How do Non-current Liabilities affect the financial position of a business?


There are certain liabilities in the company’s balance sheet for which the obligation to pay will not arise within twelve months. 

These liabilities are non-current liabilities, also known as long-term liabilities.

Non-current liabilities are closely related to cash flows to determine whether a company will be able to meet long-term financial obligations. 

Investors look at non-current liabilities to determine whether a company is likely to use more leverage.

Different ratios are used for non-current debt assessments; this includes the Debt-to-equity ratio, the interest coverage ratio, and the Debt ratio to asset company’s financial position. 

Let us learn in detail about the fundamentals of non-current liabilities meaning and how to access them.

What are non-current liabilities?

Non-current liabilities, also known as long-term liabilities, refer to the financial obligations on the company’s balance sheet that are not expected to be repaid within one year. 

Non-current liabilities examples include loans and payables that are repaid over a long period, compared to short-term loans and payables, which must be repaid within one year.

Analysts use various financial estimates to evaluate non-current liabilities to determine a company’s leverage, credit-to-capital ratio, asset rate, etc. 

Examples of long-term loans include long-term rental loans, and long-term loans, deferred tax liabilities, and bonds payable. Investors use analyses of non-current liabilities to assess the solvency and leverage of the company.

Characteristics of Non-Current Liabilities.

The Main Characteristics of non-current liabilities are as follows:

  • There is a liability from a current or past period which creates an obligation on the company to pay on a future date.
  • Liabilities are in the form of long-term debts, long-term borrowing, long-term payables, or long-term provisions. 
  • These liabilities are not expected to be repaid within a year.
  • The settlement of such liability will lead to a decrease in a firm’s assets.

Understanding Non-current Liabilities

Non-current liabilities are one of the factors in the balance sheet used by financial analysts, debtors, and investors to determine the stability of a company’s leverage and cash flows. For example, non-current liabilities are compared to a company’s cash flow to determine whether an entity has sufficient financial resources to meet the financial obligations that arise in the future.

If a company experiences a stable cash flow, it means that the company would have a low risk of default even after increasing the burden of debt.

What are the types of non-current liabilities?

The following are the main types of non-current liabilities we generally see in any company:

Long-term Lease

Rental payments are the normal costs that companies have to incur to fulfil their purchase obligations. Companies use rental funds to purchase fixed assets, such as industrial goods and vehicles.

If the lease term exceeds one year, the lease payments made in respect of the capital lease are treated as non-current liabilities as they reduce the long-term lease obligations. 

Property purchased using capital lease is listed as an asset on the balance sheet. For example, suppose a company entered into a lease agreement with another company for 10 years to use a certain machine. Such a lease is considered to be a long-term lease.


Bonds are long-term loan plans between a lender and a borrower and are used as a means of financing large projects. Bonds are issued by an investment bank and are classified as long-term loans if the repayment period exceeds one year. 

The borrower must make interest payments at fixed rates during the agreed period, usually more than one year. For example, suppose a company issued 8% bonds redeemable after 5 years, then such bonds are an example of long-term bonds.

 Long term Credit lines

A credit line is a contract between a lender and a borrower, in which the lender makes a certain amount of money available to the business when needed. 

Instead of obtaining a loan amount, an entity deducts a certain amount of credit when required up to the credit limit allowed by the lender.

A credit line usually operates for a period during which the entity can obtain funds. If a business draws money to buy industrial equipment, a credit will be classified as a non-current liability.

Secured and unsecured loans

Many businesses these days unite with each other to rely on loans. These loans could be secured loans or unsecured loans.

Importance of non-current liabilities

While people emphasise more on current liabilities analysis to know the liquidity position of a company, both current and non-current liabilities are useful in providing information about the company’s financial position. However, there are different benefits to looking at non-current debt in accounting.

  • Long-term debt helps to measure whether your business makes sense. If your cash flow is not enough to pay off future debts, it may not be a good time to take on additional financial obligations. For example, suppose a company has long-term debts of Rs. 500 crores and the cash flow per year is only 5 crores then, we can see that the company is not earning good enough to pay off its future long-term obligations. The company might have a good liquidity position but in the long run, the company may end due to the burden of debts over its earnings.


  • Debtors, creditors, Shareholders, Directors, Managers, and investors may use non-current liabilities to look at the financial ratios for a better understanding of the financial health of the company. Examples include Debt coverage ratio, Debt to equity ratio, and Interest coverage ratio. This compares debt with assets or equity, which gives a quick overview of the company’s liquidity.


  • Although the debt providers are more concerned about the company’s current liabilities, investors will often look at non-current liabilities for assessing the company’s risk. If a business uses a lot of its core resources just to meet its financial obligations, investors will be wary because this indicates that there will be nothing left to grow. Make sure you keep track of all your debts and keep your financial obligations fixed.

Financial ratios involving non-current liabilities

Investors, debtors, and financial analysts use various financial ratios to assess non-current liabilities to determine the risk and value of a company’s assets. Some of the measurements include:

Interest Coverage Ratio:

Whether the company makes enough money to pay interest is an important factor affecting the decision of debt providers. Debt providers can know this using the interest coverage ratio. This ratio is calculated by taking Earnings before interest and taxes (EBIT) and dividing it by interest costs incurred during the time. A higher interest coverage ratio means that an entity can better manage its interest payments and can pay interests on additional debts also.

Debt Ratio:

The total amount of a company’s debt is compared with the total amount of assets to determine the company’s leverage using the debt ratio. The debt ratio indicates the portion of the capital of a loan-funded company.

A less percentage indicates that the company has lesser leverage and a stronger equity position. A high percentage indicates that the company has higher leverage, which increases the company’s risk of default. 1.0 asset rate means that the company has a higher risk of default and has a negative net worth. 

Debt to Equity Ratio:

The debt-to-equity ratio (D / E) is used to assess a company’s financial viability and is calculated by dividing the company’s total debt by the equity shareholders’ capital. The D / E rating is an important measure used in business finance. 

It is a measure of the extent to which a company funds its operations and financials by Debt compared to fully owned funds. It demonstrates the equity potential of shareholders to cover all outstanding debts in the event of a business downturn.

How is Non-current liabilities different from current liabilities?

There are several factors separating current liabilities from non-current liabilities. 

Hence, here is an all-encompassing comparison chart to ease your understanding about the difference between non-current liabilities and current liabilities.

Current liabilities v/s Non-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, it 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…


Understanding the nature of the debt and its proper recording in the financial statements is essential for business. It is very important for managers as they have to make financial management decisions based on what the company owes and when they owe it. 

For investors too, debt analysis helps them measure the company’s financial strength. An analysis of non-current liabilities helps investors to make long-term financial decisions. 

Thus, understand the meaning, ratios, and significance of non-current liabilities to make long-term investment decisions.

Net Working Capital: Meaning, Formula and Essential Insights for Investors


Every company has assets and liabilities, some assets may get realized earlier than others and the company needs to pay some liabilities earlier than others. A company at any time needs liquidity to operate its business. 

Net working capital shows us the excess amount of current assets over current liabilities.

Let us understand the fundamentals of Net working capital meaning.

What are current assets?

Current assets describe all of the company’s assets that appear to be sold, used, used, or eliminated through normal business activities within a single year.

Current assets are shown on the balance sheet under the head of the current asset after the head of the fixed asset. E.g., cash and cash equivalents, Inventories, credit receivables, etc.…

What are current liabilities?

Current liabilities are short-term financial obligations that must be settled within one year or during a company’s operating cycle. Current debts are different from long-term debt, which refers to debts or obligations to be repaid over one year.

Current liabilities are shown on the balance sheet under the head of the current liabilities after the head of long-term borrowings. E.g., Bank overdraft, Outstanding Expenses, Accounts Payables, etc.…

What is Net working capital?

Net working capital calculation is executed as follows:

Net Working Capital = Current Assets (Gross working capital) – Current Liabilities.

If the result is positive then, the company’s current assets exceed the current liabilities which means the company’s financial stability is good and it can repay the liabilities within the stipulated period.

If the result is negative that means business owners need to improve the financial strategy of the business so they can repay liabilities in the upcoming future.

Components of Net working capital.

The current assets and liabilities used to calculate working capital typically include the following items:

Current assets include cash and other liquid assets that can be converted to cash within one year of the balance date, including:

1)    Cash, which includes money in bank accounts and savings checks from customers.

2)    Bonds for sale, such as Marketable Bonds.

3)    A short-term investment that the company intends to sell within a year.

4)    Accounts Receivables.

5)    Receivable notes – such as temporary loans to customers or providers – mature within one year.

6)    Other receivables, such as income tax returns, employee benefits, and insurance claims.

7)    An inventory comprising materials, Work in Progress, and Finished Goods.

8)    Prepayments of expenses.

9)    Advance payments for future purchases.

10) Other Current Assets.

      Current liabilities are all liabilities due within a year of the balance sheet date, including:

1) Accounts payable.

2) Notes payable due within one year.

3) Wages payable.

4) Taxes payable.

5) Interest payable on loans.

6) Any loan principal that must be paid within a year.

7) Other accrued expenses payable.

8) Other Current Liabilities.

 Net Working Capital Formula

The formula of Net working capital is as follows:

Net working capital = Total current assets – Total Current Liabilities.

Net Working Capital Example

Suppose a company has a cash balance of Rs. 8000, Bank balance of Rs. 12000, Debtors of Rs. 10000, and inventories of Rs. 8000, Trade payables of Rs. 5500, Bank overdraft of Rs. 5000 and other current liabilities of Rs. 6000. Then,

Net working capital = Total current assets – Total Current Liabilities.

Cash + bank + debtors + inventories – Trade payables – Bank overdraft –         other current liabilities.

Gross working capital = Rs. 8000 + Rs. 12000 + Rs. 10000 + Rs. 8000 – Rs. 5500 – Rs. 5000 – Rs. 6000 = Rs. 21500.

Positive Net Working Capital vs Negative Net Working Capital.

A company has positive Net working capital when it has enough cash, accounts receivable, and other liquid assets to meet its short-term obligations, such as payable accounts and short-term debt.

In contrast, a company has a negative Net working capital if it does not have sufficient current assets to cover its short-term financial obligations. A company with an unsecured income may have difficulty paying suppliers and creditors as well as difficulty finding funds to drive business growth. If the situation persists, it may eventually be forced to close.

Why is Net Working Capital Important?

The amount of net working capital is important because it gives an idea of ​​the liquidity of the business and whether the business has enough money to cover its short-term obligations. 

If the net working capital is zero or more, an entity can cover its current obligations. Generally, the larger the net working capital, the better prepared the business will be to cover its short-term obligations. 

Businesses should always be able to maintain enough liquidity to pay off all their debts for a year.

Net working capital is very useful when used to compare how the value changes over time, so you can establish a trend in your business spending and liquidity. It helps to see if it is improving or declining. 

If your business net working capital is mostly positive, that is a good sign that you can meet your current obligations. If there is too much gauge, that suggests that your business is unable to make its future payments and may be in danger of collapsing.

The amount of net working capital can also indicate how fast a company can grow. If an entity has a significant set of capital, it can measure its performance quickly, by investing in better-utilised assets, for example.

How to Improve Net Working Capital?

Businesses can make some changes in their operations if they want to improve their overall Net working capital. Some of those changes include:

      Change your payment terms to reduce your payment cycle and ensure that your customers pay you regularly for your goods or services

      Be diligent in tracking clients as soon as the invoice arrives, so you can collect late payments as soon as possible.

      Return a list of unused goods to your dealers for a refund of expenses.

      Extend the payment period to your merchants, if they will allow it without charging late fees.

Net Working Capital Ratio.

The net working capital ratio is nothing other than representing the percentage of the company’s current assets and liabilities.

Although the NWC is calculated by deducting current assets and current liabilities, the measure can be achieved by dividing assets by liabilities. This measure, similar to the NWC, helps determine if your company has sufficient assets to pay off debts.

Therefore, the mathematical equation to calculate the Net working Capital is as follows:

Net Working Ratio = Current Assets / Current Liabilities.

Ideally, the fair ratio should be between 1.2 – 2 times the carrying amount of current assets to current liabilities. If you see a high number, it may mean that your company is not using its current assets at their maximum.

Effect of certain transactions on Working capital

Some transactions may affect the working Capital of the company and some might not. 

The transactions that affect the working Capital may cause an increase or decrease in the working Capital, while the transactions not affecting the working capital result in no change in working capital.

There are some accounting activities that cause a change in working capital

Listed below are headings that help you understand the effect of such activities on the working capital.

Increase in working capital

The activities that result in an increase in the working capital are as follows:

Issue of Debentures

Issuing debentures will cause an increase in the working Capital as cash inflow will occur and a long-term financial liability will be created. 

The Debentures issued are not the current liabilities of the company while cash is a current liability. 

Thus, issuing the debentures increases both gross working capital and net working Capital of the company.

Sale of non-current assets

Selling a non-current asset will cause an increase in the working Capital of the company as the cash inflow will occur, and a non-current asset will be disposed of. 

Thus, selling a non-current asset will increase both gross working capital and net working Capital.

Decrease in Working capital

The activities that result in the decrease of the working capital are as follows:

Redemption of Debentures

The redemption of debentures means repaying the debentures. 

It decreases the working Capital as a cash outflow will occur and Debentures get paid off. This transaction decreases the current assets and non-current liability.

Thus, redeeming the debentures decreases the gross working Capital and the net working capital.

Purchase of non-current assets

Purchasing a non-current asset will cause a decrease in the working Capital of the company as the cash outflow will occur and a non-current asset is added. 

Thus, purchasing a non-current asset will result in a decrease in both gross working capital and net working Capital.

Transactions that do not affect working capital

  • A shift from one current asset to another current asset by an equal amount or from one current liability to another current liability by an equal amount these transactions do not affect the working Capital of the company.  

For example, withdrawing cash from a bank account will affect the cash in hand and the bank balance but it will not affect the working Capital of the company. 

In the same way, depositing cash to a bank account will affect the cash in hand and the bank balance but it will not affect the working Capital of the company.

  • A transaction involving only the non-current asset and liability: A transaction that does not have any working capital element will not affect the working Capital of the company. 

For example, When you are purchasing a machine in exchange for shares of the company, there is an increase in the non-current asset and equity of the company.

Thus, it does not affect the working Capital of the company.

How to manage working capital?

Before knowing how to manage the working capital, we need to know why is it important for an entity to manage its working capital. Net working capital is the difference between total current assets and total current liabilities.

