The current article in this series provides responses related to:
- Net Interest Margin and Spread
- What determines the PE ratio of a stock?
- Operating Leverage, Financial Leverage and Internal Rate of Return (IRR)
Net Interest Margin and Spread
Thank you for valuable time and support beginners like me.
I need your clarification about net interest margin (NIM) and interest spread. I try to understand from internet but I couldn’t. Please confirm my below understanding
- NIM = (Interest Income – Interest Expense) / Interest earning assets
Spread, on the other hand, is the difference between yield and cost of borrowing, where yield is the interest income earned on interest earning assets and cost of borrowing is interest expense charged on interest bearing liabilities.
- Spread = (Interest Income/ Interest earning assets) – (Interest Expense/ Interest bearing Liabilities)
- If Interest income = Rs. 150 crore
- Interest expense = Rs. 80 crore
- Interest earning assets = Rs. 2,250 crore
- Interest bearing liabilities = Rs. 3,000 crore
- NIM = (150 – 80) / 2250= 3.11%
- Spread = (150 / 2,250) – (80 / 3,000)= 4%
Some websites explains spread = (interest earned – interest expenses)
E.g.: interest expenses= 8%, interest earned = 12% Spread= 4%
Thank you again for your support
Thanks for writing to me!
I am happy that you are trying to understand different key concepts relevant to understanding stocks of different industries and referring to different resources for them.
Different resources would always define different ratios differently as per their preference. From you calculations, I find that you have understood the basic behind NIM/Spread.
Therefore, the first thing that you need to take care while using NIM &/or spread is that before taking the NIM/spread value mentioned on any website/source for granted, you should calculate it on your own from the annual report data and secondly, you should compare any two stocks for NIM/Spread by calculating their values by similar method.
What determines the PE ratio of a stock?
a} sir, does market’s perception or market price of share increases with increase in eps or is there any other factors involved ?
b} can P/E ratio for a company be constant with increase in eps ?
Thanks for writing to me!
P/E ratio measures how much market is willing to pay for a company. P/E will depend on many factors. Many of these factors are measurable like EPS growth, debt levels etc. how many are subjective like market perception. Therefore, there is no definite answer to your query.
P/E may increase or remain constant with increasing EPS depending upon other factors that influence a company’s performance.
All the best for your investing journey!
Operating Leverage, Financial Leverage and Internal Rate of Return (IRR)
In the web portals, I find the formulas of Degree of operate leverage, degree of financial leverage of degree of total leverage. I simply want to know what is operating leverage and its, formula to compute. And what is financial leverage and its formula.
I also what to know from you on IRR.
IRR is the rate which makes NPV zero. If a project has IRR on 15% for 5 years means, its NPV is zero or say the projects Initial cost is equivalent with discounted value of projected cash flow of first 5 years, isn’t it? If so, the future projected cash flow generated by the project from 6th year are the return for the investors of the project?
Please simply educate me or if you have any links of your article on such, please provide. I would be very grateful with you.
Operating leverage: when fixed costs are high, then with increasing sales, profits increase faster than sales in % and vice versa.
Financial leverage: company boosts its assets by raising additional resources (debt) over its equity
IRR is compared to cost of funds or risk free rate. The higher is the IRR than cost of funds or risk free rate, the more rewarding is the project.
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