example – The list of current assets in Company B’s Balance Sheet is as follows:

Debtors = Rs. 20,000

Inventories = Rs. 5,000

Prepaid expenses = Rs. 5,000

Bills receivable = Rs. 5,000

Cash and cash equivalent = Rs. 10,000

The list of current liabilities represented is:

Creditors = Rs. 13,000

Outstanding expenses = Rs. 8,000

Short-term loan = Rs. 4,000

Bank overdraft = Rs. 4,000

Trade payables = Rs. 1.000

As a result, Quick ratio is (20,000 + 5,000 + 5,000 + 10,000) / (13,000 + 8,000 + 4,000 + 4,000 + 1,000) or Quick ratio = 40,000/30,000 = 1.33

A result above 1 indicates that a corporation can satisfy its short-term financial obligations using its current liquid assets, similar to the current ratio. This method of calculating ratios is more conservative because it only considers an organisation’s immediate assets that can be liquidated quickly.

Due to the removal of inventory, the number is always lower than the current ratio. This ratio can be used by investors to determine a company’s financial liquidity.

It is important to remember, however, that a value that is excessively high in either of these ratios may imply that the organisation is not fully utilising its assets. 

As a result, when analysing these ratios, investors should keep in mind that they must be within reasonable bounds to imply that a company’s management is effectively using its present assets to manage its short-term liabilities.

Aside from the preceding pointer, it should be mentioned that the judgement as to which ratio is good enough to be considered differs by industry.

Accounting For Current Liabilities

When a business realises it has received an economic benefit that must be paid within a year, it must record a credit entry for a current liability right away. 

The company’s accountants identify the received benefit as either an asset or an expense, which will get the debit entry, depending on the nature of the benefit.

A huge automobile manufacturer, for example, receives a shipment of exhaust systems from its vendors and must pay $10 million to them within the next 90 days. 

The company’s accountants record a credit entry to accounts payable and a debit entry to inventories, an asset account, for $10 million because these items are not immediately put into production. When the company pays its suppliers’ outstanding balances, it debits accounts payable and credits accounts receivable.

 How is Non-current liabilities different from current liabilities?

Serial No. Parameters. Noncurrent liabilities. Current liabilities.
1. Meaning. Noncurrent liabilities are liabilities that are expected to be settled after twelve months. Current liabilities are liabilities that are expected to be settled within twelve months.
2. Credit Period. The credit period for repayment of noncurrent liabilities is more than twelve months. The credit period for repayment of current liabilities is within twelve months.
3. Presentation in the Balance sheet. Noncurrent liabilities are recorded under the head noncurrent liabilities in the balance sheet and appear for more than one year’s balance sheets as they are payable over multiple years. current liabilities are recorded under the head current liabilities in the balance sheet and appear in one year’s balance sheets as they are payable in single years.
4. Impact on the working capital. The working capital of the company is not affected by the repayment of noncurrent liabilities. While the Interest payments on those loans affect the operating cost of the business. The repayment of Current liabilities of the company reduces the working capital of the company.
5. Reason for accrual. Noncurrent liabilities accrue because of the long-term fund requirements of the company. The current liabilities accrue due to the working capital requirements of the company.
6. Interest. The non-current liabilities are for more than a year in the company. Thus, generally comes with an interest cost. The current liabilities are repaid within a year by the company. Thus, generally comes with no interest cost.
7. Security Non-future loans are for long terms and usually have collateral attached to them as proof of payment. E.g.: Loans borrowed for the purchase of heavy equipment may have the machine itself as collateral to pay in the event of repayment. As current liabilities arise due to day-to-day operations and have shorter credit periods, they often have no collateral attached to them to pay off the amount.
8. Examples Long-term debts, Bonds, Debentures, long-term provisions, etc… Bank overdrafts, interest accrued, outstanding operating expenses, accounts payables, etc…


Current liabilities are an important indicator of a company’s liquidity and if its management is capable of meeting such obligations with current assets. 

This type of analysis is performed to determine how well a firm is performing, whether it is overly reliant on short-term liabilities to fund its day-to-day operations, and whether its working capital is sufficient to determine its growth prospects.

Current Assets: Components, Formulation, Calculation, Examples and other Things to Know Before Investing


If you are new to the world of the stock market and investments, current assets are the best topic to start gaining knowledge on. 

The company balance sheet enlists three significant components, assets, liabilities, and shareholders’ equity. These company components reflect its business performance in any given fiscal year. These also offer valuable insights into the solvency of the company. The assets written in the balance sheet correspond to those resources that benefit the company’s operations and increase its value. Assets are of various types, of which current assetare the most essential.

The resources a company sells or uses for business operations in the next financial year are known as current assets. It includes cash, cash equivalent, stock inventory, pre-paid liabilities, accounts receivable, marketable securities, and other liquid assets. These assets pay for the daily operations and the ongoing business procedures. Hence they are of immense value for a company. The company can sell and consume these resources without difficulty to further lead to the conversion of liquid cash. In other words, these are the resources which will last for a year or less. 

What is the current asset?

Current assets belong to a company’s resources category you can convert into cash at any time in a given fiscal year. They are sorted by their liquidity when represented in a balance sheet. That is, the most liquid asset occupies the top place in the list.

These assets are the exact opposite of long-term assets. A company cannot feasibly convert long-term assets into cash in a year. Examples of such assets are equipment, land, facilities, copyrights, and other illiquid investments. These current assets last only for a year or less. Current resources can range from fabricated goods, raw materials, barrels of crude oil, work-in-progress inventory, or foreign currency based on the nature of the business and products a company sells. 

Current resources are vital for the functioning of a business. Companies can use these to fund the day-to-day operations and pay for the daily operating procedures. These resources also reflect the company’s liquid assets. Since the term represents a dollar value of all the resources that can easily yield cash in a short time frame. 

However, companies must be careful while listing the current resources they own. Include only those assets you can liquidate at a fair cost over the next year. For example, there is a giant probability that a company can sell its commonly used fast-moving consumer goods (FMCG) hassle-free in the next year. Although inventory is available on the list, heavy machines may be tough to sell. So it is better to exclude them. 

Current assets components

Many types of current assets differ by industry. Generally, the assets considered as current resources in most industries are as follows.

  1. Cash and cash equivalents
  2. Marketable securities
  3. Accounts Receivable
  4. Inventory
  5. Prepaid expenses
  6. Non-trade receivables
  7. Others

Let us discuss each one in detail.

Cash & cash equivalents

A business needs cash to operate. Hence it is a must current asset. It includes paper money, coins, checking accounts, money orders, and deposited receipts. Companies use excess cash to generate more income. Businesses can achieve it by investing in low-risk and highly liquid set-ups. Cash equivalents refer to money market mutual funds, commercial paper, treasury securities, and bank certificates of deposits. 

Marketable securities

The securities traded heavily on public exchanges are known as marketable securities. You can readily find buyers for marketing security. So these short-term assets qualify well to fit the list of current resources. There are generally two types of marketable securities, namely debt and equity securities.

Accounts Receivable 

Accounts receivable is one of the types of current assets, which refers to the money due to a business for services delivered or goods sold but not yet paid by the consumers. Whenever you expect the capital to get paid in the current year, these are known as current resources. If, however, your company offers products and services to customers on long credit periods, a part of accounts receivables will not qualify to be present in current resources. 

You may never get paid in full for specific accounts. Allowance for doubtful accounts reflects upon this consideration. It gets subtracted from accounts receivable. A never paid account is a bad debt expense and cannot be a current asset


Another common inclusion in the company’s current assets is raw materials, finish products, and components, collectively known as inventory. But you need to think carefully about the consideration of this item in the list. You can inflate the inventory by several accounting methods. In many industries, inventory is not as liquid as other resources because of the product getting manufactured.

For example, there are few chances that a company will be able to sell a dozen units of high-cost heavy machinery in the next year. But there are fair chances that a company will successfully be able to sell a thousand umbrellas in the coming rainy season. In comparison to accounts receivable, inventory is not a liquid resource. It also blocks the working capital. Inventory can become backlogged if there is an unexpected shift in the demands. But this is more common in some sectors than others.

Prepaid Expenses

A company makes advance payments for certain goods and services to use in the future. These are prepaid expenses and find a notable place in the list of current resources. You cannot generate cash from it, but you have already paid for it. It means you need not worry about the payments of certain things this year, thus freeing up the capital to use elsewhere. These may include payments done to contractors and insurance companies. 

Non-trade receivables 

The receivables from employees, vendors, and other entities for non-trade work constitute non-trade receivables. The company may get some prepaid deposits from vendors, loans or salary deposits from employees, and tax refunds from tax authorities. These enter under current assets componentsif these are to get paid within one year. 


Other current assets a company holds are any resources they can convert into cash in one fiscal year. 

The balance sheet mentions these items in their order of liquidity. The most liquid resources occupy the top positions of the list, followed by the less liquid ones. In other words, assets with higher chances of being converted into cash are always above. The typical order in which current assetsexist is cash, short-term investments, accounts receivables, inventory, supplies, and pre-paid expenses. 

Current assets formulation and calculation

The formula of current resources is derived by adding all the assets mentioned on the balance sheet that can be converted into cash easily in a time frame of a year or less. These primarily include cash, cash equivalents, inventory, accounts receivables, prepaid expenses, and more. Adding these with other liquid resources will help in analysing the short-term liquidity of a business. 

Current Assets formula

Current assets = cash and cash equivalents + accounts receivables + inventory + prepaid expenses + marketable securities + other liquid assets. 

The above calculation formula is derived from the simple steps mentioned below:

  • First, collect all the assets that can be transformed into cash in a time frame of one year or less from the company’s balance sheet. In simple words, it includes cash, cash equivalents, inventory, prepaid expenses, accounts receivables, marketable securities, and other liquid assets. 
  • Then, add up all these assets to get the total current assets
  • Next, determine the total current liabilities that your company owns. Evaluate this by calculating the amount of money your company owe and will get this within this year, like accounts payable, fixed debts, wages, and taxes.
  • In an ideal situation, the current resources will be slightly more than the current liabilities of a company. If it’s in this ideal situation, it signifies that your business is highly solvent in nature. The current resources must be at least equal to the current liabilities, if not greater. Consider looking for ways to generate more revenue in case the current resources exceed the value of current liabilities.

There can be situations when businesses want to quickly increase their current resources. Such as in a non-ideal case where the current liabilities become more than the assets. Although this might be a temporary phase, it is not at all good for your business. A company may consider actions in these situations like selling short-term investments and collecting accounts receivables from the customers. This will help in restoring an imbalance between the current liabilities and the current assets

Current assets calculation

It is important for a company to accurately calculate its current resources to get an idea of the funds available during a particular time. We cannot stress enough the fact that these calculations are especially important when analysing a business’s short-term solvency. Here are some examples that will help you understand the process better.