By managing the working capital, entities try to manage the current assets and current liabilities and analyse the interrelationship that exists between them. Thus, we can say that by analysing the working capital, entities analyse the relationship between their current assets and the current liabilities.

The main aim to manage the working capital is to deploy such amounts to current liabilities and current assets to maximise the short-term liquidity. Now let us dig into the management of working capital:   

The management of working capital involves the management of components of working capital, i.e., inventories, accounts receivables, cash, bank, etc., there are two core steps to manage the working capital:  

1)    Forecasting the amount of working capital.

2)    Determining the source of working capital.

What is Gross working Capital?

Gross working capital consists of all the current assets of the company. Gross Working Capital refers to the concept of quantitative nature.  

It means the total sum of such assets which can be converted easily into liquid form I.e., cash within one year. It is an integral part of small companies as these companies depend most on their current assets, but it never shows the true liquidity of the company.  

However, it does not add any significance to large and mid-size firms. Overall, Gross Working Capital =Current Assets.

How is Gross working capital different from Net working capital?

The gross working capital differs from net working capital in various aspects. 

In order to cover the difference in an easy manner, here is an all-encompassing chart explaining Gross working capital v/s net working capital.

Serial No. Parameter Gross Working Capital. Net working Capital.
1. Meaning Gross working capital is the summation of the current assets of the firm. Net working capital is the difference between total current assets and total current liabilities of the firm.
2. Concept. Gross working capital is a quantitative concept. Net working capital is a qualitative concept.
3. Indicates what? Gross working capital indicates the funds invested in the current assets of the firm. Net working capital indicated the firm’s capacity to pay its current liabilities and operating expenses with no problem.
4. When does it change? The value of Gross working capital changes with a change in the value of the current asset. The value of net working capital changes only when a transaction has the first effect on current assets or liabilities and the second effect on non-current assets or non-current liabilities.
5. Components. Components of Gross working capital are; Accounts Receivables, cash, cash equivalent, current investments, marketable securities, inventories, and other current assets.   Components of Net working capital are; Total current assets and the total current liabilities of the firm.
6. Formula. Gross working capital = Cash and cash equivalent + Accounts receivables + marketable securities + inventories + short term investments + other current assets. New working capital = Total current assets – total current liabilities.
7. Suitable to whom? Gross working capital is normally suitable for companies. New working capital is normally suitable for partnership firms and sole traders.
8. Use. The Gross working capital concept is used to know the financial standing of the firm. The Net working capital is used to know the liquidity of the firm.
9. Popularity in which field? Gross working capital is popular in financial management. Net working capital is popular in accounting systems.


Net working capital takes into consideration all the current assets and the current liabilities of the firm. Net Working Capital refers to the concept of qualitative nature.  

It means the total sum of such assets which can be converted easily into liquid form I.e., cash within one year less the total sum of such liabilities which are to be paid in 12 months i.e., trade payables, interest on loans, bank overdrafts. 

It shows the excess amount of cash a firm will have if all its current liabilities are paid off by using its current assets.

Net Profit and its significance in business


Net profit is a perfect statistical element which has the capability to soak all business decisions in itself and present a holistic picture of the business within a few numeric values.

Whether it is a net loss or net profit, it does not leave the company unaffected. 

In case of losses, the company might need to cut down on expenses and decrease the cost of production and eliminate additional expenses. 

However, in the case of net profit, a company dreams to flourish and accelerates production by hiring new employees and motivating the employees and employers to work in tandem with each other. 

Thus, net profit is a much wider concept than gross profit since it(net profit) is inclusive of indirect expenses and indirect incomes. 

A good net profit margin indicates the proximity of converting sales into actual profits. 

But, to be able to understand this evaluation in detail, we need to go through the fundamental net profit meaning.

Hence, without any further ado. Let us dive right in.

What is Net Profit?

The two main profitability metrics of any company include gross profit and net profit. Gross profit is a representation of the income or profit that remains after the production costs are subtracted from the revenue. 

Revenue refers to the amount of income generated from sale of the goods and services of a company. Gross profit also helps investors to determine how the total profit a company earns from the sale of its goods and services. Gross profit is also known as gross income.

On the other hand, net profit is the profit that is remaining after all expenses, costs and taxes have been deducted from its revenue. With the use of net income or net profit, investors determine the overall profitability of a company which indicates how effectively a company is being managed.

Importance of Net profit

The basic purpose of net profit is to indicate the success of a business venture. Aside from that it also talks about the company’s ability to repay its debts and reinvest. The various uses of Net Profit for different stakeholders are as follows:

For the owners: It helps the owners in computing the profit of the company once tax is paid in full. 

For the competitors: Business competitors of a company look at the net profit to gain more insight into their rival’s profitability and proficiency.

For the investors and shareholders: Net profit helps in judging the revenue-generating capacity the firm possesses based on its net profit. A firm which is sustainable has a higher chance of attracting potential investors and shareholders.

Since it is deemed necessary for the growth of a firm, companies are always trying to improve it. Increasing the sales volume and reducing the overhead expenses are among the few proven ways to enhance the net profit of a business firm.

How is Net Profit calculated?

As mentioned above, net profit shows the sales amount after all of the following are subtracted from the company’s total revenue:

  • Operating cost
  • Tax
  • Interest
  • Preferred stock dividends

Notably, the total revenue can be described as the total sales minus the discounts and the refunds. On the other hand, the operational expenses and the overhead expenses are also indicative of the cost of selling and delivering the product.

The net profit formula is as follows–

Net Profit = Total Revenue – Total Expenses

In order to calculate the Net profit of a company, its total expenses are subtracted from the total revenue that is generated.

Example of Net Profit 

Let us take Makati Private Limited and Wafira Private Limited to find out how the net profit margin is calculated.

Income Statement of Makati Private Limited 


Particulars Amount (Rs.)
Total Revenue 250,000
Cost of goods sold 50000
Gross profit 200000
Total operating expense 50000
Operating profit  150000
Interest expense 800
Tax expenses 2800
Net Income  146400

Net Profit Margin of Makati Private Limited = (Net income / Revenue) x100

= (146400/250000) x100

= 58.56%

Income Statement of Wafira Private Limited

Particulars Amount (Rs.)
Total Revenue 450000
Cost of goods sold 63000
Gross profit 387000
Total operating expense 105000
Operating profit  282000
Interest expense 1500
Tax expenses 6300
Net Income  274200

Net Profit Margin of Wafira Private Limited = (Net income / Revenue) x100

= (274200/450000) x100

= 60.933%

Therefore, it is ascertained that the profit margin of Wafira Private Limited is higher.

How is net profit different from gross profit?

Net profit and gross profit are both closely related and have an important role in financial accounting. Jointly, they help in determining and maintaining the financial records of a company.

For example, both net profit and gross profit help in analysing the financial health of the firm. Therefore, it is imperative for the owners of the company to understand them and the differences between them.

To start with, the owners and the investors must be clear about what gross profit and net profit mean.

For example, gross profit is the profit that remains with the company after its direct costs have been subtracted from its net sales. Also, gross profit is a temporary estimate of the firm’s revenue and helps in lowering the additional cost.

In contrast, surplus earnings remaining with the company after paying its taxes, interests and the operating taxes fall under the net profit. Net Profit also comes in handy for analysing the company’s sustainable profitability by helping with the calculation of the net profit margin.

To ease your understanding of the matter, here is an all-encompassing comparison chart of the same.

Gross Profit v/s Net Profit

Serial No. Basis Gross profit Net profit
1. Definition The remaining profit after all the direct expenses are deducted from direct incomes The remaining profit after all the indirect expenses are deducted from indirect incomes
2. Objective It provides a company’s profitability in a particular year. It shows the company’s position and performance in a particular year.
3. Advantage It helps to restrict the company’s manufacturing/operating costs.       It signifies the availability of a company’s profit and reserves.


4. Reliability It is a less reliable indicator since it is exclusive of indirect expenses and incomes, taxes, etc. It is a true indicator of a company’s financial position with the effect of which a company can develop itself and make decisions about the expansion of the firm.
5. Credit balance It gives the credit balance of a trading account. It gives the credit balance of a profit and loss account.
6. Formula Gross profit =Revenue-Cost of goods sold. Net profit=Gross profit-expenses

What is Net profit Margin?

The net profit margin, or the net margin, is a measure of how much the net income or the profit is generated as a percentage of its revenue. It is the ratio of the net profit to the revenues of a company or a business segment. 

Net profit margin is expressed as a percentage but it can also be expressed in decimal form. The net profit margin demonstrates how much of each rupee in revenue collected by the company translates into profit.

Net profit margin helps the investors to assess if the company’s management is making enough profit from its sales and whether or not the operating costs and overhead costs are under control.

Net profit margin is also one of the most important indicators of the company’s overall financial health. By tracking the increases and the decreases in the net profit margin, a company can evaluate whether or not the current practices are working and then forecast profits based on its revenues. 

Owing to the fact that companies express net profit margin as a percentage rather than a rupee amount, it is also possible to compare the profitability between two or more businesses regardless of their sizes.

This metric also includes all the factors in a company’s operations, including the:

  • Total revenue
  • Additional streams of income
  • Cost of goods sold and other operational expenses
  • Interest expense on the debt obligations
  • Investment income and the income from secondary operations 
  • One-time payments for rare events such as lawsuits and taxes

Investors can also assess if the company’s management is generating enough profit from the sales and whether or not operating costs and overhead costs are being controlled. 

For example, a company can have increasing revenue, but if the operating costs are growing at a faster rate than the revenue, the net profit margin will shrink. Ideally, the investors want to see a track record of the expanding margins, meaning that the net profit margin generally rises over time.

Most public companies report the net profit margins both quarterly during the earnings release and mention it in their annual reports

Companies can also improve their net profit margins over time and are generally rewarded with share price growth, as price growth is highly correlated with the earnings growth.

How to calculate Net profit Margin?

The net profit margin is calculated by using the formula given below:

Net profit margin = ((R-COGS-E-I-T)/R)*100


  • R-Revenue
  • COGS-Cost of goods sold
  • E-Operating and other expenses
  • I – Interest
  • T- Taxes

First, on the income statement, the cost of goods sold (COGS), operating expenses, other expenses, interest (on debt), and taxes payable must be subtracted.

After that, divide the result by revenue.

Convert the figures into a percentage by multiplying it with 100.

Alternatively, locate the net income in the bottom line of the income statement and divide that particular figure by revenue. After that, convert the figure to a percentage by multiplying it with 100.

How is Net profit margin different from gross profit margin?

Net profit margin considers all the costs that are involved in a sale, making it a very comprehensive and detailed measure of profitability. 

Gross margin, however, simply looks at the costs of goods sold (COGS) and ignores other things such as the overhead costs, fixed costs, interest, and taxes payable. Operating margin also further takes into account all the operating costs but still excludes any of the non-operating costs

Drawbacks of Net Profit Margin

Net profit margin can be swayed by one-off items for example the sale of an asset, which would boost profits for the time being. Net profit margin does not hone in on the sales or the revenue growth. Furthermore it does not provide insight as to whether the management has been managing the production costs.

It is best to make use of several ratios and financial metrics when it comes to analysing a company. Net profit margin is normally used in financial analysis alongside the gross profit margin and the operating profit margin.


Overall, Net profit and loss account is a nominal account which is closed at the end of the financial year and the balance is transferred to the credit side of the balance sheet. 

A good net profit margin increases the credit-worthiness of the company in the market and raises the goodwill of the company too. 

An increase in the net profit due to operating profit  is indicative of positive results but an increase in non-operating income leading to greater net profit does not mean that the company has succeeded in cost control and boost in sales. 

A temporary rise might be there due to sale of any asset or reduction in liabilities. 

Thus, an increase in net profit through daily operations of sales and cost control is a positive and wealthy sign of a developing company.

What are Non-Convertible Debentures? How they are different from other types of Debentures?


Debentures are long-term debt financial instruments companies use to gather capital from investors. They hold a fixed interest rate for a specific span. A company can issue different forms of debentures, namely convertible debentures and non-convertible debentures. Convertible debentures can be transformed into equity shares of the stock exchange, whereas non-convertible debentures cannot. 

Bonds are almost similar to debentures, but unlike bonds, debentures are not secured. In case of any defaults, the investors will have no claim for the company’s assets. Since the repayment mode is entirely dependent on the credit score of the issuing company, debentures are generally issued by highly rated and large companies with a triple-A credit rating. The debentures are an effective way for the corporations to utilise their privileged status to their benefit, taking money without any attached strings or security. 

Debentures are legal certificates that state how much money was borrowed by the lender, the principal amount, the scheduling of payments, and the rate of interest to be paid. At the end of a debenture term, the investor receives the principal money back to their account when the debenture matures. 

Companies use four different debentures to borrow money at a fixed interest rate. The types are Unsecured and secured debentures, Bearer and Registered debentures, Convertible and Non-Convertible Debentures, and first and second debentures. 

Non Convertible Debentures are instruments of the fixed income usually issued by top-class companies. The non-convertible debentures are in the form of public issues utilised to gather long-term finance. These types of debentures have a higher rate of interest compared to convertible debentures. Let us check out the entire article to learn more about non-convertible debentures, how it works, their benefits and other features. 

What are non-convertible debentures?

Before issuing, a company must know what non-convertible debentures are. The top-rated companies issue the non-convertible debentures to raise their capital for any venture. Generally, the non-convertible debentures are not supported by any collaterals. Investors can only depend on the ratings and credit worthiness of the issuing companies given by the credit agencies. These ratings allow the investors to understand the worth of a company and its future expectations and also will enable them to determine whether the company is eligible for a debenture or not. 

However, the non-convertible debentures carry a fixed rate of interest, and they also possess a selected date of maturity. Also, the interest payable for the principal amount is paid quarterly, monthly, half-yearly or yearly. The paying of the interests depends on the terms agreed at the time of issuance of a non-convertible debenture to raise funds. Compared to the convertible debentures. Non-convertible debentures have numerous benefits like low risks, tax benefits, liquidity, and maximum returns. It is suitable for the Triple A-rated companies to raise funds for specific purposes. 

A secured non-convertible debenture is considered safer than an unsecured non-convertible debenture, and it is because the company’s assets back a secured, non-convertible debenture. For instance, an investor can only invest when the company declares non-convertible debentures after its trade in the secondary stock exchange market. Moreover, being an investor, you must check the company’s creditworthiness, the non-convertible debentures’ coupon rate and the issuer’s credibility. It is better if you can purchase a non-convertible debenture of a higher rating such as AAA+ or AA+.

Suppose the company or the organisation fails to repay the principal amount within the mentioned time. In that case, the investors can liquify the company’s assets to recover their funds. 

