The Hindu Business Line : Skills in finance are three

Financial management is dynamic, not something routine like accounting, writes N. J. Yasaswy in Finance and Profits, from Vision Books (www.visionbooksindia.com). "If you understand finance well, you can understand the entire business from a correct perspective," he promises in a chapter titled `The Mantra of Money'.

Skills in finance are three, the author goes on to explain. One, technical skills or `the ability to use the appropriate financial tools and techniques, procedures and systems, methods and practices'. Two, human skills, so that you can work with people and lead them. And, three, conceptual skills, or the `mental ability to coordinate and integrate all of the organisation's interests and activities'.

After the intro part of the book, which has chapters on the Indian financial system (`Markets, Merchant Bankers and Money Bags'), and the value of money (`Cows, Coins And Money'), the author leads us to a chapter on balance-sheet, titled `The Corporate Bikini', because `what it reveals is interesting, but what it conceals is much more exciting'.

Amusingly, when you make the mistake of adding the date to the right side of the balance-sheet, `accountant's law' cited in the book counsels that you must similarly add the date to the left side too. "A balance-sheet is an innocent-looking piece of paper often made to appear unnecessarily complicated by clever accountants, and little understood by others," laments the author. "Most glossy balance-sheets published year after year by various companies are, at best, public relations souvenirs; at worst, unintelligible mumbo-jumbo."

Instructive read is a chapter on `How to Achieve a Return of 2,473 per cent per annum?' It is the Colgate story. "A small investment of Rs 2,500 in 1978 (100 Colgate shares at Rs 25 per share) logged a capital growth of Rs 12,85,120 and a dividend of Rs 3,24,780 by 2005," narrates Yasaswy. "This works out to a holding period return of 64,296 per cent for 26 years, that is, 2,473 per cent per annum."

What are the secrets? Consistent success in the marketplace, explains the author. "Producing a quality product at the lowest possible cost, distributing it as widely as possible, building a strong brand name, and selling it at the lowest possible price." Two lessons that Yasaswy draws from the company's funds management are: "Avoid borrowing as far as possible, and avoid going for rights issues."

Dividend payout ratio works out to 0.84, meaning "Colgate paid 84 paise out of every 100 paise earned, on a post-tax basis." Though considered quite high, "Colgate has historically been following this policy of a high pay-out ratio, retaining only that much money as required for its business needs," explains the author.

Educative material, crisply presented.

If bonds are in your blind spot

Plain vanilla. That may remind you of ice cream, but in the sizzling world of bonds, the phrase means `a fairly simple instrument.' It pays interest periodically and repays the principal at maturity, explains Sunil K. Parameswaran in Bond Valuation, Yield Measures and the Term Structure, from Tata McGraw-Hill (www.tatamcgrawhill.com).

In contrast, zero coupon (ZCB) or deep-discount bonds pay no interest. "They are sold for less than the amount that is payable at maturity. The difference between the terminal payment and the issue price constitutes the interest."

The slim volume is `a concise summary of a standard textbook on fixed income securities,' says the author in the preface. "The contents of the book have been used at business schools as well as for corporate training programmes, and consequently are a blend of academic rigour and practical insights."

Read through, therefore, examples such as: "L&T has issued a ZCB with a face value of Rs 1,000, and a yield of 10 per cent per annum. It has a life of five years. What should be the price?"

And don't back out from exercises such as: "A US T-bond with a face value of $1,000, paying a semi-annual coupon at the rate of 6 per cent per annum is available. The coupon dates are May 15 and November 15 every year. Assume that today is June 30, 2006 and that the bond matures on May 15, 2026. The YTM is 8 per cent per annum. Calculate the dirty price using: a) the market method; and b) the treasury method."

Enlightening read that you can bond with.

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