Let us consider a software company X wants to calculate its current assets. They tabulate the following results by examining their accounts.

Current Assets  Description Value 
Cash  The total cash available in checking and savings accounts. Rs.1,000,000
Inventory The total worth of software that they can move at any given time Rs 2,500,000
Accounts Receivable  The outstanding accounts that you can liquidate in the current year Rs 500,000
Prepaid expenses The company does not pay for any service in advance. None of the employees works at the office; all work from their homes. Monthly insurance gets paid. 0
Short-term investments You can transform the stocks into cash this year. Rs 1,250,000
Other liquid assets The company owns US treasuries that will mature this year. Rs 50,000


The current assets of the X software company will be the sum of the third column of the above table. Current assets = Rs(1,000,000 + 2,500,000 + 500,000 + 1,250,000 + 50,000) = Rs5,300,000. This number represents their financial health in front of the investors. 


Let us now look at the current asset calculations of a small bakery Y. You can obtain from their balance sheet:

Current Resources Description  Value 
Cash The bakery has some cash available inside the building and some in savings & checking account Rs 12,200
Accounts Receivable  These are the unpaid invoices of the bakery’s customers. They can call the local retail partners to liquidate these assets. Rs 2,000
Inventory It includes direct inventory and raw materials available in the bakery at any point in time.  Rs 1,300
Short-term investments The bakery is a small business and thus does not own any investments yet. 0
Prepaid expenses They have prepaid one-year insurance. It is a part of current resources because it counteracts a part of expenses.  Rs 1,200


The value of current resources of the bakery will be Rs 12,200 + Rs 2,000 + Rs 1,300, + 0 + Rs 1,200) = Rs 16,700. 


Here we will calculate the current assets of a sole proprietor who deals in furniture as a side gig. It will help him determine if he can opt for it full-time or not. 

Current Resources Description  Value
Cash The furniture seller has some cash in his business checking account from his recent sales.  Rs 500
Accounts Receivables  He takes payment of all orders simultaneously. So no invoices are due.  0
Inventory He has three tables, two chairs, an armoire, and raw materials in his workshop. Rs 3,950
Short-term investments His business has not been profitable enough to make any short-term investments. 0
Prepaid expenses  He has paid the rent of the workshop for the next six months. Rs 7,200

The furniture maker has Rs 12,900 in current resources. He can use this figure to know the future of his business by comparing it with short-term liabilities. 

Use of current assets and current assets ratio

The ratio of current assetsto current liabilities is essential in a business as creditors use this information to determine the short-term liquidity of an entity. A company is working ideally when its current resources exceed the current liabilities. Some uses of current assets are:

  • Management of the company

You can manage a company well if it owns more current assets. It is because you can have more cash for day-to-day business operations. Over accumulation, this will prove to be of higher value, as is the time value of capital. Whereas deficiency of a resource like inventory can disrupt the business procedures. At the end of each month, you have to pay bills and loans. Likewise, the company must have the necessary cash to pay the outstanding bills. Its dollar value represents the total cash and liquidity position of the business. Also, knowing this helps prepare well for the required arrangements for a smooth operation. 

  • Investments

You can usecurrent assets to determine numerous ratios such as working capital ratio, current ratio, liquid ratio, and many more. These help in financial statement analysis. Stakeholders carefully witness these ratios before investing in a company. Liquidity ratios determine the debtor’s ability to return the loan amount. Investors decide the dividend payments of the business using the dividend pay-out ratio. You can use this information for the analysis of different domains. 

Current Assets Ratio

The current ratio is a financial metric that stockholders and investors use to assess the firm’s ability as a borrower and its future in the market. It offers a perfect firm evaluation of current assets vs current liabilities. Ideally, the current resources of a company must exceed its current liabilities. It is also known as the working capital ratio. It is one of the few liquid fractions that gauge a company’s ability to use cash and equivalents to meet the immediate working capital requirements. 

The current ratio’s two primary components are current liabilities and current assets. Current assets include cash, inventory, short-term investments, accounts receivables, prepaid expenses, and other liquid resources. Current liabilities include accounts payable, income taxes, outstanding wages, and declared dividends. 

You can calculate your company’s current assets ratioby dividing a company’s total current resources by its total current liabilities. 

Current ratio = Current Assets/Current Liabilities 

The result determines the number of times the given company in consideration could pay off its immediate liabilities with its total current resources. 

For example, if the value of current resources of a company is rupees 40,18,23,400 and value of total current liabilities is rupees 10,36,75,900, then its current ratio will be 40,28,23,400 divided by 10,36,75,900 which equals 1.57. The result reveals that the company can successfully meet its immediate liabilities, thus indicating favoured financial health. Investors and stakeholders are attracted to such companies. 

Examples of current assets

The following are some examples of current assets:

  • Cash and cash equivalents consist of money markets, cash accounts, and certificates of deposits (CDs).
  • Marketable securities include stocks or equity and debt securities or bonds. Companies can list them on the exchanges, and a broker can help sell them.
  • Goods ready for sale and raw materials kept in the warehouse or factory.
  • Accounts receivables are the money that the company owns by selling its goods or services. These are the pending invoices that the customers owe to a company.
  • Prepaid expenses may include the rent of the working station, insurance, and services to be received shortly. 

Non-current assets are the resources intended for the longer term, and company cannot liquidate them immediately. So fixed or non-current assets are subject to depreciation, unlike the current resources. It is a small gist of current assets vs non-current assets


Current assets are all the resources a company can sell, realise, or consume in a short time, generally one year. These are liquid assets that companies can transform into cash in hand. These assets are used as funds to support the business’s daily operations. A company must maintain adequate levels of assets. The most significant use of current assets is the calculation of the current ratio, which determines the financial health of a business. Stakeholders and investors look at this number before investing in a company. Ideally, the ratio should be greater than one. 

How can contingent liabilities affect your investing decisions?


Before learning about contingent liabilities, it is crucial to grasp what constitutes a liability in the accounting and economic environment. 

So, what is a liability?

Any financial occurrence that creates an obligation for a corporation and requires the company to make future monetary settlements is referred to as a liability. 

In other terms, it refers to a company’s financial commitments.

To be documented in a company’s books, one must measure these occurrences in monetary terms.

Non-current liabilities, current liabilities, and contingent liabilities are the three primary forms of liabilities.

This article will take you through the contingent liability meaning and its fundamentals.

So, without any further ado, let us dive right in.

What are contingent liabilities?

A contingent liability is an obligation that may occur because of the outcome of a future event that is unpredictable. 

If the contingency is likely to happen and one can predict the amount of liability somewhat accurately, then a contingent liability is recorded. Until and unless these conditions are met, the liability is stated in a footnote of the financial statements.

To guarantee that the financial statements are accurate and follow GAAP or IFRS as required, contingent liabilities are documented.

Because the outcomes of pending lawsuits and product warranties are unpredictable, they are typical examples of contingent liability. 

The accounting standards for reporting a contingent liability may vary depending on the expected monetary amount, the responsibility, and the chance of the event occurring. 

Accounting regulations enable the readers of financial statements to have enough information. 

Types of Contingent Liabilities

In order to classify the liabilities, the scale of a contingent liability’s probability, i.e., the likelihood of an event occurring in the future, is used. The different types of contingent liabilities are as follows:

Probable Contingency

A probable contingency is a financial obligation with a 50% chance of occurring in the future, and the loss that will result is defined as a probable contingent liability.

For example, if a corporation faces a lawsuit in which the plaintiff has a strong case, this can be regarded as a likely contingency. 

A professional, such as a lawyer, will analyse the merits of a lawsuit, calculate its likelihood, and, if the possibilities of a loss are 50% or more, the lawyer describes the loss in monetary terms. 

Possible Contingency

A potential contingency occurs when liability may or may not occur, but the likelihood of it happening is lower than that of a probable contingency, i.e., less than 50%. 

As a result, a hypothetical contingency is frequently stated in the footnotes rather than being recorded in the books.

Another reason why a potential contingency is not documented in the books is that it cannot be described in monetary terms due to its low probability of occurring. 

As previously stated, any contingency that does not meet the two criteria will not be recorded in a company’s books.

Remote Contingency

A remote contingency is defined as a liability with a low probability of occurring and is not possible under normal conditions. 

Because the likelihood of such events resulting in corporate losses is slim, they aren’t recorded in the books or acknowledged in footnotes.

Why does Contingent Liability need to be recorded?

Because of its connection with three essential accounting principles, GAAP and IFRS (International Financial Reporting Standards) require corporations to record contingent liabilities.

Full Disclosure Principle:

According to the full disclosure principle, one must reveal all essential and relevant data regarding a company’s financial performance and fundamentals in the financial statements.

A contingent liability can potentially deplete a company’s assets and net profit, significantly impacting its financial performance and health. 

As a result, under the full disclosure principle, such events or circumstances must be declared in a company’s financial statements.

Materiality Principle:

According to the materiality principle, one must disclose all significant financial information and matters in financial statements. 

It is considered relevant if knowledge of an item could impact the economic decisions of users of the company’s financial statements.

In this context, the term “material” is essentially synonymous with “important.” Knowing about contingent liability can have a negative impact on a company’s financial performance and health.

Obviously, learning about it can influence the decisions made by various readers of financial statements.

Prudence Principle:

Prudence principle is a principle that provides for all possible losses but does not anticipate profits. It ensures that the assets and the revenue are not overstated while the liabilities and the expenses are not understated. 

The probability of the contingent event occurring is estimated because one cannot foresee the outcome of contingent liabilities with precision. 

If the probability exceeds 50%, liability and associated expenses are recorded. 

It is a special concern that the liabilities and expenses are not understated when contingent liabilities are recorded.

How to Recognise Contingent Liabilities?

Contingent liability has a broad meaning, making it difficult for businesses to determine whether or not to include it in their financial statements.

As a result, it is generally advisable for businesses to engage professionals who are reasonably knowledgeable about the subject. Companies can follow GAAP or IFRS requirements while also having a solid case when audited.

For example, suppose a corporation is facing a lawsuit. 

In that case, it should consult a lawyer and rely on their discretion when deciding to include or exclude a responsibility from the books.

For example, if a case’s outcome is regarded as ambiguous based on precedent and a lawyer’s judgement, the company shall only address such a contingency in the footnotes.

 Companies will be able to negotiate the complexities of contingent liabilities in this manner.

How do contingent Liabilities affect investors?

When a corporation recognises the risk of a loss ahead of time, it can put up provisions to cover such losses, aiming to mitigate the impact of a future loss. 