Types of debentures.

There are different types of debentures that can be issued by companies. Below mentioned is the list of debentures.

  • From the Security Point of View.
  • Secured Debentures.

In secured debentures, a charge is placed on the enterprise’s assets or properties for the purpose of payment. The charge can be either fixed, or it might be floating. Fixed charges are issued against those assets that appear in the enterprise’s possession. They are utilised for the activities that do not involve any sale, while floating charges, on the other hand, include the assets keeping aside those that are meant for the secured creditors. A fixed amount is issued on a particular asset. However, a floating charge is established on the general assets of the company or the organisation. 

  • Unsecured Debentures.

They do not possess any particular charge on the enterprise’s assets. However, the investor can establish a floating charge on this type of debenture by default. Debentures are usually not circulating in unsecured form. 

From the Tenure point of View.

  • Redeemable debentures.

Redeemable debentures are those types of debentures that remain due at the time of their tenure and end in small instalments or lump sums during the entire lifetime of the enterprise. The debentures can be reclaimed either at par or at a premium. 

  • Irredeemable debentures.

The irredeemable debentures are also known as perpetual debentures. The company or the organisation will not give you any added time to repay the money borrowed or acquired by circulating such ncd investment.

From the convertibility point of View.

  • Convertible Debentures.

These are the debentures that can be transformed into equity shares or any other security forms at the will of the debenture holder or the enterprise. The convertible debentures are either partly changeable or entirely convertible. 

  • Non convertible debentures.

The debentures that are non-convertible into shares or other securities are known as non-convertible debentures. Most of the categories of debentures that are circulated by the organisations fall under this segment. 

From the coupon rate point of view.

  • Specific Coupon Rate Debentures.

The specific coupon rate debentures are circulated with a mentioned interest rate which is called the coupon rate. 

  • Zero-Coupon Rate Debentures.

The variation between the principal amount and nominal amounts is treated as an interest amount, and it is connected to the term debentures. These debentures particularly do not have any specific rate of interest. To restore the debenture investors, the zero-coupon rate debentures are circulated at a discounted price.

From the registration point of view.

  • Registered Debentures.

These are ncd investment debentures in which the details of the holders, including addresses, particulars of holding, names, and other essential pieces of information, are stored in a register that the organisation keeps. A normal transfer deed can only be used to move such a form of debentures.

  • Bearer Debentures.

Bearer debentures can be transferred by delivery mode, and the enterprise does not hold any record of the debenture holders. In such a case, the bearer debentures are given to a person or entity who can show an interest coupon attached to those debentures. 

The above mentioned are the different debentures that a company can issue to raise funds. The convertible and non-convertible debentures are the most common types of debentures issued. But before debenture issuance, it is necessary to know non-convertible debenture NCDs and tax slabs in detail. 

Who and why invest in Non-Convertible Debentures?

The non-convertible debentures can be issued to and held by primary banks, individuals, primary dealers and other companies. It can also be issued to the mutual funds incorporated or registered in India, unincorporated bodies, Foreign Institutional Investors, and Non-Residing Indians. Investment in the non-convertible debentures by the primary dealers or the banks is subject to the approval of the respective regulators. Also, investment in the non-convertible debentures by foreign institutional investors should not cross the borders set forth at times by the SEBI body. Before investing or issuing the non-convertible debentures, you must know non-convertible debentures meaning with proper knowledge and understanding. 

There are multiple reasons why you must invest in non-convertible debentures.

  • Every organisation or company that wishes to raise their fund by issuing a non-convertible debenture must pass rating agencies like ICRA, CARE, CRISIL and many more. It is for the verification of the pieces of information provided. 
  • Unlike other forms of debentures, at the time of maturation of a non-convertible debenture, the interest and the principal amount are directly transferred to the bank account. 
  • The non-convertible debentures offer a higher rate of interest than fixed deposits and convertible debentures. 
  • The non-convertible debentures are listed on the stock exchanges that offer liquidity to the investors. Therefore, it provides the license to the investors to sell or buy the debentures in the secondary market. 
  • The company issuing the non-convertible debenturesare in close observation of the Reserve bank of India. It is an excellent advantage for investors. 
  • In the case of liquidation, the enterprise is required to pay the non-convertible debenture holders before the equity holders. Therefore, this type of debenture is a safe mode of investment. 
  • Non-convertible debentures do not have any TDS on the earned interests. The income of the interest earned is summed up to the total income while filing income tax returns. 

These are some advantages of investing in non-convertible debentures.

Also, some eligibility criteria must be fulfilled to apply for non-convertible debentures. Any corporate or NBFC is eligible for issuing a debenture depending upon the following conditions.

  • The corporate company or the NBFC must have a net worth of more than four crores. It must be on track with the latest audited sheet.
  • The company is endorsed with a long-term working capital limit issued by the financial institutions or banks of India.
  • The borrower’s account is classified as a financial asset by the banking institutions of India. 

How to apply and buy Non-Convertible Debentures?

For purchasing a non-convertible debenture, you can directly visit the website of the issuer and can apply for the debenture by making an online payment. This will happen only if the online payment mode is open to the investors. Also, if you have a Demat account with any stock market brokerage like the ICICI direct or HDFC securities, you can apply for a non-convertible debenture directly from there. Also, there are centres for the issuance of a non-convertible debenture which are intermediates like the registrar agents or the brokers. 

These agents are allowed to accept the NCD in physical forms. For applying for a non-convertible debenture, an individual can submit the ASBA forms ( for the UPI investors ) to any registered broker. They might also purchase these debentures from the secondary market if they are listed on the stock exchange

Below are the procedures for applying for a non-convertible debenture in the online and offline procedures.

For Net Banking or online mode.

  • Log in to your bank account by entering your personal details. 
  • Visit the investment section and select your required non-convertible debenture from the mentioned list.
  • Choose the debenture along with ASBA (Application Supported by Blocked Amount).
  • Enter the details for the non-convertible debentures, like the number of lots required and other pieces of information.
  • Once you are done, click on submit to complete your application procedure. 

For offline mode.

  • Download the nonconvertible debentures (NCD) form from the issuing company’s website or the BSE or NSE website.
  • Print the form and enter the required pieces of information. 
  • Attach the required documents and a check mentioning the amount.
  • Submit the form to the designated CDP location, the selected RTA location, or a broker. 

This is how you can apply for a non-convertible debenture.

Taxation and things to consider.

The non-convertible debentures have tax implications depending on the tax category under which the investor falls. If the debentures are sold within a year, then the tax will be applicable according to the income tax slab rate. If the debentures are sold after a year or before the maturity date, the tax will be applicable at 20% with indexation. The interest income from the non-convertible debentures is taxed similarly to the fixed income securities, which are charged under ” income from other sources “.  

The non-convertible debentures are prone to risks related to funding and handling business. Therefore, the credit ratings might be affected if the turnover amount is negatively impacted. The enterprise will then have to borrow extra money from the NBFCs or banks to cover the impact. Hence, every ncd investment investor should consider a few things before choosing a company with non-convertible debenture. 

Credit Rating of the issuer

Credit rating is a vital element to consider before opting for a non-convertible debenture. You must opt for an enterprise with a higher credit rating, which means that the company must have an AA or higher rating. The company’s credit rating shows its ability to sustain credibility and its operations. Thus, investing in company debentures with a higher rating is always safer. 

Debt Ratio

This is another crucial point you must consider before investing in a company NCD. You must check the financial statements of the enterprise. It will offer you details about the company’s debt-equity ratio, assets and other pieces of information about the financial position of the company. Also, you must ensure that the company or enterprise you choose is not heavily burdened with debt. 

NPA Provisions

The company should be such that it can regularly assign provisions for the non-performing assets. It ensures that the enterprise has profits to remove the investors’ risks and meet their obligations. 

Capital Adequacy Ratio

The CAR, or the Capital Adequacy Ratio, is a statistical indicator that determines whether a company has enough monetary funds to survive at the time of potential losses. The company must be able to maintain this ratio. Being an investor of a non-convertible debenture, you must check this before selecting the company. 

Interest Coverage Ratio

The interest coverage ratio or the ICR or a company defines the number of times the enterprise can serve its debt obligations using its present earnings. In simple words, the ICR is the ability of the company to handle debt payments. A higher rate of interest coverage ratio is a symbol of a healthy company. 

Purpose of the Non-Convertible Debenture

You can choose to invest in a company debenture that can meet the requirements of your investment horizon and financial objectives. The companies issue Non-Convertible debentures to raise funds for a particular purpose. The purposes must be clear to the investors and not ambiguous to ensure that the enterprise utilises the investors’ funds for valid purposes for the company’s growth. Thus, the document offered at the time of investment should contain all these pieces of information. 

Features of Non-Convertible Debentures.

There are numerous features of the non-convertible debentures.


The investors can subscribe to the non-convertible debentures at the time of public issue within a specified time period. Also, these debentures are listed on the stock market, where the investors can subscribe through registered brokers or securities. 


The non-convertible debentures have higher liquidity compared to other types of debentures, and it is because they are required to be listed on the stock exchange. Therefore, an investor can buy or sell the debentures whenever they want in the secondary stock market. It is an essential feature of nonconvertible debentures or ncds that allows investors to liquidate their debentures during an emergency. 

Rate of Interest

The interest rate for the principal amount is considerably higher compared to the rate of interest on the fixed deposits. Besides, the interest rate for unsecured debentures is higher than for secured debentures. They have payment flexibility; being an investor, you can repay the amount monthly, quarterly, bi-yearly or yearly. Additionally, the non-convertible debentures have an added payout option as well. 


The non-convertible types of debentures are flexible in terms of the time period. It can offer you a minimum tenure of ninety days whereas a maximum time period of ten years. Investors can also choose between short and long-term non-convertible debenture based on their investment objective. 


The taxation of the ncd investment is the same as that of the debt taxation. If the investor sells their debentures within three years, the taxes will be applicable per the income tax slab rate. Subsequently, if the investor sells their debentures after three years, the tax applicable will be 20% with indexation. 

Credit Rating

The enterprises or the brands that issue the non-convertible debentures must reach the credit house like CARE, ICRA, and CRISIL to obtain the ratings. It helps to determine the company’s trustworthiness and credit score and the company’s potential, whether it can fulfil the investors’ criteria. A company with a higher credit score can achieve the obligations of the investors, whereas a company with a lower credit score involves higher credit risk. Therefore, if the issuing company contains default payments, its credit score will fall drastically. 

Though the debentures are a quick mode for the companies to raise funds for performing their planned activities, there are also risks. Also, being an investor, you must have reasonable knowledge before acquiring a non-convertible debenture issued by a company. The non-convertible debentures cannot be converted into equity shares, unlike the convertible debentures. There are other pros and cons of investing in this type of debenture. So before investing, you should know what non-convertible debentures are.

Final Words.

There are numerous advantages and disadvantages of investing in the non-convertible debentures issued by organisations or NBFC. These types of debentures are suitable for those investors who are willing to invest their money at a higher rate of return and who possess the ability to take risks. Therefore, there are thousands of institutional investors who prefer non-convertible debentures. But for every individual, several other profitable investment options might be available in the secondary market. The mode of investing in the non-convertible debentures entirely depends upon the investor. 

Compared to other debenture modes, non-convertible debentures are fruitful because they offer a higher rate of return. The non-convertible debentures can also be a suitable option to broaden your stock market portfolio. Learn all the market risks and other pros and cons of NCDs and invest in them.

Mid Cap Stocks: Meaning, features, and essential insights for investors


Are you aware of the term ‘dark horse’?

For those who are unaware, 

A dark horse is a contender about whom people know very little regarding their skills and ability, but they possess the potential to turn out successful.” 


Mid Cap Stocks are analogous to the term dark horse in the financial world. 

But, how do you identify the dark horse? 

To gain that skill, one needs to understand the fundamentals of Mid Cap stocks. 

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

What are Mid Cap Stocks?

These companies are neither too big nor too small and are “just perfect” for investors looking for a mix of growth and profitability. 

Mid-cap firms are interesting since they are expected to grow and boost profits while increasing market share. Investors consider stocks of such firms to be less dangerous than small-cap stocks but riskier than large-cap stocks as they are still in the growth stage. 

They are in the midst of their growth curve regarding parameters like efficiency and productivity. If you want to identify a Mid Cap Stock, you need to calculate a company’s market capitalisation and determine whether it is a mid-cap company. 

One way to find out market capitalisation is by multiplying a company’s outstanding number of shares with the value of each share. 

But, to gain clarity about the concept, one needs to first understand the definition of the Mid Cap Stock. 

Mid Cap Stocks meaning

The term “mid-cap”refers to companies and stocks that fall between the large-cap and small-cap categories. 

This classification of a company’s stocks is determined by its market capitalisation.

These stocks belong to companies with an average market capitalisation of somewhere between Rs. 5,000 Crore to Rs. 20,000 Crore. Such companies are expected to grow into large-cap companies with the right strategy and efficient operations. 

Companies listed from 101st to 250th in the NIFTY index are generally considered to be mid-caps. NIFTY also has a benchmark mid-cap index in India called Midcap 50, which hosts the top 50 mid-cap most traded securities in India.

Features of Mid Cap Stocks

Mid-cap stocks are versatile, given their ability to possess some large-cap and small-cap stock attributes. The characteristics of mid-cap stocks are as follows:


Mid-cap stocks are diversified because they comprise many companies that fall between large-cap and small-cap categories. The returns and risks associated with these shares vary on the company’s future performance. 

There is a wide range of mid-cap stocks in the market, which range from the new mid-caps to the matured mid-caps. This wide range provides diversity in investment. Some mid-cap companies may be nearing the development stage from being small-cap companies. 

But, though not fully established as mid-cap companies, these companies still offer higher returns and lower volatility than small-cap stocks. 

There is a wide range of mid-cap stocks in the market, which range from the new mid-caps to the matured mid-caps. This wide range provides diversity in investment.

At the same time, others may have recently graduated from a small-cap company to a mid-cap one and thus can provide greater returns than stability.


Mid-cap stocks are relatively liquid in comparison to small-cap stocks. Buying and selling stocks is simple because they are well-known and famous, offering excellent liquidity to investors. 

They are not as liquid as blue-chip companies, but they are traded more than small-cap stocks due to their increased capital size, market share, and reputation. As a result, investors are more at ease investing in mid-cap companies.

Possibility of Growth

Mid-cap stocks belong to companies with substantial growth potential that could be perfect investors who are willing to take the moderate risk for significant returns. 

This growth happens because mid-cap stocks have not yet realised their full growth potential like large-cap stocks. 