However, listing a contingency as a liability in the books is not for this reason.

Instead, when a contingent obligation is recorded in a company’s records, the information is made public to shareholders and auditors. 

As a result, registering a contingent liability can be interpreted as a way to protect shareholders from potential losses.

Even though firm shareholders can actively watch lawsuits, information about warranties, which are also a type of contingent liability, is not readily available.

As a result, in order to protect investors’ interests, all likely contingent liabilities (with a probability of occurrence of at least 50%) must be documented in a company’s accounts. 

It enables people to make informed investing decisions.

Example of Contingent Liability

Some contingent liabilities examples are as follows:

Assume that a company is being sued for patent infringement by a competitor. 

The corporation’s legal department believes the rival firm has a solid case, and the company forecasts a $2 million loss if the firm loses. 

The firm sets an accounting entry on the balance sheet to debit (raise) legal expenses by $2 million and credit (increase) accrued expenses by $2 million because the liability is both probable and straightforward to estimate.

The accrual account allows the company to post an expense without making a cash payment immediately. 

If the litigation results in a loss, the accumulated account (deduction) is debited, and the cash account is credited (reduced) by $2 million.

Assume that a lawsuit is a possibility but not a certainty and that the cost is anticipated to be $2 million. 

The corporation discloses contingent liability in the financial statements’ footnotes in these cases. 

If the firm considers that the possibility of the liability occurring is remote, the possible liability does not need to be disclosed.

Because the amount of products returned under warranty is unknown, a warranty is another frequent contingent liability. 

Consider the case of a $50 bicycle seat that comes with a three-year warranty from a bike manufacturer. 

If a company is producing 1,000 bicycle seats every year and offers a warranty on every seat, the company must anticipate how many seats may be returned under warranty per year.

Suppose a corporation estimates that 200 seats will need to be replaced under warranty for $50. 

In that case, the company will post a $10,000 debit (increase) to warranty expense and a $10,000 credit (increase) to accrued warranty liability. 

The accounts are modified at the end of the year to reflect the actual warranty expense incurred.

Differences between various types of Liabilities

The differences between the three liabilities are as follows

Serial No. Parameters Non-Current Liabilities Current Liabilities Contingent liabilities
1. Definition A company’s financial obligations that can be repaid in less than a year. A company’s financial commitments that must be written off within a year. Depending on the outcome of a specific occurrence, financial responsibilities may or may not exist in the future.
2. Records in books In the balance sheet, these liabilities are recorded. In the balance sheet, these liabilities are recorded. If a contingent liability has a 50% or greater chance of being realised, it is recorded in both the Profit & Loss Account and the Balance Sheet.
3. Examples ·       Bonds

·       Long-term Debentures

·       Mortgage loans

·       Derivative Liabilities

·      Creditors

·     Tax Liability

·     Bank Over     Draft 

·    Outstanding Payments

·       Bills Payable

·       Lawsuits

·       Warranty

·       Investigation

A company’s accounts must always include likely contingent liabilities; a conceivable contingency must be stated in the footnotes, and they must ignore the distant contingencies totally.

On the other hand, shareholders must always be aware of potential liabilities and maintain track of different sorts of liabilities in order to understand an organisation’s financial liquidity and solvency properly.

Impact of Contingent Liabilities on Share Price

Contingent liabilities are more than likely to negatively influence the company’s stock price since they may threaten the ability of the firm to generate future profits. 

The amount of impact they have on the stock price is decided by the chance of a contingent obligation emerging and the amount of money involved. 

Because contingent liabilities are inherently unclear, it is not very easy to predict and quantify the exact influence they have on a company’s stock price. The company’s financial stability also determines the extent of the impact. 

Even if it appears likely that the hypothetical obligation may become an actual liability, investors may choose to invest in the firm.

They can continue investing if they believe the company is in such a solid financial position that it can easily absorb any losses that may occur from the contingent liability.

Unless it is very significant, a contingent liability will have little impact on a company’s stock price if it has a good cash flow situation and is rapidly generating earnings. 

The nature of the contingent responsibility and the risk it entails are critical considerations.

A contingent obligation expected to be settled soon is more likely to impact a company’s stock price than one that the company might not pay for several years. 

The longer it will take to settle a contingent liability, the less chance of it becoming an absolute liability. 

For instance, if a lawsuit has been pending for the past five years because the opposition representative has died or is severely ill, and none of the other nominees has claimed their rights to continue the lawsuit in the past five years. Then, the chances for the activation of that lawsuit are very thin. 

Hence, the company might not be obliged to pay that contingent liability ever. But again, we must not forget that things can go either way.

Final thoughts

Accounting for contingent liabilities is a highly subjective topic that necessitates expert judgement. 

For both management and investors, contingent liabilities can be a complex topic to grasp.

As large organisations with various lines of operation might require the careful use of multiple approaches for valuing liabilities and risk weighting.

Options pricing methodology, projected loss estimation, and risk simulations of the effects of changing macroeconomic conditions are examples of sophisticated analysis.

Contingent liabilities should be scrutinised with caution and scepticism because, depending on the circumstances, they can cost a corporation millions of dollars. 

Contingent liabilities might appear out of nowhere and be utterly unforeseeable. 

One example of a contingent liability is Volkswagen’s $4.3 billion liability stemming from its 2015 emissions scandal. 

Why is Cash Flow an important financial metric for the investors?


There is an old saying about running a business: Cash is King

And if so, then the Cash flow is the blood that keeps the heart of this king’s kingdom pumping. 

Cash flow is one of the most important components of small or medium-sized business success. 

Without cash, profits mean nothing. 

It just stays in the books and does not help smooth operations.

Many businesses end up bankrupt because the value of the revenue does not match the amount of cash. 

Thus, managing cash flows is crucial for business success.

So, let us try to understand cash flows and how to manage them.

What is Cash flow?

The term cash flow 

means the total amount of cash and cash equivalents transferred within and outside a business. 

Receipts of earned income imply cash inflow, and paid expenses indicate cash outflow. 

The company’s ability to generate value for the shareholders is primarily determined by its ability to generate positive cash flow or, in particular, increase long-term free cash flow (FCF).

Understanding Cash flow

Simply put, Cash flow is the amount of cash a business receives and pays.

Businesses spend money on expenses and earn money from sales as revenue. 

They may also earn income from interest, investments, payments, and licence agreements and sell products on credit, expecting to receive the amount they owe at the end of the date.

Assessing time, uncertainty, and amount of cash flows, as well as where they will go and come from, is one of the most important objectives of financial reporting. 

Assessing the company’s financial viability, flexibility, and overall financial performance is highly crucial.

Positive cash flows indicate that the company’s liquid assets are growing.

This growth enables the company to repay its obligations, reinvest in its business, return money to shareholders, pay costs, and protect against future financial challenges. 

Companies with solid liquidity can live better during financial crises, avoiding the costs of financial stress.

Cash flows can be analysed using the cash flow statement, the general financial statements that report company resources and expenditure over a specified period. 

Company executives, analysts, and investors can use it to determine how a company can obtain cash to pay off its debts and control its operating costs. 

The cash flow statement is one of the most critical financial statements issued by the company, as well as the balance sheet and income statement.

Types of Cash flow

The different types of cash flow are categorised based on the nature of activities responsible for the flow. The various types of cash flow are as follows:

Cash Flows from Operating Activities

Cash flow from operating activities refers to the cash flows involved in the production and sale of goods from normal operations of the business. 

The positive cash flow or cash flow income from operating activities indicates that the company has sufficient operating income to pay off its operating expenses. 

In other words, there should be more operating cash flow than operating cash outflows for the company to be financially viable in the long run.

 Net operating cash flows are calculated by subtracting the operational expenses paid in cash from the operating incomes received in cash. 

Net operating cash flows are recorded in the company’s cash flow statement. Net operating cash flows also indicate whether a company has the potential to expand its operations.

 Note that the operating cash flow helps classify cash received from customers and sales. 

If, for example, a company produces large sales from a customer, it will increase revenue and profits. 

However, additional income does not improve cash flow when there is difficulty in collecting payments to the customer.

For example, if a company made a sale of Rs. 50 Crores to a customer but received only Rs. 20 Crore. 

The company’s sales increase the company’s revenue by Rs. 50 Crore. 

At the same time, the operating cash flow will increase by Rs. 20 crores only.

This indicates that the company was not able to acquire cash from the customers in an effective way.

 Cash flow from investing activities

Cash flow from investing activities indicates the amount of money generated or spent on various investment-related activities over a specified period. 

Investment activities include the purchase of shares, securities investments, or the sale of securities or assets.

Poor cash flow revenue from investment activities may be due to a large amount of cash invested by the company in long-term assets of the company, such as research and development (R&D), which is not always a warning sign.

Cash Flows from financing activities

Cash flow from financing activities indicates the total cash inflow used to fund a company and its capital. 

Financial transactions include transactions involving debt generation or repayments, equity, and interest payments. 

One can understand the company’s financial capabilities and how well the execution of corporate capital structure finances and its management by analysing the Cash flows from financing activities.

Importance of Cash flow analysis

Cash flow analysis determines a company’s income available in cash to pay off its expenses. 

That is calculated as current assets (cash or cash equivalents, as receivables) minus current liabilities (liabilities payable during the coming accounting period). 

This calculation determines the working capital of the company.

It states whether your business can pay off its debts and generate enough cash to continue operating for an extended period can be understood using cash flow analysis. 

Long-term positive cash flow is often a sign that good things are about to come, while negative cash flow conditions can indicate potential downfall.

What does a weak cash flow imply?

Cash flow is an essential factor that determines the company’s liquidity, financial position, and flexibility in its operations. 

The company might have negative impacts in the long run due to weak cash flows. The following are some reasons for weak cash flows and their consequences:


Advertising or taking an order of high volume may result in overspending by the company. 

Further, the absence of receipt of cash from customers with huge orders will add up to the company’s liquidity burden until the amount is received.

Increase in Inventory

The company may stock up the inventory to fulfil the high market demands. 

A sudden change in such demand can block a substantial amount of cash in such unsold inventory. 

This situation, in turn, creates operational challenges for the company.

Long payment cycle

Companies may allow customers a more extended credit period for payment to promote sales and attract customers. 

That keeps cash invested in raw materials for an extended period, creating stress on working capital. 

Thus, keeping an optimal payment cycle keeps the working capital flows.

What are the different ways to improve cash flows?

The different ways to improve cash flow are as follows:

Collecting receivables

To speed up the receipt, the company should make a good credit and cash management system. Companies should have bank accounts in banks that have branches, even in rural areas. 

These customers in rural areas can send payments, and their cheques will be processed by banks as soon as possible. The company should ask customers to approve cheques in advance. 

The company can also try to give discounts to customers if they pay their bills immediately.

Tightening credit requirements

Businesses often have to give extended credit to customers to attract them, especially when they are just starting or growing. 

But businesses should research in advance to find the risk of extending the credit period to the customers. 

Can they pay their bills on time? 

Is their business growing or weakening? 

Are they having income problems? 

One should be well aware of the indicators. 

The company should take the initiative to tighten credit-providing norms. As a result, customers with good credit ratings will only be eligible for credits, reducing the risk of nonreceipts of payments and improving the cash flow.

Pricing discounts

Another option to increase the cash flow is to give customers discounts if they pay in advance. 

While the company’s profit margin may be affected by this practice, it can help the company manage cash flow by encouraging customers to make payments ahead of payment cycles.

Increasing Cash Sales

If a company needs more money, it should try to attract new customers or sell additional goods or services to its existing customers. But this may be easier said than done. 

Acquiring new customers is essential for a growing business, but turning prospects into sales can take time and money. 

It may also need high sales and marketing expenses. 

Selling to existing customers is cheaper, and you can do this by analysing what they buy and why – information.

It could lead to an increase in your profit margin and, hopefully, generate more revenue. 

But businesses need to understand that increasing sales may simply increase the revenue in the books of accounts and not actual cash if this sale is not a cash sale. 

Thus, the company needs to increase cash sales to increase cash flows.

What is a Cash flow statement?

A cash flow statement is part of the financial statements of the company summarising cash flows and cash equivalents (CCEs) coming in the company and going out of the company. 

How good a company is in managing its cash position is indicated by the cash flow statement, which means how well a company generates cash to pay off its debt obligations and finance its operating costs. 

The Cash flow statement is one of the three most important financial reporting statements.

Thus, it complements the Statement of profit and loss and the Balance sheet.

How is Cash flow different from Revenue?

Revenue refers to the revenue generated by the sale of goods and services. If the item is sold on credit or through a paid payment system, the money may not be received from that sale and booked as receivable accounts. 

But, these do not represent the real income of a company at that time. Revenue also tracks outflows and inputs and separates them according to source or usage.

For example, if a company had credit sales of Rs. 500 in the previous year and credit sales of Rs. 600 in the current year. The company received Rs. 100 of the prior year’s accounts receivables and received Rs. 450 from the current year’s credit sales. 

Then,The company’s revenue for the previous year was Rs. 500, while the Cash flow was only Rs. 400 as Rs. 100 was still outstanding at the end of the year. And the current year’s revenue is Rs. 600. 

The current year’s cash flow will be Rs. 550 (Rs. 100 from the previous year’s sale + Rs. 450 from the current year’s sales).

What is Cash Flow Management?

Cash flow management is the process of tracking how much cash is coming into the business and how much cash is going out of the business.

Cash flow management helps predict how much access to cash will be there for the business in the future. It also allows you to determine how much your business needs to pay off debts, such as paying employees and suppliers.

Cash flow is a term used to describe changes in the amount of cash a business has from one period to another. Such changes are analysed and traced by cash flow management. 

This type of management helps you identify trends, plan for the future, and deal with any problems with your cash flow.


In a nutshell, we understood that cash is the blood and fuel to run any business and meet its operating expenses. 

Cash flow management becomes crucial during times like the pandemic we are recently facing. 

A company with an excellent financial structure and cash position is always ready for such times.

Not only the companies or business units, but you may also use cash flow and cash flow management techniques in your daily life. 

Individuals can use cash flow management to manage their income, living expenses, and money management.

CAPM: How does it work and why is it important?


The Capital Asset Pricing Model measures the relationship between the investment risk and expected return. To assess CAPM, you need to understand two risks, systematic and unsystematic. Systematic risks are general risks involved in all investment types, such as wars, inflation, and recessions. However, unsystematic risks are specific risks related to equity or stocks. The CAPM provides a theory for quantifying risk and then translating that risk into estimates. 

CAPM – Meaning

CAPM is an important element of financial management. What is CAPM meaning? The Capital Asset Pricing Model or CAPM is a model that describes the relationship between a security’s anticipated return and risk. It proves that the expected return on security equals the risk-free return plus a risk premium determined by the security’s Beta. A specialised model known as the CAPM is used in business finance to examine the connection between anticipated dividends and investment risk for a given company. 

A unique model, known as the capital asset pricing model, or CAPM, is employed in finance to determine the correlation between the risk of investing in a particular equity and expected dividends. The expected returns for security are calculated using the CAPM model. The risk-free returns and the addition of Beta can be used to compare this. Understanding systematic and unsystematic risk is necessary to correctly evaluate the capital asset and pricing model. Systematic risks are all broad risks associated with any investment. Numerous risks could materialise, including recessions, wars, and inflation. These are merely a handful of instances of systematic risk.

On the other hand, unsystematic risks refer to risks connected with investing in specific stocks or equity. On the other hand, unsystematic risks are not viewed as threats and are typically accepted by the market. By concentrating on systematic securities risks, CAPM can forecast whether specific investments will lose money.

Formula And Components Of CAPM

Below is a representation of the CAPM formula (capital asset pricing model). CAPM calculation can be done by using this formula.

Expected Rate of Return = Risk-Free Premium + Beta * (Market Risk Premium)

Ra = Rrf + βa * (Rm – Rrf)


Ra = Expected return on a security

Rf = Risk-free rate

Ba = Beta of the security

Rm = Expected return of the market.

The expected returns of an asset are calculated using the CAPM formula. It is predicated on the notion that investors must be compensated for systematic risk, also known as non-diversifiable risk, in the form of a risk premium. A rate of return higher than the risk-free rate is known as a risk premium. According to research, investors want a higher risk premium when making riskier investments.

Example of CAPM Formula

When trying to get a grasp on the various components that go into the calculation of CAPM, keep the following in mind. Let’s say you’re thinking about investing some of your money in stocks that now cost Rs. 153 but promise yearly returns of 6%. If we make the assumption that this specific company has a beta factor of 1, we can calculate the projected dividend profits by taking into account the risk-free premium of 2.5 per cent and the investor’s expectation of a yearly market gain of 8 percent.

After putting all of the relevant information into the equation, one may reach the following conclusion:

Ra = Rrf + βa * (Rm – Rrf)

Ra = 6 per cent + 1 x (8 per cent – 2.5 per cent)

Ra = 11.5 per cent

Take a look at another example of the CAPM model. The following transaction will include the investor purchasing equities for a total cost of 1555 rupees. It is anticipated that such an investment would provide returns of around 10 per cent annually. In this instance, the beta factor is equal to 0.5. The risk-free rate is now around 6%. This investor anticipates a 10% growth in the value of the market over the course of the next calendar year.

Ra = Rrf + βa * (Rm – Rrf)

Ra = 10 per cent + 0.5 x (10 per cent – 6 per cent)

Ra = 12 per cent

Risk-Free Rate Return

The risk-free rate return is the value given to an investment that ensures a return with no risks. 

For instance, the yield on an Indian government bond popularly known as G-Sec (Government Security) with a 10-year maturity date corresponds to the value of the risk-free return. Since there is little chance of the Indian government defaulting, investments in Government securities are regarded as having zero risks.

Market Risk Premium

An investor’s expected return (or anticipates receiving in the future) from holding a risky portfolio instead of risk-free assets is known as the market risk premium. The premium rate allows the investor to decide whether to invest in the securities and, if so, what rate he will receive in addition to the risk-free return provided by government securities.


The stock volatility in relation to the market as a whole is measured by the Beta. Beta is a measurement of the stock’s sensitivity to changes in the state of the market. When Beta is 1, the stock moves in lockstep with market fluctuations. For instance, if the stock’s Beta is 1.2, any change in the general market would result in a 120 per cent change in the stock’s value. In contrast, Beta values under one are undesirable.

CAPM Importance and Interpretation

The CAPM has significant uses in corporate finance as well. The expected return on a company’s stock is how the cost of equity is defined in financial literature. A company’s stock price reflects the opportunity cost to shareholders of any equity funds it uses to grow its business. The capital asset pricing model is significant in financial modelling for a few crucial reasons. First off, it aids in evaluating the suitability of a potential investment by assisting investors in calculating the expected return on a particular investment.

The capital asset pricing model (CAPM) is an idealised representation of how securities are valued in financial markets, establishing expected capital investment returns. The model offers a method for estimating expected return on equity by quantifying risk and translating that risk into estimates.

Every investment bears some amount of risk, and even investments in stocks run the risk of not performing as expected. The discount rate used to calculate expected equity cash flows is known as the cost of equity, which aids investors in determining how much they are willing to pay for those cash flows. Because they are risk-averse, investors will only take a chance if they can accurately forecast their return on investment. Investors can use CAPM to calculate and estimate the necessary return on investment based on a risk assessment.

How should CAPM values be interpreted?

The expected dividends and stock capital gains over the anticipated holding period are discounted using the CAPM formula’s expected return. The CAPM formula shows the stock is fairly valued relative to risk when the discounted value of those future cash flows equals   ₹ 100.

Difficulties With CAPM

The CAPM formula is based on a number of assumptions that are false in practice. 

The modern financial theory is predicated on two tenets: 

The first is that the securities markets are extremely competitive and efficient (meaning that pertinent information about the companies is quickly, widely disseminated, and absorbed), and the second is rational risk-averse investors. They seek to maximise satisfaction from returns on their investments dominating these markets. Despite these drawbacks, the CAPM formula is still widely used because it is straightforward and simplifies comparing different investment options. The inclusion of Beta in the formula implies that the price volatility of a stock can be used to quantify risk. Price changes in either direction, though, are not equally dangerous. Because stock returns and risks are not normally distributed, the look-back period used to calculate a stock’s volatility is not standard.

Additionally, the CAPM assumes that the risk-free rate will not change during the discounting period. Assume that during the previous example’s 10-year holding period, the interest rate on U.S. Treasury bonds increased to 5% or 6%. In addition to increasing the cost of the capital used for the investment, an increase in the risk-free rate could make the stock appear overvalued. The market portfolio used to calculate the market risk premium is only a theoretical estimate and cannot be used as an alternative investment to stocks. Investors frequently substitute a significant stock index, such as the S&P 500, for the market, which is a flawed comparison. It is assumed that future cash flows can be estimated for the discounting process; this is the most serious criticism of the CAPM. The CAPM wouldn’t be required if a stock investor could predict future returns with high levels of accuracy.