Mid-cap companies might gain tremendously during a bull market or favourable market conditions due to their untapped potential, resulting in higher returns.

Merits of Mid Cap Stocks

Mid-cap stocks are the connection between small-cap stocks and large-cap stocks, and the following reasons indicate the advantages of investing in mid-cap stocks.

The benefits of investing in mid-cap stocks are as follows:

Stock Life Cycle

Business entities experience several stages in their life cycle. The introduction stage companies have the lowest market capitalisation as they are yet to generate earnings. 

After the introduction stage, companies tend to enter the second stage, the growth stage.

The demand for the company’s products increases, and due to this, the company’s market capitalisation grows. 

Mid-cap companies are in this stage, and it is less risky than the small-caps yet more adaptive to change than large-caps. The investor may invest in stock during its growth to earn the fruitful return of capital appreciation during maturity when the earnings are stable, which results in higher stock prices.

Stock success rate

The mid-cap stocks are underdogs, i.e., the portfolio allocation to mid-cap stocks is lower, but the mid-cap stocks are attractive investments to be made. They are nothing but small-cap stocks with higher success rates and have survived the introduction stage. 

They have survived the small-cap introduction stage, giving them a financial advantage over the small-cap stocks. Mid-cap stocks have been outperforming due to their ability to deliver cash flow and growth.

Returns over risk

Small-cap stocks are risky stocks but may produce good returns, and large-cap stocks are less risky stocks but may produce lesser returns. 

On the other hand, they may provide better returns than large-cap stocks. As a result, the return per risk relationship is better in mid-cap stocks.

Demerits of Mid Cap Stocks

As rosy as these stocks may look, there is also a flip side to these investment instruments. Few demerits associated with Mid Cap Stock are as follows:

Value trap

A value trap is a situation that occurs when a corporation operates in a low-profit environment with little cash flow and cannot break free. When markets are not performing well, this overreliance might lead to volatility issues. The situation is especially true when stocks are overvalued and stock market volatility is at its highest. 

Mid-cap companies are highly susceptible to a value trap, especially those with low rankings. The majority of revenue in mid-cap stock may come from a single business line, and it may go out of business if the trend continues. 

Inadequate resources 

A scarcity of opportunities can hamper the growth of the market’s Mid Cap Stock segment. 

Mid-cap enterprises are more likely to have inefficient managerial and organisational infrastructure when compared to large-cap companies.

Hence, even though the mid cap stock makes a lot of money while increasing its worth, the tight not be able to make the best use of it due to a lack of opportunities.

Effect of a financial bubble

An unstable financial bubble may cause a mid-cap company’s outstanding performance. 

Due to market speculation of more price increases, mid-cap stocks may perform very well.

On the other hand, most of these businesses may lack the financial strength to survive when the bubble bursts. As a result, when an investor is looking for the best mid-cap stock, they must make sure to investigate the financial history of those mid-cap companies. 

Also, many mid-cap companies may lack the financial wherewithal to withstand the speculation before the bubble to assess their financial strength appropriately. 

To forecast the future growth, investors must thoroughly examine the company’s past financial soundness.

What do Mid Cap Stocks mean for an investor’s portfolio?

Mid-cap stocks have features like; diversity, chances of growth, moderate rate of risk, and liquidity. These features make mid-cap stocks more advantageous over small-cap and large-cap stocks. 

History has witnessed that most Mid-cap stocks perform better than both small-cap stocks and large-cap stocks in terms of return and capital appreciation.

They are expected to perform better in the current market, given that mid-cap stocks have features of both small-cap stocks and large-cap stocks.

This aspect allows them to exploit the best of both the market extremes, i.e., moderation of risk and substantial return. 

The few main advantages an investor may enjoy by including the mid-cap stocks in their portfolio are as follows:

Accepted by the Indian market

Mid-cap stockholders get easy credit on mid cap stock compared to small-cap stockholders. 

The investor is exposed to more risk when investing in small-cap stocks than in mid-cap stocks, which gives mid-cap stocks the upper hand in attracting investors.

Graph position

Mid-cap stocks are in the middle of the market growth graph, i.e., between small-cap and large-cap stocks that give it room for appreciation in value, and investors have better chances of receiving capital appreciation.

Limited attention

Mid-cap stocks are like the underdog stocks, meaning that they may get overlooked by investors in the initial days resulting in limited attention. 

Limited attention leads to low demand, which leads to low pricing, making them more attractive for inclusion in an investor’s portfolio. 

Investors may invest a more considerable amount in such stocks to earn price appreciation if they are confident that the stock will catch attention in the future.

Analysis of financials

Compared to the small-cap stocks, mid-cap stocks provide more information on the financial position and health, making it easier to analyse the companies listed in the mid-cap arena. 


An efficient investor can quickly analyse the available data and make more rational investing decisions while investing the hard-earned money.

What should an investor keep in mind while buying Mid Cap Stocks?

If an investor considers investing in mid-cap funds, they should go for it if their investment objectives match the perks provided by mid-cap stocks. 

The following are some investment objectives while investing in the Mid Cap Stock:

Scope of Return

Mid cap stocks are in the middle of the market growth graph, i.e., between small-cap and large-cap stocks that give it room for appreciation in value and investors may have better chances of receiving returns.

Moderate Risk

Compared to the small-cap stocks, mid-cap stocks have lower risk due to diversity and lower complexity in the business.


Investors generally overlook mid cap stock, resulting in price affordability. They give suitable returns, and thus the price of such stocks tends to grow in the future, which results in price appreciation.

Earn Long-term returns

If an investor is seeking a long-term investment that will generate sustainable growth, mid-cap stocks are an excellent choice because the investor can profit from price fluctuations when the mid-cap stock is becoming a large-cap stock. 

If investors are looking for the objectives listed above, they can invest in Mid Cap Stock.

What are the significant companies with Mid Cap Stocks in India?

Some of the most notable companies that are perfect for investors looking to invest in Mid Cap Stock are as follows:

Crompton Greaves

Crompton Greaves Consumer Electrical (CGCEL) is a front runner in the industry of fans and light consumer electrical markets.

It has an excellent product portfolio that focuses on diversification and innovation. The company is said to have generated a gross Internal Rate of Return of 33%. 

The company is expected to grow significantly in the coming years due to its robust distribution network in the consumer electrical space. 

However, it does face competition from leading players like Orient electric and Havells, which could hinder the company’s growth.


Escort is one of the front runners in the tractor manufacturing industry. The company has a well-established dealer at work and robust financers with periodic product launches and marketing tactics.

Escort has also established its presence across various sectors apart from tractor manufacturing like agriculture machinery, construction equipment, and railway equipment. 

The company’s growth potential seems ambitious due to its performance over the last three years. 

However, the market share of Escorts in the Western and Southern regions is still not up to the mark. 

Relaxo footwears

Relaxo Footwears is one of the front runners in the non leather footwear market in India.

The promoters of this brand have been involved in the footwear business for the past 30 years.

The firm has shown 13% and 27% growth in profits over the last decade, and the company is expected to grow significantly in the upcoming years.

Polycab India 

Polycab India (PIL) is one of the front runners in the Indian cable and wire industry. The company already has 22% of the market share in the cable market. 

The country’s southern and western zones are where the form is famous for its products. 

The red flag for the firm could be that it is domestically focused. 

However, it is expected to grow significantly as they expand its business and operations in the coming years.

Deepak Nitrite 

Deepak Nitrite (DNL) is a significant contributor to the chemical industry of India, which is one of the fastest-growing contributors to this industry worldwide.

For the past five years, the growth rate of Deepak Nitrite (DNL) has been around 26 percent. The company is expected to grow significantly in the upcoming years.

India is a fast-growing economy that liberalises industrial and service sectors. Hence, the chances of a mid-cap company turning into a large-cap company are better than in developed economies like the US and Europe.

How are Mid Cap Stocks different from Small-Cap Stocks?

Let us understand how Mid Cap Stock differs from small-cap stocks with the help of an all-encompassing comparison chart.

Serial No. Basis Mid Cap Stock Small-cap stocks
1. Definition Mid cap stocks are shares of those companies that have an average market capitalisation and financial position. These companies are positioned better than small-cap companies but lesser than large-cap companies. Small-cap stocks are stocks of those companies that have the lowest market capitalisation and financial position in the market. Typically, these are the companies that have newly entered the market and have the highest risk.
2. Market capitalisation Mid-cap companies have a market capitalisation of between Rs 5,000 crores and less than Rs 20,000 crores. Small-cap companies have a market capitalisation of less than Rs 5,000 crores.
3. Risks involved  Risk is more prevalent in mid-cap companies because many investors invest in growing companies, resulting in higher volatility in returns. Small-cap companies are riskier because their prices fluctuate more frequently, increasing the risk for investors.
4. Growth potential Mid-cap companies have ideally high growth potential. They are an excellent investment option for investors seeking slightly higher growth. Small-cap companies have the most significant potential for growth compared to mid-and large-cap companies. They have lower share prices, and their smaller size allows them to grow more prominent in the future.
5. Liquidity  The stocks of Mid-cap firms’ have the liquidity that is often lower than that of large-cap firms because these firms are still in their development stage while the large-cap firms are already developed. 

However, mid-cap firms have greater liquidity than small-cap firms, given their better position and lesser risk.

Compared to mid-and large-cap enterprises, small-cap companies have the least liquidity. These equities have low trading volumes, which are often relatively lower than large-cap and mid-cap stocks.
6. Types of investors Investors who want to grow their wealth substantially but do not want to bear a risky portfolio – choose Mid Cap Stock. Mid Cap Stock helps create a diversified portfolio. Small-cap stocks are perfect for investors that have a huge risk appetite. 

These investors desire huge capital appreciation.

7. Volatility Mid-cap stocks are more volatile than large-cap stocks but less than small-cap stocks. Small-cap stocks are the most volatile stocks.
8.  Returns Mid Cap Stocks promises better returns at a moderate risk. Small-cap stocks promises substantial returns at high investment risk.

What are the substitutes of Mid Cap Stocks for the investors?

If an investor feels unsure about investing in Mid Cap Stock, then there are a plethora of alternative investment options available for them.

The substitute investment options for Mid Cap Stock are as follows:

Sovereign Bonds

Sovereign Bonds are issued by the government that provides regular income over some time to the investor. 

These bonds are appropriate for risk-averse investors looking for secure investment options.

Debt funds

As the name suggests, debt funds are used to invest in the company as debt, and debt funds provide a regular and fixed income to the investor. Debt funds include debentures, bonds, treasury bills, etc. 

They provide steady returns over comparative risk.

Balanced funds

Balanced funds refer to funds used to purchase stock and debt instruments and help the investor diversify the portfolio’s risk. 

Shares are risky compared to debt instruments, and thus, balanced funds are used to average out the portfolio’s risk.

Bottom Line

Overall, we can conclude that mid-cap stock belongs to companies with average market capitalisation. 

These companies are on the rise and have the potential to provide substantial revenue like capital appreciation because of their growth.

The telecom giant Airtel and the IT pioneer Infosys were once mid-cap companies, but now they are successfully established large-cap companies in their respective sectors. Hence, a worthy mid-cap company can offer substantial growth to investors. 

The only caveat here is the careful selection of the company. 

An investor must never forget that the situation can turn either way. Therefore, it is crucial to DYOR (do your own research) and invest while considering the risk involved.

Your investments should be in synchronisation with your risk appetite.

How can the Market capitalisation of a company influence your investing decisions?


Did you know investing in the stock market can give you desired returns and even more if you invest in the right company’s shares? 

The know-how to invest in a company that meets your investment objectives comes with an enriching experience in the market. 

But, it is said that investing in the big players of the stock market can help you earn steady returns with lesser risk. 

The big players in the stock market, like Reliance limited, TATA, etc… are less likely to plunge suddenly. But, the big question is how to identify the big players or small companies in the market? 

Well. The answer is simple – Market capitalisation!

Market capitalisation is the concept used to determine the size of the companies in the stock market. It is the multiple of the total number of shares outstanding and the market price per share of the company. 

But, only this information will not suffice to enrich your knowledge. Hence, let us understand market capitalisation meaning in a bit more detail.

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

What is market capitalisation?

Market capitalisation is the market value of the total number of outstanding shares of the company. One can calculate a company’s market capitalisation by multiplying the market price of the company’s shares with the total number of outstanding shares of the company.

A corporation with 1 crore shares outstanding at INR 100 a piece, for example, would have a market capitalisation of INR 1 billion. Instead of sales or total assets, this statistic is used by the investing community to determine a company’s size. 

Market capitalisation is one of the parameters used in acquisitions to analyse whether a takeover candidate is a fair bargain for the acquirer. Understanding the worth of a company is an important task that can be difficult to do quickly and accurately. 

Market capitalisation is a simple and quick technique to assess the value of publicly listed firms by extrapolating what the market thinks they are worth. 

In this case, simply multiply the share price by the number of available shares. Because firm size is a basic driver of numerous qualities in which investors are interested, including risk, using market capitalisation to illustrate the size of a company is crucial. 

It is also simple to figure out. A firm with 20 thousand shares that sell for INR 100 each has a market capitalisation of INR 20 lacs. 

On the other hand, a business with 10 thousand shares outstanding with a share price of INR 1000 per share would have a market capitalisation of INR 1 crore.

How is market capitalisation determined?

The market capitalisation of a firm is first determined through an initial public offering (IPO). 

When a company wants to go public before announcing its IPO, it hires an investment bank to assess the business value with the help of valuation tools. This helps the company to ascertain the number of shares to be issued to the public along with the opening price of the same.

For example, a business that finds its IPO valued at INR 10 crores by an investment bank may elect to issue 10 lac shares at INR 100 per share or 20 million shares at INR 50 per share. The initial market capitalisation would be INR 10 crore in either case.

Once a firm goes public and begins trading on the exchange, supply and demand determine the price of its shares on the market. 

If the shares experience high demand due to favourable circumstances, the price will climb. 

If the future of a company does not look to be promising, the sellers of the shares may drive the price down. The market capitalisation thus becomes a real-time evaluation of the company’s worth.

The formula of market capitalisation

Investors can gain clarity by understanding the formula for this evaluation method before delving into the finer points.

N X P = MC


Market capitalisation is abbreviated as MC.

N is used to denote the number of outstanding shares.

And P is used to denote the closing price of each of the company’s shares.

Importance of market capitalisation

While the significance of market capitalisation has been mentioned in its definition; it is critical for potential investors to fully comprehend its significance. This can also assist them in comprehending the market and its impact on a company’s shares and worth.