Advantages And Disadvantages of CAPM


  • Only the capital asset pricing model considers the systematic or market risk, not the security’s inherent or systemic risk. This factor removes the ambiguity surrounding a specific security risk, leaving only the more certain general market risk as the main variable. The model assumes that the investor has a diversified portfolio, so there is no longer any unsystematic risk between the stock holdings.
  • In the financial sector, it is frequently used to determine the cost of equity and, ultimately, the weighted average cost of capital, which is heavily used to assess the cost of financing from various sources. Compared to other existing models, such as the Dividend growth model, it is considered to be a much better model for calculating the cost of equity (DGM)
  • It is a versatile and simple model. This model is widely used, so it can quickly and easily compare stocks from different nations.


  • Several assumptions underlie the capital asset pricing model. The idea that a riskier asset will generate a higher return is one of the presumptions. Next, Beta is computed using the historical data. The model also assumes that a stock’s past performance is a reliable indicator of its future performance. But that is farther from the truth.
  • The risk-free return is another presumption made by the model, which holds for the entire stock investment. The risk-free return and possibly the model’s calculation will change if the return on government treasury securities increases or decreases. It is not taken into analysis when determining the capital asset pricing model.
  • The model assumes that all investors have access to the same information and use the same criteria to weigh the risks and potential rewards of particular securities. It is predicted that investors will favour low-risk investments over high-risk ones for a certain return. Investors will favour higher returns over lower returns for a given chance. Even though this is a general rule, some riskier investors might disagree with this idea.

CAPM Assumptions

The investors are risk-averse

Risk-averse investors do not want to take the risk but still want to maximise their returns on their portfolios are dealt with by CAPM. For these investors to receive higher returns, diversification is required.

The choice is based on risks and returns

According to CAPM, investors base their investment choices on risk and return, and the portfolio’s variance and mean are used to calculate the return and risk. The capital asset pricing model affirms rational investors should forgo their unsystematic or diversifiable risks. There is only the systematic left that changes with the security’s beta version. 

Regarding the application of Beta, investors have different preferences. 

While some investors only consider Beta when assessing risk, others consider both Beta and variance of returns. Because people perceive risk and reward differently, CAPM offers several effective frontlines.

Similar expectations of risk and return

All investors have the same goals in terms of risk and return. In other words, the expectations of risk and return are the same for all investors. The anticipated mean and variance forecasts differ significantly when the expectations are different. This makes countless efficient frontiers possible. Additionally, each asset will have a unique, efficient portfolio. Different investors will pay different prices for purchases due to their other preferences.

Free access to all available information

All investors have free access to all necessary and available information, which is one of the key presumptions. The markets are inefficient if few investors have exclusive access to information. In other words, drawing a common, efficient frontier line is challenging when the information is not widely available.

There is a risk-free asset, and borrowing and lending at the risk-free rate are not constrained.

The capital asset pricing model assumes that risk-free assets are available to simplify Markowitz’s theory’s complex and paired covariance. The risk-free asset results in the MPT’s curved efficient frontier and simplifies the CAPM’s linear efficient frontier. Investors wouldn’t focus on the characteristics of specific assets as a result. The risk can be either increased or decreased by adding a portion of risk-free assets and borrowing the additional investments required at a risk-free rate.

CAPM Efficient Frontier

Investors should be able to manage risk using the CAPM to construct a portfolio. 

The efficient frontier is a curve that would be present if a portfolio’s return in relation to risk could be perfectly optimised using the capital asset pricing model. CAPM theory is useful for investors.

According to Modern Portfolio Theory (MPT), a portfolio’s expected return rises as risk rises, starting at the risk-free rate. A theoretical portfolio can be built on the Capital Market Line (CML) with the best return for the amount of risk being taken at some point. Still, any portfolio that fits on the CML is better than any possible portfolio to the right of that line.

Despite being challenging to define, the CML and efficient frontier illustrates a crucial idea for investors; there is a bargain between increased return and increased risk. Because it is impossible to create a portfolio that perfectly fits the CML, investors frequently take on excessive risk in an effort to improve their returns.

The efficient frontier can only be calculated theoretically and makes the same assumptions as of the CAPM. A portfolio would be offering the highest return possible given its level of risk if it were located on the efficient frontier. However, since future returns cannot be predicted, it is impossible to determine whether a portfolio is on the efficient frontier or not.

Draws from the pricing model for capital assets

The multi-period nature of investment appraisal is incompatible with the idea of a single-period time horizon. Although it can be said that CAPM variables are constant over time, experience has shown that this is not how it is in the real world. The CAPM calculation is a false predictor of the potential rate of return despite being widely used. The underlying presumptions of the CAPM are unrealistic and rarely apply in the real world of investing.

What does CAPM mean for investors?

The capital asset pricing model (CAPM) is an idealised representation of how securities are valued in financial markets, establishing expected capital investment returns. The model offers a method for estimating expected return on equity by quantifying risk and translating that risk into estimates.

Investors use the CAPM to determine a stock’s fair value. So, they will use the formula to help update pricing and return forecasting when the level of risk changes or other market factors make an investment riskier.

Investors use CAPM to establish a stock’s fair market value. As a result, they will use the formula to help re-price and forecast potential returns when the number of risk changes or other market circumstances make an investment riskier. The higher the expected return is when investing, the greater the risk. Based on the level of risk, the capital asset pricing model (CAPM) attempts to determine how much you can expect to earn. The model is frequently used in conjunction with fundamental, technical, and asset-sizing approaches when making investment decisions.


Although there have been more assaults on the CAPM recently, research has shown that it is resilient to criticism. However, the CAPM continues to be a very helpful tool in the financial management toolkit until something better emerges.

How to earn from a bull market ? Summary of bull runs in India.


 As an investor, you might have come across certain statements from your fellow investors like; 

The market is Bullish.


The market is Bearish.

How knowing what these mean and what actions to take when a market is bullish or bearish can help you?

Knowing the market type and its features can help you make an investment strategy accordingly. 

Knowing the market will surely help you to earn better returns.

In the case of a bullish market, the market is optimistic, and the prices are increasing for most of the shares in the market. 

Let us get into the basics of a bull market meaning and how you could earn the best out of a bull market.

What is a Bull Market?

 A Bull market is a condition of a financial market where the prices are rising or the market shows the expectations of price rise. 

The bull market term can be applied to anything that is traded in a financial market, like Bonds, real estate, currencies, and commodities.

Prices of securities cannot only rise during trading; they may rise or even fall daily. 

Thus, the term bull market is used essentially for an extended period in which most of the securities’ prices are rising. 

The bull market may last for months or even years.  

Understanding the Bull Market

 A bull market is seen generally because of optimism, investors’ confidence in the market growth, and the belief that good results should continue for an extended period. 

Due to the constant risk of fluctuations, it is really difficult for an investor to predict consistency in following a certain trend in the market.

There is no specific benchmark to identify a bull market, but the most commonly used definition of a bull market states the situation when the prices rise by 20%, after a drop of 20%, or before the second drop of 20%.

A bull market is very difficult to predict. Thus, an investor can only identify what has happened.

Features of a Bull Market

There are several features of Bull Market that make it worth understanding. These features can also be termed as causes of bull markets. Some of the features are as follows:

Investors have confidence

When the investors see that the market is optimistic and the prices are increasing continuously, they tend to make bold investment decisions.

This decision comes when the investors are confident in the market which in turn helps the market to grow.

It is seen in strong economies

A bull market tends to be seen in a strong economy or an economy that is strengthening. 

Bull markets generally happen when there is an increase in the gross domestic product (GDP) and a decrease in the unemployment rate and corporate profits.

Initial Public Offering (IPO)

We can see an increase in the number of Initial Public Offerings (IPO) during a bull market. 

It is quite obvious as, during the bull market, people believe that the stock market is the easy money-making way, and this helps the IPO issuers to sell their shares to eager investors.


Demand for shares by the investors is high in a bull market while the supply is less. 

Demand is high due to the eagerness of an investor to invest in a market that is growing and prices are showing an increasing trend. 

Supply will be less because investors will tend to hold the stocks.


The bull market provides high capital gains to traders and that makes people suffer from a Fear of Missing Out (FOMO) on the stock market. 

They put money in the stock market with a wish to earn easy money with the market flow. 

This, in turn, increases the number of retail traders in the market.

How to earn out of a Bull Market?

 Investors who want to earn maximum advantage from a bull market should invest when the bull markets start. 

Investors should buy when the prices have just begun to rise and sell when the bull is at the peak, where the prices are the highest. 

It is quite difficult to determine when the bottom and peak phase of a bull market occurs.

An investor may use the following investment strategies in a bull market to earn good returns.

However, as it is difficult to assess the market there, these strategies involve at least some amount of risk. 

Nonetheless, there are some bull market trends that arise through investor activities at the time of bull runs in the market.

Momentum and trend following strategies: 

The Similarities: 

In both approaches, investing is disciplined, focusing on price, trends, and when to stop. Both buy on the rise and sell on the rise. Both cut their losses. And that’s where the similarities end.

Momentum strategy in Bull market: 

This is a significant rule that small investors should follow in a bull market. A bull market is not one-way. But as long as the bull market is intact, momentum is rising. You should always stay on the same side of momentum. So you can buy high and wait for the stock to go up, or you can buy dips. Either way, you should never try to outsmart the market. In a bull market, the very idea of ​​selling against momentum can put you in big losses. Momentum is the message the market is trying to convey. If you feel differently, then the market knows something that you don’t. Just listen to what the market is trying to tell you!

Following the trend:

One thing we should be clear from the outset is: trend trading is a conservative approach to speculation. Trend-following trading strategies are therefore simple, less risky and attractive to all types of traders, especially those who need confirmation before entering the market.

Conservative traders look for signs that a trend is in place before committing any money to a position.

Aggressive traders, on the other hand, always like to play with the option of picking a market top or bottom. Therefore, the trend following strategies presented in this article appeal to more conservative traders. As they can usually complement other strategies, the ideas presented are applicable to traders of all personalities and strategies. 

A bull market can be fruitful for investors because the market tends to grow like the horns of a bull. Investors should keep investing in the market and make investment decisions based on the bull market’s trend. 

Buy and Hold Strategy

Buy and hold is one of the most basic strategies in investing, it is a process of buying a security and holding it to sell on a future date. 

The prima facie requirement for this strategy is confidence from the investor’s side in the share of the company. 

The optimism and the confidence that comes with a bull market helped boost the buy-and-hold strategy.

Increased Buy and Hold Strategy

This strategy is a variation of the Buy and Hold strategy; it also involves some additional risk. 

In this strategy, the investor will continue to add to their holdings by buying till there is an increase in the price of a particular security. 

A common method is to buy a fixed quantity of additional shares for every increase in the share price of a predetermined amount. 

Full Swing Trading Strategy

Full Swing Trading as the name suggests is the most aggressive strategy an investor can follow in a bull market. 

In a full swing strategy investors try to squeeze out as much gain as they can by rapidly buying and selling the shares in the large bull market. 

Retracement Additions

Retracement is a small period in a bull market where the securities’ prices fall. 

Even in a bull market, it is likely that the stock prices will only increase.

There are probably shorter periods where the market prices see a dip in the market even when the general bull trend continues. 

Some investors keep looking for such retracement and invest in the bull market during these periods. 

The main aim behind this strategy is to enter the bull market at the time of a small deep and earn out of them, assuming that the bull trend will continue.

What makes Prices rise in a Bull Market?

Before understanding what makes the prices rise in a Bull market, let’s understand the concept of liquidity in the stock market; liquidity is an important and sometimes underestimated factor. It indicates how much investor interest a particular stock attracts.

Trading volume is not only an indicator of liquidity but is also a function of corporate communication (that is, the degree to which a company receives the attention of the investing community).

Large-cap stocks have high liquidity—they are well-watched and heavily traded. Many small-cap stocks suffer from a near-permanent “liquidity discount” because they’re simply not on investors’ radar screens.

When the investors tend to invest more in the stock market, it may result in an increase in the market liquidity as the stocks can be now converted into cash easily. The highly liquid market may lead to a bull market. As a result of the demand-supply concept, the high demand for stocks in the market tends to increase their prices.

The bull market may exist side by side with a strong, robust, and growing economy. 

Stock price reflects the future expectations of profit and the ability of the company to generate positive cash flows. 

A strong production economy, low unemployment rates, and a rising Gross Domestic Product (GDP) suggest a growing profit and continuous growth. 

All these are reflected in the rising stock prices.    

Why is it called a Bull Market?

The terms Bull (for upward trend) and Bear (for downward trend) are thought by some to derive from the way each animal attacks its opponents. 

That is, a bear swipes down while a Bull attacks from its high-standing horns. 

These actions are used metaphorically to relate to the movement of the market. 

If the trend is upward, it is a bull market, and if the trend is downward; it is a bear market. 

Though many people have sayings about why these trends are bull and bear, this was one of them.

What were those periods when India saw Bull runs?

India has seen several bull markets from the 80s to recent decade. Listed below in chronological order are the periods of the Bull Market in India with a quick gist of each of them. 

Hence, the periods in which India saw Bull runs are as follows:


India saw its first bull market in 1985-86. 

This bull began in the year 1985 after Mr. Rajiv Gandhi became the youngest Prime Minister of India after the unfortunate death of his mother and the former Prime Minister of India, Indira Gandhi. 

The sudden death of Indira Gandhi Shook the whole of India. 

This incident resulted in a huge victory for the Indian National Congress. Indian Politics entered a new age. 

The market was filled with optimism under the charismatic finance minister V.P. Singh. V.P Singh laid out a reform for long-term fiscal policies and rationalisation of excise duty.

Further, subsidies were given by the government of India to corporate companies to increase Industrial production which triggered growth in the economy and the domestic products. 

As a result, the market experienced new highs. Rajiv Gandhi was interested in bringing a revolution in Information technology. 

With these reforms, the market experienced a high of nearly three years. The market surged from 230 to 670 levels within a period of fewer than 2 years. 

The Bofors scam resulted in the end of the bull market in the year 1987 which brought the market back to correction.


India did not wait much longer to see its second bull market. 

The 1991-92 Bull market is famously known as the Harshad Mehta bull market. 

This bull run started in the year 1991 which was due to the formation of a new government.

The Indian National Congress. PV Narsimha Rao became the new Prime minister of India, and Dr. Manmohan Singh became the finance minister.

The budget year 1991 proved to be path-breaking for the Indian Economy, and thus the stock market saw a boost of around 300% in less than 18 months. 

The rally was fueled by Harshad Mehta; The Big Bull of the Indian stock market.

 Harshad Mehta, in his scam, used the illegal money to make investments in the stock market by exploiting the loopholes in the Banking system.

Harshad Mehta made such a reputation in the market that the market was moving at his will and managed to hike the demand for certain shares like Sterlite, Videocon, and ACC (Associated Cement Company). 

This made ACC see a huge jump from Rs. 200 to Rs. 9000 within 3 months. The Stock markets were madly overvalued.

In the end, Harshad Mehta sold the Majority of his shares for huge profits, which crashed the market. 

By the year 1994, the market came down to almost 30% of the 1992 market.


The advent of the internet in 1998 marked the next bullfight in India.

While the US was in the middle of the dot com bubble, Asia was under the threat of Y2K (a disruption that was expected to hit Computer Systems in 2000). 

However, India was not intimidated by that and took the opportunity to enter global software Markets. All to provide debugging services. 

So, it started the integration of IT shares in the stock market. 

Within 2 years, the BSE IT index gained more than 1000%. 

More than 30% of SENSEX is now built by IT companies; this led to a major adjustment of IT stocks, and thus the market began to adjust in 2000. 

During this period (1998-2000), SENSEX increased from 2,700 points to 6000 points.


The next Bull Cycle began in the summer of 2003 introduced by Infrastructure and Liquidity global. 

After the explosion of the dot-com bubble in the US and the Y2K incident in Asia, global markets, including India, are set to become more significant.

Investor sentiment is now in full swing. An important feature of this Bull run, which made it different from previous bullfighting, was that it was not directly in India.

Many other countries like China and Brazil have also climbed very high this time. 

The US, on the other hand, has seen growth in the housing industry, which has led to a slowdown in debt. 

The US banking sector was finally exposed in 2008 with the collapse of Lehman Brothers. 

As a result, Wall Street collapsed, and its effects spread across the globe.

As a result, Indian markets declined several times in 2008. From the top 20,000 levels, SENSEX dropped to 8,000. 

Therefore, noted the end of some Bull Run prices and bulls.


The 2013-18 bull is considered to be the tallest bull in Indian history. However, it was moving slowly again. 

At this time, SENSEX was at 18,000, the lowest, in 2013, and was able to hit 38,000 in August 2018, which is growing almost 2 times in 6 years. 

The bull race began in 2013 with Modi’s growth in Indian politics. It was a time when dissent from power was rampant and the nation was outraged by the appearance of fraud and corruption. 

India was desperately looking for a new Leader. In 2014, Modi led his party, the BJP, won, and the NDA formed a government at the centre.

Before National Politics, Modi had been Gujarat’s Prime Minister three times in a row. 

The factories in Gujarat developed under his rule so he was expected to produce similar results at the Center. With programs like Make in India and Digital India, BJP did not disappoint the Market. 

In 2017, Mid-Cap and Small-Cap companies performed at a very high level. The rally was expected to continue in 2018, but the NBFC crisis of September 2018 rocked the sentiments of investors.

 Although the markets did not fall sharply, they could not grow at the same pace again. 

In 2019, the market was once again shaken by global tensions (trade war between the US and China) and volatile price volatility. 

With the highly criticised 2019 budget in line with the GDP level falling below 5%, the bullfight is now believed to be over.

What Kills a Bull Market? 

Inflation, high-interest rates, and a recession may all contribute to the demise of the bull market. 

But time is everything. 

The stock market anticipates a recession, usually reaching a peak six to nine months before the start of one. 

To make matters worse, stocks are sometimes anticipating an impending recession. 

Also, stocks tend to do well in the early days of high levels and inflation; they show economic stability, after all.

Ultimately, however, high prices stagnate growth as inflation undermines the value of investment returns.

 How is a Bullish Market different from a Bearish Market?

You may have heard the terms bear market and bull market used as a metaphor for what is happening in the stock market.

In short, the bear market is where prices fall and the bull market is where prices go up. It is easy to translate both words as they contradict each other. 

During the bear market, which is a major decline in stock prices, you will often see low investor confidence and the perception that the market is volatile. 

In the bull market, which is a steady rise in stock prices, you will probably see high investors’ confidence and the perception that there is a strong economic climate. 

However, the bear market clearly describes any stock index or stock that is declining 20% ​​or more from the recent highs. 

On the other hand, the bull market tends to rise 20% from the recent decline of the bear market and reach a benchmark record high.

Investors in the bear market are tempted to sell their investments during this time to eliminate the risk of losing more money. 

On the other hand, investors in the bull market may sell part of their stock for a decent gain or hold on to the hope that prices will rise even more in the future.

Regardless, although it is easy to get caught up in the market, experts often suggest leaving your investments alone for a long time. 

To avoid reacting to market fluctuations, stop looking at your portfolio regularly. 

It is a natural feeling to want to respond quickly to a loss of value, so skirt around that loose reaction by looking at your investment as little as possible.


Overall, The bull market may provide profitable opportunities to make quick money for traders, but, on the contrary, they are less popular with value investors (who will last longer). 

Therefore, Mr. Warren Buffet correctly stated, “Fear when others are greedy and be selfish when others are afraid.” 

An investor needs to be careful while investing in the bull market because when the bull run ends, the market gets corrected.

How can Bracket order help you strategise your investment decision?


As a trader, one is highly unlikely to miss the term bracket order. 

It is designed to ease trading for the traders in this volatile market.

But, what is bracket order?

A bracket order is a unique form of order that allows the user to execute an intra-day position and benefit from further exposure while being safeguarded by a stop loss and profit target (profit booking) order.

The system is designed to execute three orders simultaneously: 

  • A limit order (1st leg of the process)
  • A corresponding stop loss market order that will only be triggered at the specified stop loss trigger price (2nd leg of the process). 
  • And a profit objective limit order will only be triggered at the specified profit objective price (3rd leg of the process).

If the stop loss trigger price is hit, the stop-loss order is executed as a market order, and the third leg (the objective profit order) is automatically cancelled. 

In the same way, if the profit objective trigger price is met, the stop loss is automatically cancelled.

A bracket order is a combination of all three of these orders placed at the same time. 

Bracket orders allow you to restrict any possible losses on a position while also allowing you to book profits at the price you specify.

Example of Bracket Order

To better comprehend the concept, let us consider the following bracket order example:

Assume that an investor issues a limit order to purchase a company’s stock for Rs 100 per share. 

This is accompanied by a stop-loss order of Rs 92 and a goal order of Rs 105 per share.

The investor’s primary position of Rs 100 is bracketed by a higher-priced and lower-priced limit order, as seen above.

Now, you can only place one of the two limit orders. There can be many scenarios for this situation. So, let us dissect each of them one by one. The scenarios are as follows:

Scenario 1: 

If the stock price increases to Rs 105 after the investor makes a limit order for Rs 100, the target order will be automatically placed, and the stop-loss order will be cancelled.

Scenario 2: 

If the stock price falls below the investor’s stop-loss level, it will be followed by the cancellation of the target order because it would be executed at Rs 95 a share.