Universal Technique 

Market capitalisation is the most extensively utilised way of evaluating a corporation all around the world. 

Because this is one of the most prominent and commonly accepted techniques, it is simple for investors to comprehend a company’s worth regardless of its geographic or economic location.

Precise Suggestion 

Suggestions of market circumstances are always risky because they can alter owing to a variety of causes. However, one form of evaluation that is quite precise is market capitalisation. The smaller the market cap of a company the more aggressive and risky it is and vice versa.

As a result, while it is not completely foolproof due to apparent reasons, it is a reliable tool for assessing the risk of investing in a company.

Affects the index 

In the stock market, this technique is also used to analyse the value of shares of various firms for the index. 

Stocks having a higher market capitalisation are given more weight in the index using this strategy.

Helps in Comparing 

It is a convenient approach for investors to compare different companies because it is a universal method that can be used to analyse any company’s market worth. 

This comparison not only aids in determining a company’s size but also the risk involved in investing in it.

Balanced portfolio

To avoid suffering a large loss, investors should keep a well-balanced portfolio. This comprises investing in a few top companies based on market capitalisation, as well as high-risk investments in new businesses.

While this method of appraisal is simple and widely recognised, investors should be aware that it ignores a company’s debt and other financial liabilities. Furthermore, it does not account for various sorts of returns, such as stock splits, dividends, and so on.

Investors can gain clarity by understanding the formula for this evaluation method before delving into the finer points.

Types of Companies based on market capitalisation

There are three main types of stocks to pick from based on this popular approach for analysing a firm. 

A portfolio that is well-balanced with a good mix of all of these can help to reduce risk.

Type of Stock Market capitalisation
Small-cap stocks Market capitalisation up to 5000 crores.
Mid-cap stocks Market capitalisation between 5,000 and 20,000 crores.
Large-cap stocks Market capitalisation above 20000 crores.


These are some of the most reliable business groupings on the market. As a result, investing in these businesses can prove to be a safe option. 

Another essential point to remember is that, while these are solid businesses, the return on investment may be rather low. As these companies have typically reached the apex of their growth, and as a result, stock values are less likely to shift dramatically. 

However, because of the low risk and slower growth, investing in these stocks is a prudent alternative.


Companies that have experienced some growth and are relatively steady but still have significant growth potential fall into this category of market capitalisation evaluation. 

These stocks imply that a company is well-established in its field, with the potential for additional expansion. 

While investing in these companies can be dangerous due to their lack of industry experience, the risk of investing in their stocks is far lower than that of the next set of companies. 

As a result, the return on them could be larger than that of large-cap companies.


The equities with the smallest market capitalisation are the riskiest of all. These are start-up businesses that have yet to make a name for themselves in their field. As a result, they could be extremely dangerous. 

Success can skyrocket a company’s stock price, while failure can result in a significant loss for shareholders. These are the riskiest investment options available. 

Thus, selecting the right combination is of utmost importance. Because each can be affected differently by the market or economic changes, large-cap, midcap, and small-cap stocks have taken turns leading the market over time. 

Many investors diversify their portfolios by including stocks with different market capitalisations. 

When large caps are declining in value, small caps or midcaps may be on the increase, and they may be able to help compensate for any losses.

You will need to assess your financial goals, risk tolerance, and time horizon before putting together a portfolio with a healthy mix of small-cap, mid-cap, and large-cap companies. 

A diversified portfolio with a variety of market capitalisations can assist you in reducing investment risk in one area while still supporting your long-term financial goals. 

One must, however, keep in mind that diversification does not guarantee the absence of risk.

Vital Valuation Ratios

While learning about market capitalisation, investors need to become familiar with a few key ratios. 

The proportions that take market capitalisation into account are as follows:

Price to Earnings Ratio 

The price-to-earnings ratio is used to calculate the projected future return on investing in a company’s stock. This ratio is calculated by dividing the market capitalisation by the net revenue over the previous 12 months.

Price-to-free-cash-flow ratio 

The price-to-free-cash-flow ratio is derived by dividing the MC by the 12-month free cash flow. It’s also used to forecast predicted profits.

Price-to-book Ratio

This value is calculated by dividing MC by the company’s total book value. It is calculated by subtracting an institution’s total liabilities from its entire book value of assets.


This metric assesses the short-term operational results that can be expected. 

Earnings before Interest, Taxes, Depreciation, and Amortisation (EBITDA) is the acronym for earnings before interest, taxes, depreciation, and amortisation. 

The enterprise value (EV) is computed by subtracting total cash from the market capitalisation and adding the value of preference shares and debentures. 

By dividing the EV by EBITDA, the ratio is determined.

Factors influencing market capitalisation

The market capitalisation of a corporation is influenced by a number of things. 

These factors might help investors determine whether a company is likely to provide good profits.

  • The demand for an institution’s products or services, as well as its capacity to meet that need, are some crucial factors that impact a company’s market capitalisation.
  • Market capitalisation is impacted by market fluctuations. This could be a result of a market crisis or industry crisis, an economic slowdown, or both.
  • A company’s stock value is lowered by exercising a warrant.
  • Competitor brands’ or institutions’ performance and creativity.
  • A company’s dependability and repute.

How does the number of shares affect market capitalisation?

The number of outstanding shares of a firm is determined by factors such as share repurchases and new share issuance. The market capitalisation of a firm does not change when it splits its stock to issue new shares.

While understanding the impact of many factors on the MC is important, investors need also be aware of how investments develop or drop over time. With the help of an example, this is explained.

If each share of a corporation costs Rs.100, Mr Bhagat, who invests Rs. 10,000, will receive 100 shares of the company. When the company’s market capitalisation rises, the share prices rise with it. 

If the stock prices rise to Rs. 120, Mr Bhagat’s investment will be worth Rs. 12,000 in total. 

As a result, Mr Bhagat stands to profit Rs.2,000 on his Rs.10,000 initial investment.

Issuance of Bonus Shares increases the number of outstanding shares, but it does not have an impact on the market cap of the company because the price of the share goes down proportionately.

Other approaches to determine a company’s worth

There are a few more methods for calculating an enterprise’s worth that are commonly employed. The next sections go over each of these methods in depth.

Equity Value

This figure is arrived at by adding together all of a company’s assets. This asset evaluation, however, is done in the context of common shareholders (equity investors).

Enterprise Value

The enterprise value of a firm is determined by assessing the assets that serve as the company’s functional core. In addition, all stockholders are taken into consideration. This comprises stocks, bonds, and preference shares, among other things.

What is the market capitalisation Variant – Free Float?

The term “float” refers to the number of outstanding shares that are available for public trading. 

This float is used in the free-float technique of calculating market capitalisation, although it excludes shares owned by business executives. 

The main difference between the traditional MC and the free-float method of computation is that the former considers the whole value of stocks, whereas the latter does not. 

Most of the main exchanges across the world have adopted this indexing system.

Drawbacks of market capitalisation

Market capitalisation does not measure a company’s equity value, despite the fact that it is frequently used to describe it. That can only be achieved with the help of a thorough examination of the company’s basics. 

It is not efficient to ascertain the value of a company based on the market price because of its inability of it to reflect the actual value of a share of the company. 

The market frequently over-value or under-value shares, implying that the market price can only tell you the amount the market is willing to pay for the shares of a particular company.

The market capitalisation does not determine the amount a firm would cost to acquire in a merger transaction, despite the fact that it measures the cost of buying all of its shares. 

The enterprise value is a comparatively better way to understand how much it might cost to buy a company outright.

How is market capitalisation different from Enterprise Value?

There are advantages and disadvantages to having a large market capitalisation. On the one hand, larger firms may be able to acquire better funding from banks and sell corporate bonds.

The enterprise value of a corporation is calculated by taking its market capitalisation, adding all of its debts, and deducting its cash. 

Many investors make use of enterprise value to get an idea of how much it is going to cost to buy a firm and take it private. The enterprise multiple, for instance, is a valuation measure that makes use of it. 


For an investor who is analysing stocks and weighing potential investments, market capitalisation can be a useful tool. For a publicly-traded company, market capitalisation is a fast and straightforward way to estimate what its value is by extrapolating what the market thinks it is worth. 

This metric, rather than sales or total assets, is used by the financial community to determine a company’s size. Market capitalisation is used in acquisitions to analyse whether a takeover candidate is a fair bargain for the acquirer.

How do investors use margin trading for profitability?


In today’s world, where the market fluctuates at each changing second, we have ample opportunities to earn gains out of these fluctuations. We could earn out of the market even when we lack liquidity. Margin trading is one of those methods.

Diving into a vulnerable business method like margin trading requires a plethora of information and plenty of tips and tricks. 

Let us proceed ahead and grab the basics of them!

Key terms related to margin trading

Some key terms relating to margin trading are as follows:

Margin account

A margin account is a type of brokerage account in which the broker puts in the money with which the investor (borrower) can purchase stocks in the market, keeping a minimum margin requirement in possession.

Margin call

A margin call is a call by the broker (lender) to the borrower when the amount in the margin account falls below the minimum margin requirement. 

In case of any defaults, the broker has the legal right to sell all of the shares of the investors and cover up his/her margin loan amount.

Minimum margin requirement

A minimum margin requirement is the necessary amount of money that the investor is bound to keep in the margin trading account.

Concept of Margin Trading

Margin trading refers to the trading process where an individual increases their potential return on investment by investing more than they can afford. Here, investors can benefit from the opportunity to buy shares at a marginal price of their true value. Such trading transactions are financed by brokers who lend investors cash to buy stocks. Margin can be settled later when investors liquidate their position in the stock market.

In this regard, margin trading gives investors access to higher capital for investment, thereby helping them to leverage their market position, either through security or cash. Subsequently, this trading helps to increase results so that investors can get higher profits from successful trades. However, this trading can be quite risky and the investors only get profit when the total profit is more than the initial margin.

SEBI Regulations relating to Margin Trading

Until recently, margin trading in India was only allowed through cash, while the provision of shares as collateral was restricted. However, as per the new regulations issued by SEBI In 2018, investors can leverage their market position through margin trading by providing shares as collateral.

Further, margin accounts can only be offered by authorised brokers under the regulations issued by SEBI.

How can investors participate in the margin trading Process?

Those who wish to invest through margin trading can do so by creating a Margin Trading Facility (MTF) account with their brokers.

An MTF account is a type of brokerage account where the authorised broker disburses the funds to the investor to buy shares or other similar financial products. As in usual with margin trading, borrowing on MTF accounts can be used against the collateral in cash (also known as minimum margin) or securities purchased and come with an interest rate charged periodically.

How does MTF margin trading work?

When an investor buys securities through funds in the MTF accounts and the value of these securities is increasing above the interest rate charged on them, then the investor

enjoys higher returns than they would have if they had invested in the securities with only their funds.

However, on the other hand, the broker charges interest on the funds in the MTF accounts for as long as the loan remains outstanding, thereby increasing the investor’s cost of purchasing the securities.

As a result, if the securities do not appreciate and rather fall in value, the investors will suffer losses in addition to having to pay the interest on the margin funds to the brokers.

An illustration

The following is an example of margin trading that illustrates how this process works:

Suppose Mr Sharma buys shares for Rs. 100, and when squared off, the price of this stock rises to Rs. 112. If he had bought the shares through the cash he had and paid for them in full, Mr Sharma would have earned a 12% ​​return on his investment.

On the other hand, if he buys this stock using margin trading and pays only Rs. 40 in the cash segment, he will get a 72% return on the money he invested.

Margin trading thus allows investors to earn a lot higher return on investment.

On the other hand, if the share price falls, the investor may also suffer insurmountable losses. For example, the value of the shares bought by Mr Sharma falls from Rs. 100 to Rs. 50. If he had bought these shares entirely in cash, he would have suffered a 50% loss on his investment. But if he buys stock through margin trading, he will have a loss of more than 100%.

There is also an e-margin trading option that allows investors to buy shares by simply paying 25% to 45% of the total amount. This tool allows investors to pay the remaining amount at a certain pre-agreed interest rate. For example, if you want to buy 100 shares of company A and the current price of one share is Rs 500, then you would have to have a total amount of Rs 50,000 plus the required amount for the brokerage to continue. 

However, in the case of e-Margin, you can buy these shares by paying only 25% of the total delivery amount, and the remaining 75% of the margin amount will be provided by the broker. This margin amount is then collected with predetermined annual interest.

Hence, from the above example of margin trading, we can understand that this process can bring investors either high profits or significant losses, depending on how stocks work in the market.

Advantages of margin trading

The benefits of this business process can be summarised as follows:

  • Ideal for short-term profit generation

Margin trading is ideal for investors who want to profit from short-term price fluctuations in the stock market, but do not have enough money in hand to invest.

  • Take advantage of your market position

This trading process helps investors to use their positions in securities that are not from the derivatives sector.

  • Maximise return

It allows investors to maximise the rate of return on the capital invested.

  • Use securities as collateral

Investors can use securities in their Demat account or their investment portfolio as collateral for margin trading.

  • Regulated by SEBI

Margin trading facility is under constant supervision of stock exchanges and SEBI.

Risks associated with margin trading

While investors can increase their profits from margin trading, it can also be risky for several reasons. Following are some risks associated with margin trading.

  • High risks:

The risks associated with margin trading are high as investors may end up losing more than they invested.

  • Minimal balance maintenance:

Investors must maintain a minimum balance in their MTF account at all times. If the balance falls below what is mandated by the broker, the investor will be forced to put in more cash or sell some shares to maintain the minimum balance.

  • Risks of liquidation:

Brokers have the right to liquidate assets in the MTF to recoup their losses if investors do not live up to their end-margin trading agreement.

However, investors can minimise the chances of losses from this trading by applying the following practices:

  1. Because investing through margin trading is similar when borrowing an advance, investors are required to pay a certain percentage of interest on it. Therefore, investors must try to settle the margin as early as possible to avoid the accumulation of large interest over time.
  2. Investors should be careful and refrain from borrowing the maximum allowed amount. It is best to continue trading on margin once investors are confident in creating profiles.
  3. Because margin trading can bring both high profit and losses, investors should ensure that they have sufficient cash to cover the margin, even if the market turns out to be disadvantageous for them.

Therefore, investors must gauge their risk appetite before deciding on margin trading for investments.

What is the difference between margin and leverage?

Margin and leverage differ from each other on several factors. To ease the understanding of the matter, we have provided an all-encompassing comparison chart between margin and leverage.