Scenario 3: 

Because a bracket order is typically a limit order in the stock market, there is a probability that the main order will not be placed as well. 

The main order, in this case, was a Rs 100 limit buy order. The investor would not be allowed to buy the stock in the first place if the price does not exceed Rs 100.

Regardless, if an order is not made in any of the three scenarios, the broker will cancel the bracket order at the end of the trading day. 

For this reason, bracket orders cannot be carried over to the next trading session.


To summarise, a bracket order is made up of three orders in the stock market.

1)   The main order: It books a trader’s position.

2)   A target order: Some refer to this as a profit booking order.

3)   A stop-loss order.

Benefits of a Bracket Order

The first advantage of a bracket order is that it allows traders to place three orders simultaneously. It is helpful for intraday traders who need to close down a profitable position in less than 6 hours.

Some brokers additionally offer a trailing stop-loss option, which allows the stop-loss level to be modified in real-time based on how and in which direction the current market price is changing.

Because of the way bracket orders work, they may be able to assist intraday traders in reducing risk. 

With the target order in place, traders will be able to book a profitable position, or with the stop-loss order in place, they will be able to limit losses to some level.

How is Bracket Order different from Cover Order?

The various differences between Bracket Order and Cover Order are as follows:

Serial No. Basis Of Difference Bracket Order Cover Order
1. Meaning An initial order, a stop-loss order, and a target order are all part of a three-legged order. A two-legged order with an initial order and a stop-loss requirement.
2. Significance Make a profit and loss forecast. Reducing the risk
3. Squaring off the order If the original order is not filled, the broker cancels the entire bracket order, which is not carried over to the next day. The broker squares the position if the stop loss is not triggered, resulting in lesser capital losses.


Such order types should only be attempted by those who thoroughly understand how the stock market works and the ins and outs of intraday trading. 

If stock market players are not familiar with the peculiarities of intraday trading, it might be not easy to square off a lucrative session inside the same trading day. 

So, study, investigate, and become a knowledgeable investor.

How to consider booking value while making investment decisions?


Determining whether a listed company is worth its market price is a complex task. 

Many investors and market analysts use different methods to know the correct value of the company. Investing in a company without knowing its true value might cause a loss to the investor. The market price is affected by many external and internal factors and the demand for the company’s stock in the market. 

Making investment decisions merely based on the market value of the company can be a bad investment decision. 

Booking Value is the carrying value of the company in its books of accounts.

Let us dig a bit deeper into understanding booking value definition so that you could use it to make better investment decisions. 

What is Booking Value?

The Booking Value of a company is the value of the company’s equity value as reported in the financial statements of the company. 

The Booking Value of the company is generally computed about the company’s stock value and calculated by adding all the assets of the company and subtracting the liabilities of the company.

Booking Value is generally equal to the cost of assets in the Balance sheet reduced by the intangible assets and the liabilities of the company. 

In other words, it is the net asset value (NAV) of the company. 

For the initial outlay of the investment, Booking Value may be net or gross of the expenses such as trading expenses, service tax, sales tax, Goods and service tax, service charges, and so on.

In other words, if you want to close the business, how much money will be left after you sell off all your assets at Booking Value and pay off all your liabilities at Booking Value. Also known as Shareholders Equity, Net Worth.

The Formula of Booking Value

The formula for Booking Value is as follows:

Booking Value = Total assets (other than Intangible assets) – total outside liabilities.

Examples of Booking Value

The examples of booking value are as follows:

1) Suppose a company has Current assets of Rs.10 lakhs, Non-current assets of Rs.20 lakhs, intangible assets of Rs.3 lakhs, current liabilities of Rs.5 lakhs, and non-current liabilities of Rs.10 lakhs.


Booking Value = Total assets – Total liabilities

         = (Rs.10 lakhs + Rs.20 Lakhs – Rs.3 Lakhs) – (Rs.5 lakhs + Rs.10 lakhs)

         = (Rs.27 lakhs) – (Rs.15 Lakhs)

                     = Rs.12 Lakhs. 

2) Suppose a company has Current assets of Rs.25 lakhs, Non-current assets of Rs.30 lakhs, intangible assets of Rs.5 lakhs, current liabilities of Rs.12 lakhs, and non-current liabilities of Rs.20 lakhs.


   Booking Value = Total assets – Total liabilities

         = (Rs.25 lakhs + Rs.30 Lakhs – Rs.5 Lakhs) – (Rs.12 lakhs +Rs.20 lakhs)

         = (Rs.50 lakhs) – (Rs.32 Lakhs)

                        = Rs.18 Lakhs. 

How to use Booking Value while making investment decisions?

Booking Value is not a district component that gives a lot of data to the investor for making decisions. 

It does not give related information about the real value of the company and the potential returns that the company may earn in the future.

 For example, a company having a higher Booking Value does not mean that it will perform better than the company having a lower Booking Value as Booking Value is an absolute unit and not a relative unit. 

Thus, comparing two companies based on Booking Value may lead to bad investment decisions.

Booking Value of the companies can be used to compare the size of the companies, and the company’s potential excess of the value of assets after paying off all the debts and liabilities of the company.

For example: 

Suppose company A has a Booking Value of Rs.50 lakhs and Company B has a Booking Value of Rs.20 lakhs this does not mean that company A will surely perform better than company B in the future. 

The difference only indicates that company A will have access to money after paying off all the debts and the liabilities after selling all its assets compared to company B.  

 Importance of Booking Value

Booking Value is considered a good measure as it represents a fair and accurate worth of the company. The Booking Value of the company is computed by using the past and historical data of the company. 

Thus, it gives a reasonable idea of the company’s worth to investors and analysts. Booking Value shows exactly where the company stands in terms of the value of assets compared to its liabilities in the financial statements.

Investors who use a value investing strategy for making investment decisions primarily use Booking Value because it enables them to find Bargain deals on the stocks, especially when it is evident that the company is undervalued or is probable to grow in the upcoming future and the share is going to grow in future.

Shares that value in the market below the Booking Value are considered undervalued because they are probable to increase in the future. 

An investor who can identify such stocks and invest in them can earn easily out of the price difference, thus Booking Value helps an investor in earning good returns if the investor can evaluate Booking Value reasonably.

Drawbacks of Booking Value.

Apart from the merits, there is also a flip to booking value as a financial metric. The drawbacks of booking value are as follows:


Booking Value of the company considers the historical cost of the assets and liabilities of the company thus it does not take into consideration the impact of the market on the value of the company. 

This may be misleading for investors depending only on the Booking Value while investing.

For example: Suppose Company A has a Booking Value of Rs.50 lakhs and a market value of Rs.100 lakhs and company B is having a Booking Value of Rs.75 lakhs but the market value of company B is Rs.30 lakhs as it is not performing well in the market.

Suppose an investor invests in company B as it has a higher Booking Value compared to Company A. 

In that case, the investor may have to suffer losses in the future as the company has a lower market value.

Intangible assets

Another drawback of considering Booking Value as a measure for decision making is that it does not take into consideration intangible assets like goodwill, patents, copyrights, etc. 

Even if these assets are not tangible in the books of the company yet they offer a lot of value to the company’s business.

Historical cost

Another drawback of Booking Value is that it uses historical cost for pricing the assets of the company that might have changed dramatically over the period. 

Booking Value may not provide a correct valuation picture of the company when the company is using a method of depreciating the asset faster or slower than it should be.

 Other Booking Value Considerations

Booking value is effective for several considerations and they are as follows:

Intangible assets

The Booking Value has a flaw that it does not take into consideration the intangible assets within the company. 

Intangible assets are the assets that do not carry any physical form but are crucial for the business of the company. Examples are Goodwill, patents, copyrights, and trademarks. 

These assets do not have any physical form but assist the company to generate revenues.

For example, suppose an investor is looking to invest in shares of a company working in the book printing business. 

Because it is a company in the business of book printing, a major portion of the company’s value is rooted in the content it prints and sells and the right to print.

This company could be trading much higher in the market than its Booking Value as the market valuation takes into consideration the intangible assets of the company but the Booking Value does not. 

The market value of the copyrights the company holds may be high and still be ignored by the Booking Value.  

Mark to market valuation

Using Booking Value as a parameter for making the financial decisions have certain limitations as seen above when mark to market valuation is not applied to the assets of the company that may experience an increase or decrease in their market value.

For example, land owned by the company may have a higher market value than the Booking Value due to market price appreciation while its old motorcar may have a lesser market value than its Booking Value due to outdated models and technological advancement. 

In these cases, the historical values may mislead the valuation, given its fair market price.  

Price-to-Book ratio

Price-to-Book Ratio is a valuation multiple used for value comparison between similar companies within the same industry when they follow the same system of accounting and similar accounting methods for the valuation of assets and liabilities. 

The ratio may not be useful for comparing two companies from different industries or following different valuation policies and accounting methods. 

It may be noted that while some companies show their assets at historical costs, some companies may show their assets at the mark to market valuation.

Thus, we can conclude that a higher price-to-Book ratio does not necessarily mean a premium valuation and a lower Price-to-Book valuation does not necessarily mean a discounted valuation. 

Further, it may be noted that a price-to-Book ratio of 1 indicates that the market price of a company is exactly equal to the Booking Value of the company. 

An investor should invest in companies having a Price-to-Book ratio of 1 since the market price of the company generally carries some premium over the Booking Value.

How is Market Value different from Booking Value?

Market value considers more factors than Booking Value yet determining the Booking Value of a company is more difficult than finding the market value, but it can be far more rewarding. 

An investor can earn high returns and build a fortune by tracking the market value and the Booking Value of companies. 

Investing in companies having lower market value than the Booking Value can generate higher returns for an investor. 

The market value is derived from how much people are willing to pay for the company’s stock while the Booking Value is similar to the net asset value (NAV) of the company. 

The Market value of the company jumps around much compared to the Booking Value of the Company. 

Learning about the Booking Value can give an investor a more stable path to achieving their financial targets.  

The Market Value and the Booking Value are very different and traders use both book and market values to make investment decisions. The difference between Market value and Booking Value may mean:

Booking Value Greater than Market Value:

It is really rare for a company to trade at a market value lesser than the Booking Value. 

It indicates that the market has lost confidence in the company, it may be due to a company facing business issues and problems, loss of a crucial lawsuit, or any other event having an impact on the operations of the company. 

In other words, this means that the market does not believe that the company is worth its Booking Value.

Investors hunting for the values of companies may invest in such companies which are valued below their Booking Value. 

They see these companies to be undervalued and speculate in the hope that the market price will increase in the future as it is undervalued currently.

Market value Greater than Booking Value:

The market value of the company is usually higher than the Booking Value. 

The market value of the company is higher because they have more earning capacity than its assets. 