Margin v/s Leverage

Serial No. Basis Leverage Margin
1. Definition Leverage is a kind of debt that the broker lends. Leverage means trading more than the actual capacity and affording a lot more with the help of margin loans. Margin is the minimum amount that the borrower has to keep to get a loan, and it is a  mandatory obligation on the part of the investors.
2. Type of investment Leverage is a great investment tool that can mobilise small investments into greater profits with market fluctuations. Margin is an obligation of two types:

Initial margin and maintenance margin.

Initial margin is the deposit required on the opening of a margin account, and maintenance charges are the charges for keeping the margin account in active usage when incurring losses.

3. Kind of security It is primarily a kind of debt. It is primarily a type of collateral security.

What are the facilities and features of margin trading?

The features of margin trading and the facilities provided by it are as follows:

  • Investors who want to invest using the margin trading process should be well aware of the risks and rewards of the trade factor and should comply with the terms and conditions of the trade.
  • It makes the investor capable of creating leverage positions that are not part of the derivative segment.
  • This position can be created using the margin amount against the stock margin as collateral securities.
  • Position can be carried forward up to T+N days (T = means trading day whereas N = means the number of days the said position can be carried forward). N is defined changeably from broker to broker.
  • These securities are predefined by the SEBI and exchange board of control from time to time.
  • Only corporate dealers are sanctioned to offer MTF as per SEBI guidelines.


Margin trading is a riskier idea, and accomplishing it without any information and experience might lead to fatal debt conditions or even insolvency. It is suitable for experienced investors and those who are well-versed or able to bear the risk. 

When margin trading is executed properly, profits can be made on an extensive basis due to increased buying power. However, if any faults arise, the investors can lose more than the original investment.

By now, it’s clear that margin trading is not for beginners! 

Liquidity-The Business Ability To Converting Assets


In a financial disaster, liquid assets might include cash on hand or an emergency savings account. Furthermore, liquid assets are essential since it allows you to take risks. It will be easier for you to decline a great deal when it arises if you have cash on hand and easy access to money. Cash, savings accounts, and checkable accounts are examples of liquid assets. We can convert it easily to our requirements.

What is liquidity?

Liquidity refers to the easiest method of converting assets into cash. Assets like stocks and bonds are very liquid. We can convert it into money within days. However, assets such as property, plants, and equipment are difficult to convert into cash. For example, if you own land and need to sell it, liquidating it can take weeks or months, making it less liquid than your bank account.

In other words, the ease with which an asset may be bought or sold at a price that accurately represents its intrinsic value is known as liquidity. Since it can be converted into other assets the fastest and most effectively, people regard cash as the asset with the highest level of liquidity. Examples of physical things that are relatively illiquid are collectables, fine art, and real estate. The distribution of other financial assets over the liquidity spectrum includes anything from equities to partnership units.

Liquidity assets refer to how easily an item may be purchased or sold on the market at a price that reflects its true worth. Due to its ease and speed of conversion into other assets, cash is regarded as the asset with the highest level of liquidity. Real estate, fine art, and collectables are a few examples of tangible assets that have a low liquidity level. Various points on the liquidity spectrum are occupied by other financial assets, ranging from shares to partnership units.

Cash, for instance, is an asset that can be used to buy anything most simply, like a $1,500 refrigerator. The likelihood of finding someone willing to exchange the refrigerator for their collection is slim if they have no cash but a rare book collection worth $1,500. They will have to sell the collection and use the proceeds to pay for the refrigerator. If the individual had months or years to wait before making the purchase, it could be okay, but if the person just had a few days, it might be problematic. Instead of waiting for a customer who was prepared to pay the total amount, they could have to sell the books at a discount.

Market liquidity 

Market liquidity describes how easily we can purchase assets and sell assets in a market. The stock exchange of a nation or the real estate market of a city permits the purchase and sale of assets at predictable and open prices. In this case, the market for refrigerators in exchange for rare books is nonexistent due to its extreme illiquidity.

On the other hand, the stock market has high market liquidity. If an exchange has a significant volume of trading that is not dominated by selling, in this case, the price a buyer offers per share (the bid price) and the amount a seller takes (the asking price) become similar. But it will only work if the exchange has a significant volume of transactions and selling has not dominated it. In this case, investors will no longer have to give up investment income to sell quickly. 

The market gets more liquid when the spread between the bid and ask prices narrows. When it expands, the market gets more illiquid. Typically, real estate markets are significantly less liquid than stock markets. 

The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, is frequently determined by their size and the number of open exchanges on which they may be exchanged.

Accounting liquidity

Accounting liquidity measures how an individual or corporation can fulfil financial commitments with the liquid assets at their disposal. It can pay off debts when they come due. In the preceding scenario, the rare book collector’s assets are somewhat illiquid and would likely not be of their entire Rs. 2 lakh value in a pinch. We can measure accounting liquidity by comparing liquid assets to current liabilities or financial commitments due within a year. Several accounting liquidity measures differ in how narrowly they define “liquid assets. ” Analysts and investors use it to identify organizations with high liquidity and determine depth.

We need to use a variety of ratios to quantify accounting liquidity, and each one uses a different definition of “liquid assets.” Analysts and investors use these to identify companies with strong liquidity. It is thought of as a depth measurement.

Liquidity calculation

Financial analysts assess a company’s capacity to meet short-term obligations with liquid assets. Generally, a ratio larger than one is preferred when applying these calculations.

Current ratio

A company’s capacity to pay its short-term debt and obligations, particularly those due within one year, using assets available on its balance sheet is determined using the current ratio, a liquidity ratio formula. Another name for it is the working capital ratio. Investors like current ratios of one or higher.

A corporation may be unable to pay off its short-term debt if its current ratio is less than 1.

A current ratio larger than 1 indicates that the business has an excessive amount of unsold goods or cash on hand.

Formula: Current Ratio = Current Assets / Current Liabilities

The total of all assets that will be utilized or converted into cash in the upcoming year is known as current assets. Cash, inventories, and accounts receivable are all included in this list. The total liabilities due in the upcoming year are known as current liabilities. Payroll, accounts payable, mortgage payments, and loans are all included in this list.

What does the current ratio measure

  • Current ratios can change depending on the sector, the size of the business, and the state of the economy.
  • Consumer goods and other recurring revenue-generating businesses sometimes have lower current ratios than cyclical industries like construction.
  • Current ratios might vary amongst organizations, even within the same sector.
  • For instance, the liabilities and assets might vary depending on supplier agreements.
  • A big retailer like Walmart could bargain with suppliers for favourable conditions that let it hold onto goods for extended periods and have lenient payment terms or obligations.

During an economic boom, investors may favour lean companies with low current ratios and expect dividends from companies with high current ratios. However, they prefer companies with high current ratios during recessions since they have current assets that may help them weather downturns. Current ratios are not always a good gauge of a company’s liquidity assets because they assume that all inventory and assets may be promptly converted to cash. This could not always be the case, especially during periods of economic turbulence. Acid-test ratios are used in these situations because they calculate immediate liquidity by subtracting inventory from asset estimations.

Quick ratio

The fast ratio is often known as the acid-test ratio. It is a little stricter. It does not include inventory or other current assets, which are less liquid than short-term investments, cash and cash equivalents, and accounts receivable. 

It gauges a company’s capacity to use rapid assets to pay its short-term financial commitments. It is mostly used by analysts in analyzing the creditworthiness of a company or assessing how fast it can pay off its debts if due for payment right now.

The equation is: Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) / Current Liabilities

Variation: The quick/acid-test ratio may be made a little more forgiving by just deducting inventory from current assets:

Quick ratio (Variation) = (Current Assets – Inventories – Prepaid Costs) / Current Liabilities

Lower ratios could be a warning that the firm is having liquidity problems, whereas higher ratios suggest a more liquid company. Most businesses would ideally like to have a quick ratio of 3 or greater. However, other businesses, like the technology industry, have substantially higher fast ratio requirements, which can be as high as 10 or 12. The quick ratio should be taken into account together with other indicators, such as earnings-per-share or the rate of return on investments, as the quick ratio alone does not provide a complete picture of a company’s financial health.

Advantages of quick ratio

By examining the financial data of a corporation, one may quickly calculate the fast ratio. It could only examine assets that are presently available while ignoring other factors like prospects, transaction time, etc.

If the company files for bankruptcy, the quick ratio is the ideal choice for short-term creditors who want to know when they will receive their money.


The quick ratio is not the best metric for determining liquidity. It disregards factors that might potentially affect a company’s financial situation, such as long-term debt and depreciation.

When computing accounts receivables, the quick ratio does not take the turnover rate or the normal collection period into consideration.

For instance, a company could have a large number of accounts receivable, which eventually might lead to a higher quick ratio. However, it might still have a detrimental effect on the company’s liquidity assets because it doesn’t take into account how long it will take for the receivables to be turned into cash.

The formula of cash ratio:

As opposed to other liquidity ratio formulas, the cash ratio only considers cash or cash equivalents, leaving other assets, such as accounts receivable, out of the calculation. As a result, it tends to be a more cautious assessment of a company’s capacity to pay its debts and commitments.

Formula: Cash Ratio = Cash + Cash Equivalents / Current Liabilities

  • The cash ratio is a measurement of liquidity, and it shows how well a firm can satisfy its short-term obligations fully with cash and cash equivalents.
  • A company’s entire current liabilities are multiplied by the total of its cash and near-cash securities reserves to arrive at its cash ratio.
  • The cash ratio is more cautious than other liquidity assets since it only considers a company’s most liquid assets.
  • If the answer is more than 1, the company has more cash available than its current liabilities; if the answer is less than 1, it has more short-term debt than it does cash on hand.
  • Lenders, investors, and creditors all evaluate a company’s short-term risk using the cash ratio.

If the cash ratio is less than 1

If a company’s cash ratio is less than 1, it has more current liabilities than cash and cash equivalents. It indicates that there isn’t enough cash on hand to cover the existing debt. It could not be a bad thing if the company’s financial sheets are distorted by things like extended credit terms with suppliers, well-managed inventory, and restricted consumer credit.

If the cash ratio is greater than 1

If a company’s cash ratio is greater than 1, it has more cash and cash equivalents than current liabilities. In this case, the company can pay off all short-term debt and still have cash on hand.

Liquidity assets or securities

Assets that are easily convertible into cash are referred to as liquid assets. Even while assets are priceless belongings that may be exchanged for money, not all of your assets can be sold immediately away for cash or without incurring a loss. Cash is a common liquid asset. The most liquid asset is cash.

Liquid Securities are freely traded securities with a market value that are listed on certain markets.

Over-the-counter (OTC) securities, such as some sophisticated derivatives, are sometimes highly illiquid. A home, a timeshare, or a car are all examples of fairly illiquid personal property for individuals since it might take weeks or even months to find a buyer and much longer to complete the sale and get cash. Additionally, broker fees are frequently fairly high.

Why Are Some Stocks More Liquid?

The size of the float (the number of shares available for trading) and demand from individual and institutional investors are the two most important liquidity considerations. As a result, large-cap equities are often the most liquid.

The most liquid stocks are often those with the largest daily transaction volume and the greatest level of demand from various market players.

Additionally, these stocks will attract more market makers, who maintain a more closely regulated two-sided market. Less liquid stocks have wider bid-ask spreads and shallower markets. Compared to more well-known names, these frequently have lesser trading volume, market value, and volatility. As a result, the stock of a large international bank will frequently be more liquid than that of a small regional bank.

Liquidity in stock market

If a stock is liquid, it may be sold quickly and effectively without experiencing a significant price shift. It could be challenging to find buyers for a stock at the official market price if it is illiquid. A dealer could thus be forced to offer a discount on the sale.

An indicator of stock liquidity is the share liquidity turnover, which is computed by dividing the total number of shares exchanged over a certain period by the typical number of outstanding shares during that same period.

Why Liquidity in stocks are different from one another?

The stocks with the highest daily transaction volume and the greatest level of interest from diverse buyers and sellers tend to be the most liquid. These equities will also draw more market makers, who keep a more tightly controlled two-sided market. Less liquid stocks that are less liquid have shallower markets and broader bid-ask spreads. These names often have a lower trading volume, market value, and volatility than more well-known ones. Therefore, a major multinational bank’s stock will often be more liquid than a small regional bank’s.

Importance of liquidity

It is challenging to sell or convert assets or securities into cash when markets are not liquid. For example, you may possess a priceless and unique family artefact that has been valued at a specific amount or more. No one will pay even close to your object’s evaluated worth. When there is no market (i.e., no buyers). However, it is extremely illiquid. It could even be necessary to hire an auction house to serve as a broker and find possible buyers, which will take time and cost money.

However, liquid assets may be swiftly and readily sold for their full worth at little to no expense. Additionally, businesses must maintain a sufficient level of liquid assets to fulfil their immediate liabilities, such as payroll or bills, to avoid a liquidity crisis that might result in insolvency.


Liquidity is an important matter. Liquidity is crucial for your company if you wish to borrow money. A small business’s liquidity ratio formula will demonstrate to potential creditors and investors that the enterprise is solid and well-capitalised, with sufficient resources to weather any unforeseen challenges.

Understanding a company’s liquidity is crucial for determining how capable a company is of meeting its current liabilities and short-term loans. Any extra funds can be utilised to expand the business and distribute dividends to shareholders. Ratios like the cash ratio, current ratio, and others are used to quantify liquidity. These will be covered in more detail in the following piece in this series. Let’s look at an illustration for now.

What are Liabilities, and Why Are They Important?


Liabilities come in many forms, including accounts payable, loans payable, accrued expenses and long-term debt. 

Liabilities are obligations that are payable to a person or an entity. 

Let’s look at the different types of liabilities and how they impact the bottom line of businesses, both large and small. 

What Is Liability?

Liabilities represent potential future costs for a company or business. A liability can take many forms, including loans, accounts payable, or debt from a legal settlement. There are two main types of liabilities: Current and Non-current liabilities.

Current liabilities must be paid off within one year, including money owed for accounts payable and short-term debt. Long-term debt is classified as noncurrent liabilities, which refer to debts with maturities longer than one year. For example, bonds issued by a government would fall into this category because it is not expected to be paid back for several years.

The importance of liabilities to businesses cannot be overstated. For a company or business, liabilities make up part of its assets. It is possible to have negative assets if you have more liabilities than assets. A company’s level of debt impacts its ability to access new capital from lenders because higher debt levels imply less money available for operations. On top of that, it also influences how the company is valued by investors when they consider whether to buy stocks or bonds in that company.

Types of liabilities

There are three types of liabilities—current, noncurrent, and contingent, but we mainly talk about the two liabilities. Noncurrent liabilities do not have to be repaid within a year; current liabilities are debts that must be.

Noncurrent liabilities include long-term loans such as mortgages, car loans, property taxes and loans on which you are not currently paying interest but will have to pay interest later. For example, if you own a house with an outstanding mortgage loan that you have yet to pay off, it’s considered a noncurrent liability.

Keeping track of current and noncurrent liabilities is essential to stay on top of your financial obligations. If you don’t, your business could go under or face severe consequences regarding its credit rating. 

Current liabilities (short-term liabilities) 

A current liability is an obligation that will come due within a year. As the name suggests, short-term doesn’t necessarily mean that you have to pay it off in one year; instead, it’s an amount you must have on hand by year’s end to pay down your debts. Current liabilities are listed on your balance sheet under assets. The basic formula for calculating current liabilities looks like this:

This may seem simple enough, but let’s take a closer look at each component. We’ll use TCS as an example throughout our discussion. We’ve provided links below so you can follow along as we discuss each element in more detail—and we also encourage you to check out our financial statements tutorial for additional information about how companies present their financial data!

Total current liabilities = Accounts payable + Accrued expenses + Short-term debt + Current portion of long-term debt.

The formula for calculating short-term debt looks like this: Current portion of long-term debt: Long-term obligations with maturities longer than one year are considered noncurrent liabilities, which we’ll discuss later. However, some long-term debts do come due within one year; these debts are called current portions of long-term obligations.

  • Wages Payable

Wages Payable is a catch-all for any money the business owes its employees. Wages payable could also include bonuses or reimbursements for specific expenses. Any money due from employees should be listed on your balance sheet under liabilities unless it’s owed to shareholders (in which case it would be listed as shareholder equity).

  • Interest Payable

Interest is an expense that can be either an income or an expense. For a business, interest payable will most likely show up as a current liability. That’s because businesses use short-term loans for working capital and inventory, which means there’s usually only enough cash to cover these liabilities for less than one year.

  • Dividends Payable

The dividends payable account reflects all dividends that a corporation owes to its shareholders. This would typically include short-term obligations of less than one year. When you look at a corporation’s balance sheet, you can see how much money it is obligated to pay its investors. That’s helpful because it can show if there are any liabilities on a company or if it has plenty of resources to fund growth.

Non-Current Liabilities (long-term liabilities) 

Noncurrent liabilities consist of long-term debts and other financial obligations, such as leases and pension obligations, that extend beyond one year. Suppose a business has Rs. 1 crore in total assets and Rs. 1 crore in debt but has several operating leases, for example. In that case, its total current liabilities will exceed its total current assets. The difference is composed of noncurrent debts, so noncurrent liabilities would equal 2 crores (deficit of 1 crore-plus leases of 1 crore).  

An example of a noncurrent liability would be a lease on office space expiring next year, even though it won’t come due for another 12 months. Hence, businesses record it on their balance sheet because it relates to future events.

If something doesn’t have an original maturity date (like accounts payable), then its maturity date will be whenever you pay it off. When liabilities relate to specific assets that aren’t owned by a company, such as paying back loans from using someone else’s money, we refer to them as secured liabilities. Examples of secured liabilities include mortgages and home equity lines of credit. Because these items are related to assets, their balances change along with asset values.

Noncurrent liabilities include mortgage loans, debentures, deferred tax payable, bonds, derivative liabilities, etc.

Long-term liabilities = liabilities – current liabilities

  • Mortgage payable/long-term debt

In a personal balance sheet, assets must equal liabilities plus equity. The definition of assets includes current and future assets, such as savings accounts, property or vehicles owned by you (or your company), inventory on hand, and equipment used to generate revenue. Debts include real estate mortgages, loans from financial institutions, and credit card balances. When total debt is higher than total assets, it’s negative equity—also known as insolvency—which means you owe more than you own.

  • Deferred tax payable

In accounting, deferred tax payable is an account that records all of a company’s liabilities related to income taxes. This number equals total income tax expense minus current income tax payable. The deferred tax payable account helps businesses ensure they are not over-or under-paying their future corporate income taxes by accumulating short-term costs in a convenient location instead of spreading them out among multiple, less accessible accounts. It also allows for easier tracking and allocation of expenses by business function.

  • Post-Employment Benefits

The amount of money you’ll receive in benefits after leaving your company can vary dramatically, depending on your work environment. The most common forms of post-employment benefits include health insurance, life insurance, disability insurance, dental insurance, vision coverage, and 401(k)s. Take some time to research these different types of coverage before deciding which plan is best for you (especially regarding 401(k)s). You might be surprised by how much more valuable it is than your salary at first glance.

  • Derivative Liabilities

With derivative liabilities, many businesses are looking to avoid accounting for these items as liabilities right now. Instead, they wait until the expiration of a contract before accounting for them. This means a derivative liability is classified as an asset on one balance sheet entry and then reclassified as a liability when it expires. For example, suppose a business buys specific securities from another party that expires in five years with an option to sell them back at 100% of the original value within two years. In that case, those securities are currently recorded at 100% value on their balance sheet. Still, they will be classified as noncurrent liabilities (in most cases) upon expiration (or maturity) date—in other words, two years from now.

Contingent liabilities 

A contingent liability is a potential loss that may or may not occur, depending on what happens in the future. In other words, if something happens, it’s a claim against your company. An example of contingent liability is medical claims for which you are likely responsible but haven’t been filed yet.

While you don’t have to pay off contingent liabilities now, they can still impact your business financially—for example, by increasing your risk of going bankrupt if too many such claims pop up. Liabilities that do not appear on your balance sheet because they have not yet arisen are called potential liabilities. You can think of current liabilities as your operating expenses while keeping an eye out for potential liabilities and new ones all along.

Contingent liabilities could be written off if it is determined that no payment will be made. Suppose such a determination cannot be made because of insufficient information. In that case, such contingencies should continue appearing on company balance sheets until all facts are known, or it becomes apparent that no further expenses will result from these events.

The term contingent means that something could happen in the future. At the same time, liability refers to any debt obligation for which you’re liable (i.e., if you borrow money from someone else).

Contingent liabilities are often excluded from net income because their ultimate amount cannot be determined with certainty. However, suppose there’s a reasonable possibility that these obligations will be paid in full by year-end. In that case, these amounts should be included in net income (and as current liabilities) because they represent an outflow of cash within one year.

Examples of Liabilities

Invoice Bookings/Unpaid Invoices, Credit or Loans payable, Unearned income such as fees due to service but have not been completed yet. Fixed Assets, if sold, will be recorded as gains or losses.

Current Liabilities formula = Total Current liabilities+Total Long Term Liabilities – Cash Balance – Short Term Investments -Inventory value of the company. For example, if current liabilities are Rs. 10,000, and total long-term liabilities are Rs. 5,000, then there is a need to improve current liabilities, which means that more money is required to fulfil them by companies bank balance or assets sales/investments, etc.

Companies’ financial statement accounts show what an organization owns (Assets) and what it owes (Liabilities). Assets include cash, inventory, buildings, land, and investments, while liabilities represent unpaid bills. All of these are grouped into three categories; Current Liabilities (payable within one year), Long-Term Liabilities (payable over time), and Shareholders’ Equity (company’s net worth).

Since businesses use financial statements to manage their operations and plan for future growth or development, it is essential to understand how each component affects business operations.

What Are Liabilities in Accounting?

So, what is a liability in accounting? Simply put, liabilities are debts that a business or company owes. Businesses usually have several different types of liabilities, such as short-term (which typically refers to debts that will be paid off within one year) and long-term debt (which relates to obligations with a term longer than one year).

The liability designation in accounting can refer to several things. Still, generally speaking, it refers to any amount of money or item owned by a company for which it is legally obligated. It’s also important to remember that everything in accounting has double-entry bookkeeping implications.

  • Bank debt

A bank loan or line of credit is one of two main types of liabilities for a business. The other kind is the debt you’ve raised from other investors, typically in exchange for shares in your company or preferred stock. Think of bank debt as liabilities that involve another party—the bank—and therefore require you to share your ownership in your business with them.

  • Mortgage debt

Most businesses use some form of debt financing, such as a mortgage or line of credit. Mortgage debt is typically used for long-term investments, like buying land or building a factory. Most small businesses don’t usually have enough assets to put up for collateral against a large loan; instead, they use equity to secure their loans. A loan secured by collateral is called an asset-based loan, while an unsecured personal loan is known as a liability.

  • Accounts payable

Many businesses have to pay their vendors. Most companies opt for their account payable to provide a buffer between when a company pays its vendors and when it receives payment from its customers. This is especially true if you run an e-commerce site or some other business that needs inventory on hand before it begins selling. In these situations, the accounts payable—the number of money businesses owe to vendors—can get pretty high quickly.

Liabilities vs Assets

Both liabilities and assets fall on either side of the balance sheet, but their relative values help determine your company’s financial health. Think of them as scales: If you have more liabilities than assets, it’s a bad sign—like lifting weights on one end while putting nothing back on the other.

On the one hand, net worth is a snapshot in time: If a company is getting off its feet, it might have few assets but lots of future potentials. But suppose a company has more liabilities than assets for an extended period (and can’t explain why). In that case, investors will panic about potential bankruptcy—or its value isn’t maximized correctly.

One key difference between liabilities and assets is how long they last. Assets like buildings or equipment last longer than liabilities like loans or accounts payable, which means companies with much debt may be less stable than those with little debt over time. Another difference between assets and liabilities is whether they’re tangible or intangible:

An asset like cash counts toward your net worth even though it doesn’t take up space in the office; intangibles like goodwill don’t matter because there’s no physical manifestation of goodwill on paper. However, the most significant difference between assets and liabilities is how they affect cash flow.

Liability payments come out of cash flow every month; asset purchases generally don’t until the company sells them later down the line. For example, if Reliance Industries buys a building for Rs. 2 crores and puts it under your corporation’s name, you’ll need to pay taxes on that Rs. 2 crores. You’ll also need to pay property taxes yearly based on your local government’s charges.

However, when Reliance industries sell that building five years from now for Rs. 2 crores, all of that profit goes straight into Reliance’s pocket—not into any other part of business operations. When deciding what types of assets and liabilities make sense for a company’s model, it’s important to remember. Does the company plan to hold onto these items indefinitely? Or do they plan to flip them quickly for maximum profit?

Assets−Liabilities=Owner’s Equity

In the majority of cases the situation, the account equation is usually described as:


How liabilities work

A liability is an obligation or debt. It is recorded on a balance sheet as a decrease in assets (because it represents the use of funds) and an increase in liabilities (because it means an obligation to repay funds). Liabilities can be considered debts that have not yet been paid. They include money owed to banks, suppliers, employees, or tax authorities. In accounting terms, liabilities fall into two broad categories: current and long-term liabilities. 

Current liabilities cover short-term debt such as accounts payable, wages payable, and income taxes. Long-term debt – such as mortgages, loans, and bonds – are included under long-term liabilities. Some debts represent obligations that will never be repaid; these are classified under other types of noncurrent liabilities.

For example, deferred tax liabilities refer to future taxes that must be paid but for which no payment is due. The opposite of liability is an asset. Assets are things of value owned by a business, including cash and property. 

Assets must equal liabilities plus owners’ equity on a company’s balance sheet — if one side goes up, another side must go down. If the company owes Rs. 10,000 but owns Rs. 15,000 worth of equipment and furniture in company office space, the company’s net worth would be Rs.5,000 (Rs. 10,000 – Rs. 15,000 = – Rs. 5,000). This figure indicates how much the company would lose if the business failed and had to pay off all its creditors with what was left over after liquidation.

Liabilities vs Expenses

Sometimes, business owners get liabilities and expenses confused. The difference is that liabilities are expenses that you can’t write off on your taxes. This means you have to pay for them even if they aren’t deductible on your income tax return.

Liabilities include accounts payable (money you owe other businesses), accrued expenses (expenses that have already happened but need to be paid), and loans or mortgages on property owned by your business. Insurance is another liability. It helps protect against risk and covers such things as property damage, theft, lawsuits, etc., but it also must be paid whether or not you can claim it as a deduction for income tax purposes.

For example, say your business owes Rs 30,000 to Abc Corp., but you aren’t able to deduct that expense from your taxes because it isn’t a deductible expense under tax law. However, even though you can’t claim that Rs 30,000 on your income tax return, you still have to pay it back to Abc Corp. to keep that business relationship intact.

That makes it a liability even though it isn’t an expense in taxes or deductions. Your bank loan is another liability because it needs to be paid back even if there isn’t any interest charged (and most loans won’t have any). It’s still money you have to pay back either way, with nothing left over for a deduction on your taxes.

Another example is what happens when one small business has a negative month—meaning they lose money instead of making it. If they had liabilities totalling Rs. 5,000, and expenses totalled Rs. 10,000 during that month, their profit would be -Rs. 5,000 (Rs. 10K expenses – Rs. 5K liabilities = -Rs. 5K profit).

However, if they had just expenses totalling Rs. 10K without any liabilities during that same month (-Rs. 10K expenses), their profit would be +Rs. 1K (Rs. 0 liabilities + -Rs. 10k expenses = +Rs. 1k profit) despite losing money overall. That said, not all businesses have liabilities like mortgages or loans on the property. That’s because most businesses don’t own the property outright (for example, an office building or factory) and don’t need to borrow money to get started.

Relation between liabilities and assets 

One of the most common ratios that bankers use to determine whether a business is a good fit for a loan or not is called gearing, also known as leverage. Gearing refers to how much of an organization’s capital comes from liabilities rather than shareholders’ equity (the money invested by investors).

For example, Company XYZ has 1 lakh in shareholders’ equity and another 5 lakh in debt. Gearing refers to how much of that 6 lakh total capital (1 lakh + 5 lakh) is financed by debt (in our example, it would be 5 lakh). Banks prefer companies with high gearing levels because their assets are secured against their debts. In other words, if Company XYZ defaults on its loans, banks could seize its assets and sell them off to recoup some of their losses.

This makes businesses with high levels of gearing safer investments for banks. To calculate gearing, you divide a company’s long-term debt by its shareholder’s equity. If Company XYZ had no long-term debt, its calculation would look like: 1 lakh / 1 lakh = 100% If Company XYZ had no long-term debt but had short-term debts instead, its calculation would look like: 0 / 1 lakh = 0%

How Do You Know If Something Is a Liability?

One way to tell if a financial liability is dragging you down is by determining if it’s eating up a sizable portion of assets. Liability doesn’t have to mean bad, however. It just means that for your business to grow and flourish, it needs help from outside sources—others need to take care of the liability for your business (and assets) to remain safe.