The investors in the market believe that these companies have a good future and the potential to earn profits and growth.

Profitable companies typically have market values higher than their Booking Values because the investors believe in these companies and are willing to pay higher than the Booking Value. 

The investors hunting for growth may find these companies worth investing in because these companies have profits growing at a stable rate. 

Sometimes higher market value may also mean that the stock is overvalued and trading at a higher price than what it should be.

Booking Value Equals Market Value:

Sometimes, the Booking Value of the company may be equal to its Market value or are nearly equal to each other. 

In these scenarios, the company is fairly valued in its books and the market has no reason to value it at any amount different than its Booking Value.  

Other Values that are affected by Booking Value

Booking Value as a parameter for making investment decisions have drawbacks as stated above and no investor would want to invest in any stocks until they have a firm knowledge of other aspects of the valuation of the company. 

Following are a few other Values that an investor may use:

1) Earnings per Share (EPS) 

Earnings per share, as the name suggests, are the net earnings that go to each share. 

For calculating the EPS, Net profits attributable to shareholders are divided by the total number of outstanding shares of the company.

For Example, if a company has earnings of Rs.50 Lakhs and the number of outstanding shares is 25 lakhs then,

EPS = Rs. 50 Lakhs / 25 Lakh shares

   = Rs. 2 Per share.

2) Price to Earnings ratio (P/E ratio)

P/E ratio measures how many times a company is priced as compared to its earnings. For calculating the P/E ratio, the Market price per share is divided by the EPS of the company.

For Example, if a company is quoted in the market at Rs. 50 and its EPS is Rs. 5 then,

P/E ratio = Rs. 50 / Rs. 5

              = 10 Times.  


Booking value is a financial factor that is widely used to determine a company’s value and determine whether the company’s stock is undervalued or overvalued. It is wise for investors and traders to pay close attention to booking value relative to market value.

However, the type of company and the assets of the company may be poorly represented in the booking value. The booking value sees the carrying value of the assets of the company.

Carrying value is often the historical value of the assets which might not show the current fair value of the company’s assets. Thus, booking value should be used along with other valuation metrics for making financial decisions.

Beta Stocks: Meaning, Types, Formula and other essential insights for investors.


The market has never been easy. 

Bargaining for what one wants at the lowest price has always been the game. 

And no seller gets such naive buyers to get the maximum price. 

Similarly, every investor wants to invest the least and get the most returns in a single stance. 

So, ever felt the urge to learn more about it or explore how the world’s greatest investors make decisions in a second?

Well. We are here to quench your curiosity.

So, without any further delay, let us scroll down to interpret the fundamentals of beta stock meaning in share marketing and its business environment!

What are beta stocks?

Beta stocks are referred to as highly sensitive and volatile securities susceptible to fluctuations regarding changes in the market environment. 

It is usually applicable to every share type instrument; it is estimated against the potential risk and return on investment subjected to market risks and the working situation of the issuing company.

To put it in a sentence, beta stocks are the statistical indicator of how volatile prices can be in changing market conditions. Beta in the stock market is usually calculated with regression analysis.

A higher stock beta is suggestive of higher returns on investment, and a lower stock beta indicates a lower return on investment. The beta of a particular stock suggests to the investor how much the stock will add up to or subtract from the diversified portfolio.

Beta stocks


Key glances

  • Beta is a stock evaluation instrument used to assess relative risk in investment against a standard benchmark according to market fluctuations.


  • It is a component of the Capital Asset Pricing Model (CAPM).


  • It is a statistical indicator, but high beta stocks do not always mean that returns are greater in the long run, i.e., the period/longevity of returns is uncertain. 


  • Investors have to take a practical approach to get a complete understanding of the ROI and risks.


  • Beta is an important but not the only instrument responsible for arriving at investment decisions.

Formula for calculation of beta in stocks

The formula for calculation of Beta in Stocks is as follows:

Beta coefficient (β) = Covariance of a stock / Variance.


Covariance is the change in the stock’s returns in relation to a change in the market’s returns.

Variance is the dispersion of the focal data point from its mean value.

Types of beta of Indian stock

The value of beta share price varies with respect to the securities and the benchmark index against which it is calculated.

When (β)>1

A higher return on total investment is expected when the beta value is greater than 1.

This means that the corresponding stock has more responsiveness than the share market. 

These usually comprise securities issued by small and mid-cap companies.

When (β)<1

When the beta value is less than 1, it indicates that the price variations are relatively stable. The degree of responsiveness is not massively affected by market conditions.

When (β)=1

This beta value has a parallel effect on share price with the returns and market fluctuations. Generally, large-cap companies stocks have a beta of 1. The prices are in parallel with the benchmark index.

When (β)=0

When the value of beta is zero, it indicates that the share price has no alterations with respect to the benchmark index. 

Generally, government bonds and securities have a beta value of zero. These securities do not respond to the market fluctuations and thus have no association with them.

When (β)<0

When beta values are less than zero, securities having an inverse relation with the stock market are expected to hold negative beta coefficients. 

In the time of a drastic fall in the share market price, investors usually create a pool of their money in anticipation to earn higher returns in future. 

Generally, gold holds negative beta coefficients and its value is expected to rise over time, yielding higher returns.

What is the difference between high-beta stocks and low-beta stocks?

There are several factors of difference between High beta stocks and low beta stocks. So, here is an all-encompassing comparison chart between them to ease your understanding of the concept.

Serial No. Basis High beta stocks Low beta stocks
1. Definition High beta stocks are the stocks that perform in correlation with the market index but with greater magnitude. 

These stocks tend to outperform severely during a bullish market but also underperform severely during a bearish market.

Low beta stocks are stable stocks that do not depend on market index performance. 

These stocks might not outperform or give substantial returns during a bullish market. 

But, they also remain stable during a bearish market.

2. Category of stocks Usually, stocks of growth and cyclical companies are high beta stocks. Staple companies (consumer), pharma companies, and companies of utility have low-beta stocks. Most are value stocks and pay a high dividend.
3. Economic situation for allocation A strong economic situation is preferable for acquiring high beta stocks and allocating resources there. A sustained, stable or normalised economy 

Is preferable for low beta stock allocation.

4. Risk appetite The ones who have a higher risk appetite should opt for high beta stocks to earn potentially greater returns. For the ones who have a lesser risk appetite, low beta stock allocation is recommended to them.
5. volatility High beta stocks are highly volatile. Low beta stocks are less volatile compared to high beta stocks.
6. Returns High beta stocks deliver larger returns. Low beta stocks deliver less returns compared to high beta stocks.
7. Market crisis High beta stocks tend to experience rapid degradation during market falls. They tend to fall even more than the index. Low beta stocks tend to fall less than the market index when the market is falling.

What is the necessity of beta as a risk measure?

The necessity of beta as a risk measure are as follows:

  • Beta calculation is an approximation of how much the market fluctuations would add to risk or return.


  • The necessity of beta holds high as it is primarily used for the Capital Pricing Assessment Model and it is a systematic measure of stock responsiveness to the market as a whole.


  • For a methodical approach, the stock should be related to a benchmark index to sharpen the analysis.


  • Different beta values of stocks provide different returns and risk involvement. Thus, beta is by and large important for studying the stock and market.


  • Beta of your portfolio is the weighted average beta of all the securities constituted in your portfolio. Thus you can manage your beta by portfolio rebalancing in such a way that your desired beta can be achieved for the portfolio depending on your risk appetite.


  • Including risk free securities having low to zero beta (like, Government bonds.) in your portfolio to reduce your overall beta is one of the techniques to manage the risk and hedging the market position. 

How does beta operate?

In a statistical view, beta shows the slope of a line through regression points of data. Every data point on the line represents the individual stocks’ return against the market as a whole.

 A security’s beta value is calculated by dividing the product of the covariance of the security’s returns and the market’s returns by the variance of the market’s returns over a particular period.

The beta calculation leads the investors to identify in which direction will the stock move concerning the rest of the market. It provides useful insights and saves the investors from a risk pool. However, the market that is used in relation to the benchmark should be related to the stock. Unless a dissimilar approach would lead to an unfavourable situation.

Beta in stocks is the main element of the Capital Asset Pricing Model (CAPM):

Beta in stocks is an integral part of the CAPITAL ASSET PRICING MODEL(CAPM). It helps the company to assess its returns on its basis, which is similar to alpha(another integral part of CAPM).  

During the boom period, when the market is at its peak levels, high beta stocks are expected to generate manifold returns and on the other hand downswing in the market, shares can lead to substantial losses too.

How is Theoretical Beta different from Practical Beta?

The statistical values of beta are well defined in theory showing normal distribution of returns and risk involved concerning the stock. 

But, a market is prone to a large number of insecurities and problems. 

When the theoretical beta is subjected to market conditions, the reality and applicability of beta change. Practically, returns are not always normally distributed, but unevenly.

When low beta values have a smaller price change, it is less volatile but the longevity of the downtrend might not be favourable to the investors. Though the volatility is low, the downtrend would add to the potential losses. 

Thus, practically it would spoil a portfolio performance. Hence, a practical approach is also needed at the time of investment.

Similarly, high-value beta stocks would add to the gains and returns but simultaneously would increase risk on the part of investors.

Merits of Beta stocks

The merits of Beta stocks are as follows:

  • Beta stocks have tremendously boosted the analysis to invest and intake risk and return in a proportion.


  • It has valued stocks over time with respect to market changes and has proved to be an efficient tool.


  • Beta is an important element in the CAPITAL ASSET PRICING MODEL.

Loopholes in Beta figure estimation

The drawbacks of using Beta figure estimation are as follows:

  • Beta can be meaningful in assessing the returns of a stock investment but it has some limitations and restrictions too.


  • Beta is useful to determine a short-term risk and analyse the volatility in the Capital Asset Pricing Model (CAPM). However, it is calculated on historical data points. Thus, its relatedness decreases to determine the future of the stocks’ returns based on past data.


  • Beta is also less useful to long-term investments because the volatility of the stock can change diversely over a time period due to market factors and the growth of the company’s past performance. Thus, investors are provided with a rough figure of returns and an estimation can be made of the gains on the equity through the stipulated benchmark index.


In inference, beta stocks have widely given investment analysis and the stock market a good upthrust. With the help of instruments like beta and alpha stock investors would get into a mess.

It is fundamental to invest in the stock market where it serves as a reliable factor. High and low beta stocks with different ranges have divided the investors into their own zone of investment interest. 

That is low-risk investors would look after the low beta stocks and high-risk investors would definitely hunt for greater returns with risk too, higher.

However, it is just a statistical estimated tool and is not a concrete instrument to arrive at important decisions because market conditions and fluctuations are always a surprise to investors and entrepreneurs.

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