Liabilities of Discontinued Operations:

The reason is simple. If a company continues to lose money, it may not have enough assets to cover its liabilities (amounts owed). In such an event, or if there is another unexpected development such as a natural disaster that destroys valuable property, a company could end up being forced into bankruptcy. By tracking these liabilities separately from current assets, you’ll be able to make well-informed decisions about whether it makes sense for your business to continue in any given situation.

How Do Liabilities Relate to Assets and Equity?

In business, an asset is something that provides a future economic benefit. The company’s assets typically include cash, inventory, accounts receivable, fixed assets such as equipment and buildings, intangible assets such as goodwill or patents, stockholder equity (net worth), and outstanding debt. A liability is an obligation of a business that obligates it to pay some other entity.

For example, if company A buys supplies from another company B on credit instead of paying with cash, company A account payable is a liability. If a company borrows money from a bank to expand business operations or takes out a loan to purchase real estate for business use instead of paying cash for these items with the company’s funds (business’s equity), the company owes money.

Know Negative Liabilities

First, determine whether you’re dealing with liability in legal terms. For example, if you agree to do work on someone else’s behalf and they refuse to pay you because they don’t like how it turned out, that’s not your liability—that’s theirs. It could be an asset and a liability, but it’s not technically a liability until there is a judicial ruling. Second, remember that liabilities can change over time (for example, if interest rates drop).

That said, what matters most is whether or not you have money or capital tied up in something that has or could end up costing more than its fair share of resources. If so, it’s almost certainly a liability. As you evaluate assets and liabilities from both perspectives, consider these other issues: What are they worth? How long will they last? How quickly will they wear out or become obsolete? What costs might I incur if I need to replace them now rather than later?

Finally, note that even if something doesn’t currently cost you or a company anything extra to own it, that doesn’t mean it isn’t a liability. For example, many people have made significant investments by buying property where they live at a low price while rent prices are high. Owning property can turn into one of your greatest assets over time. Still, when you first buy it and make payments on mortgage loans for years before any appreciable equity is built up–it’s often seen as one of your biggest liabilities.

What’s the Difference Between Liabilities and Debt?

One of the most common mistakes entrepreneurs make is confusing liabilities with debt. It’s easy to understand how that happens, however. Liabilities and debt are very similar because they represent something you owe to someone else. Still, liabilities are recorded on the balance sheet, while debt is recorded on the income statement. The difference between liabilities and debt is that a liability represents an obligation you have due to past actions. In contrast, debt represents an obligation due to a loan or payment made in exchange for goods or services provided by someone else.


Liabilities refer to debts or commitments that are a part of a company’s financial records. Liabilities appear on a balance sheet and can have many different forms, depending on your situation.

As mentioned above, long-term liabilities may consist of loans or bonds due in more than one year. The most common liabilities on balance sheets include accounts payable, which refer to an organization’s obligations to pay vendors for items bought on credit; notes payable.

Which indicates that an organization owes money to another party (such as bondholders), accrued expenses, taxes payable, rents payable, dividends payable and capital leases. Understanding these concepts is important because they help you understand how liquid (or how available) your cash is at any given time.

Large Cap Stocks: What are they, and are they worth investing in?


Have you also felt jealous when your investor friends brag about holding shares of premium firms with large market capitalisation?

Do you want to go ahead and invest in large-cap companies but are unsure about what you are getting yourself into?


High five. Because you are at the right place.

As we have got you covered.

This article covers the basics of Large Cap Stocks to help you understand the fundamentals of the concept, thereby aiding your well-informed decisions for your investment options.

So, let us start with the basics first. Read on to know the definition of Large Cap Stock.

What are Large Cap stocks?

On average, large-cap corporations have a good track record and are an excellent alternative if you would like to invest in a company’s stock with less risk comparatively. Long-term investors should choose them because of their considerable market position and consistent high performance. 

The depth of a company’s market is measured by its market capitalisation; therefore, to calculate the market capitalisation value of a company, multiply the number of outstanding shares by the stock’s share price. 

Some Large Cap Stocks in India are from the market companies listed on Indian stock exchanges like Reliance Industries and Infosys.

However, a more formal Large Cap Stocks definition is necessary for the clarity of the concept. So, let us understand what does Large Cap Stocks means.

Large Cap Stocks meaning

According to SEBI criteria, all companies listed on stock exchanges are ranked based on their market capitalisation. Large-cap firms are the top 100 companies globally and are defined as those with a market valuation of $10 billion or more.

Large-cap companies are more mature, and as a result, they are less volatile during bear markets as investors seek safety and become more risk-averse compared to mid-cap and small-cap equities.

Features of Large Cap stocks

The features of Large Cap Stocks are diversified, and some of them are listed below. The attributes of Large Cap Stocks are as follows:

Consistent Returns

An average and consistent return are expected out of large-capitalisation companies as they are well-established and have reached financial maturity. As a result, the value of their shares cannot rise as rapidly compared to that of mid-cap and small-cap stocks. The dividend component is the primary source of return on such stocks and contributes significantly to the returns on these stocks.


Large-cap corporations have a robust financial infrastructure, enabling them to withstand market fluctuations and reduce risk. Due to this, Large Cap Stocks normally react reasonably to market volatility. 

Unlike mid-cap and small-cap companies, it considerably reduces the risk of such investments because they are not at risk of experiencing bankruptcy during a market crisis and can continue their operations.


Companies on the Large Cap Stocks list have a deep operational history and success. In numerous ways, the general public can access their extensive track records, allowing them to be trusted. 

Potential investors can track the stock’s performance over time and see how it has coped in various market circumstances.


In comparison to other stocks, large capitalisation stocks are slightly more expensive, as these stocks have proven track records, strong financials, and are stable investment options. 

Hence, making them costlier in the market.


The most popular stocks in the market are Large Cap Stocks, and this is because of their enormous popularity and readily available purchasers. They are the most liquid investment choices on the market. This, in turn, makes them more fluid, as there are more buyers and sellers.

Demerits of Large Cap stocks

There are some significant drawbacks of Large Cap Stocks, and they are as follows:

Capital appreciation is low

One of the significant disadvantages of Large Cap Stocks is their limited potential for capital appreciation. 

During a bull market, stock values do not rise as much as mid-cap and small-cap stocks due to their mild reaction to market fluctuations.


Individuals with low disposable income cannot afford to invest in Large Cap Stocks in India because they require significant capital. Hence, it turns out to be costly for beginners and small investors.


India has only a few large-cap companies following the recent SEBI categorisation, which does not leave many options for investors. Hence, most investors have difficulty choosing a large-cap company according to their preferences and investment choices.

What do Large Cap stocks mean for an investor’s portfolio?

There are some benefits that an investor reaps while having Large Cap Stocks in their portfolio. Such benefits are as follows:

Consistent performance 

Large Cap stocks are highly consistent and provide stability to your investment portfolio. It is improbable that a company with a large market capitalisation will experience bankruptcy or lack of operations during a market crisis.

Large-cap companies are doubtful to go inoperative in a bearish market. Hence, having Large Cap Stocks in your portfolio can balance your losses suffered through other securities during a market slump.

Consistent income

When an investor buys Large Cap Stocks, they know that the primary source of income will be dividends and not capital appreciation. Hence, investors cannot expect substantial capital gains on the sale and transfer of Large Cap Stocks, but they can expect regular dividends. 

The lack of regular returns from other types of securities makes large cap stocks a much better investment option.

Transparency of records

Large-cap companies in India are bound to provide their financial statements and other vital documents for availability in the public eye. However, mid-cap and small-cap companies are not obligated to do so. This information allows investors to access their profitability and operations performance in the Large Cap Stocks list.

It also provides a holistic picture of the company’s position to the investors. Such information will always be available to provide transparency and regulated investment conduct for the investors. It also helps the investor to assess the financial position of a company and understand if it is a fit for their portfolio or not.

These stocks enhance your investment portfolio, thereby easing the investment process.

What are the substitutes of Large Cap stocks for the investors?

If an investor is unsure about investing in Large Cap Stocks, then given below are a few substitute investment options that they can consider. The other investment options are as follows:

Mid Cap Stocks

The mid-cap stocks are expected to perform better than Large Cap Stocks in terms of capital appreciation. The performance of midcap stocks has been improving significantly in the past few years. 

These stocks are comparatively less safe than the Large Cap Stocks and do not come with the promise of steady payouts in the form of regular dividends. But, these companies have immense potential for capital appreciation. Hence, it is suitable for investors who want capital gains.

Exchange Traded Funds (ETFs)

Exchange-traded funds (ETFs) are a category of mutual funds purchased and sold on recognised Stock Exchanges. These exchange-traded funds include shares, debentures, treasury bills, bonds, and other fixed-income securities. 

ETFs are a desirable option for investors who have just begun their investment journey because of their low cost and tax efficiency, along with other characteristics of stocks.

Equity Funds

Equity funds are a category of mutual funds in which equity shares or stocks are purchased with the help of pooled investment. Experts manage these funds; hence the risk factor is substantially reduced, but the returns are similar to that of equity returns.


A stock that provides a diversified return on the capital employed is termed a multi-bagger. 

These stocks have a low cost and give a substantial return on the investment amount.

The returns are said to be multiples of the investment amount; hence, they are named multi-bagger. For example – if the investment returns are three times the investment amount, it is called a triple bagger.

Investors who are new to the market should consult a market professional or get registered on an investment platform to understand the market dynamics and make well-informed decisions.

An investor should always examine the objectives and affordability of the investment before considering their investment options.

What should an investor keep in mind while buying Large Cap stocks?

We have already explained the characteristics of Large Cap Stocks in the article. However, here are some things that investors can keep in mind before they decide to invest in Large Cap Stocks.

Most Indian companies have a substantial market capitalisation and a track record that suggests consistent growth and an upward trajectory in the profit margins. Such companies are mostly free from debt, but a low, stable equity ratio is acceptable.

Large Cap Stocks are mainly famous for their dividend payouts, and this steady dividend income allows investors to generate a regular passive income. Large-cap companies get regular dividends to compensate for their stagnant market price, indicating a stock’s lack of capital appreciation possibilities.

The mandatory criteria for a large-cap company is a high return ratio, including return on equity and return on capital employed. It should also have a high-interest coverage ratio, cash flow consistency, and other valuable metrics.

How are Large Cap Stocks different from mid-cap stocks?

Let us understand how Large Cap Stocks differ from mid-cap stocks with the help of an all-encompassing comparison chart.

Serial No. Basis Large Cap Stocks Mid Cap Stocks
1 Definition Large Cap Stocks are the stocks of companies that have a large market capitalisation. Midcap stocks are the stocks of companies that have an average market capitalisation that is neither small nor large.
2 Risk appetite for investors The large-cap funds are comparatively safe than mid-cap funds. Hence, investors who are not willing to take a risk and are just looking for steady dividend payouts should invest in large-cap funds. The mid-cap funds are riskier than large-cap funds but safer than small-cap funds. Hence, investors that are willing to take considerable but not significant risk can invest in midcap funds.
3 Liquidity Large-cap funds are highly liquid because they give steady returns and belong to companies that have had an impeccable track record and stable financial position. Midcap funds are less liquid than Large Cap Stocks but more liquid than small-cap stocks. Hence, one can conclude that mid-cap stocks have moderate liquidity.
4 Volatility The Large Cap Stocks are less volatile as they belong to robust companies with high market capitalisation. The mid-cap stocks are moderately volatile, given their belonging to companies with average market capitalisation.
5 Returns Large Cap Stocks offer consistent returns in the form of steady dividend payouts.

The average return generated from these stocks has been around 5%-8% in the past five years.

The mid-cap stocks offer capital appreciation and return higher than Large Cap Stocks but lower than small-cap stocks.

These stocks have been recorded to provide a return of 9%-12% in the last five years.

6 Dividend payouts The Large Cap Stocks give a regular dividend payout. Mid-cap stocks are not obliged to give regular dividend payouts.
7 Capital appreciation Large Cap Stocks do not show capital appreciation because their stock value is mostly saturated at a highly significant value.  Mid-cap stocks have a high potential for capital appreciation and can help an investor book substantial capital gains.
8 Types of Investors Investors who are not looking for riskier investments and are inclined toward a conservative approach can invest in large-cap funds. 

Large-cap funds do not give quick money or aggressive returns, so if an investor is looking for long-term and stable returns, they should invest in large-cap funds. 

Midcap funds are slightly riskier than large-cap funds but are perfect for investors who have a moderate risk appetite and are looking for long-term investments.
9 Growth Large-cap companies signify stable returns and consistent growth. Mid-cap companies have great potential for growth.

What are the significant companies with Large Cap Stocks in India?

Below is a list of companies with a significant market capitalisation that provide Large Cap Stocks. Hence, a few companies that offer Large Cap Stocks are as follows:

ITC Ltd.

ITC Ltd. is a company that has a dominant presence in the Indian cigarette market along with a substantial business that operates in other sectors like printing and packaging, branded packaged food, personal care products, and various other FMCG products.

As of March 31, 2021, the company’s liquidity is estimated to be above INR 33,000 crores.

Hindustan Unilever Ltd.

Hindustan Unilever Limited (HUL) is one of the biggest FMCG companies in India. The establishment of Hindustan Unilever Ltd. in India has been in place for more than 80 years.

As of March 31, 2021, the company’s liquidity happens to be INR 4321 crores.

Tata consultancy services Ltd. 

Tata Consultancy Services (TCS) Ltd. is an IT giant in India known for enabling IT services in the outsourcing segment. 

The company has a robust financial portfolio with solid liquidity and free cash reserves.

As of March 31, 2021, the company’s liquidity happens to be INR 5,992 crores.

Reliance Industries Ltd.

Reliance industries are the representative company of the Reliance group, the largest private-sector enterprise in India.

The company’s choice is a strong market position with stable cash flows and strong liquidity.

Housing Development Finance Corporation Ltd.

Development Finance Corporation Limited (HDFC) is a front runner in the housing finance industry in India with a distribution network of 651 outlets. 

The loan portfolio of HDFC was INR 6,189 billion as of December 31, 2021.

Bottom Line

In a nutshell, we can say that Large Cap Stocks belong to companies with a robust financial background and large market capitalisation. These stocks are perfect for conservative investors with a low-risk appetite. These types of stocks do not provide capital appreciation because their market value is already at a substantially higher position making the growth stagnant.

The growth is stagnant because of the saturated market capitalisation. So, further, a development would require significant innovative shifts in policy making. Selection of perfect policy is a time-consuming process with its own share of risk. Hence, instead of losing money to a risky approach, such firms decide to issue dividends to their shareholders from the company’s retained earnings.


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