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What are the Vesting Rules for My Keogh Plan?
Vesting rules depend on the type of Keogh contributions being made. The IRS imposes certain rules on Keogh Plans, which includes vesting restrictions. Different employers might have totally different vesting schedules, as long as they satisfy the IRS rules. It depends on the type of contribution being made, such as matching or profit-sharing or money-purchase contributions, whether the plan is a QACA, and so on. Many contributions are immediately vested, while some are gradually vested over a few years, and some are on a cliff-vesting schedule. Continue reading...
What is a Consolidated Tax Return?
A consolidated tax return is a single filing that covers several subsidiary companies and their parent company. One of the advantages of doing so is that the capital gains of one can be offset by the capital losses of another. It can also allow a profit sharing plan for the parent corporation to use profits from the subsidiaries. Corporations with subsidiaries can file a consolidated tax return that covers all of the affiliated companies. Continue reading...
What is a Money Purchase/Profit Sharing Plan?
Money Purchase plans and Profit Sharing plans are two types of Defined Contribution plans that can be used at a business, together if desired. Both of these are Defined Contribution plans, which means that only the terms of the contributions to the plan are defined in the plan document. This is different than Defined Benefit plans, which specifically define the benefit due to an employee at retirement, which is generally a monthly pension payment. If an employer wants to use both a Money Purchase plan and a Profit Sharing plan, it is possible, but since both of them are Defined Contribution plans, they will be limited in aggregate to the allowable defined contribution limits for employer contributions. Continue reading...
What is a Keogh plan?
Keogh plans are any type of qualified plan at a sole proprietorship or partnership. Keogh plans come in various forms, and this is because they are actually quite a broad category. IRS Publication 560 (found here) divides workplace retirement plans into SIMPLE IRAs, SEP IRAs, and Qualified Plans. This last category, Qualified Plans, includes profit-sharing plans, 401(k)s, 403(b)s, money purchase plans, and defined benefit plans such as pensions and salary continuation plans. Continue reading...
How Can I Establish a Money Purchase/Profit Sharing Plan?
Like other qualified plans, these need a written plan document and investments to fund. A written plan document must be established and distributed to all employees notifying them of the plan and of all pertinent details, in language they can understand. Plans must be established by December 31 of the year for which contributions will be made, and, since the contributions come from the employer for both of these, the employer has at least 8 months of the following year to meet funding requirements. Continue reading...
What is a Profit?
In its simplest form, a profit is the revenue or income gained from an entity after all expenses/overhead is accounted for. In business, a company deals with a number of expenses - operating expenses (the cost of doing business), fixed costs (overhead), salaries and benefits, legal fees, and so on. If a company’s revenues exceed all of these costs combined, the company is considered profitable. A profit is also known as a company’s bottom line, net earnings, or net profit. Continue reading...
What are Profitability Ratios?
Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...
What is an Operating Profit?
Operating profit is a company’s profit from its business operations, and can be calculated by taking gross profits minus operating expenses. Operating profit is synonymous to operating income, and represents a company’s profitability from its core operations, which excludes earnings from other investments or interests and also does not factor the impact of taxes or interest. Continue reading...
What is Profit Margin?
Profit margin is a profitability ratio that measures, as a percentage, how much a company keeps per sale. Profit margin can be calculated by dividing net income by sales. A higher profit margin means a company keeps high percentage of each dollar sold as profit. For example, a 50% profit margin means that for every dollar earned, a company retains $0.50. It is often helpful for an analyst to look at how a company’s profit margins have changed over time, to measure whether it is becoming more efficient in the sales of goods. Continue reading...
What is Accounting Profit?
Profit is a term that is synonymous with earnings and net income, and it is basically what is left of revenues after expenses. All of these are basically computed the same way: gross revenue minus the cost of goods sold, business expenses, and taxes. Some variations on each of these will choose to look at the numbers before certain expenses, such as taxes. For example, “gross” accounting profit could be defined as revenue minus cost of goods sold, while “operating” profits would also subtract the costs of business expenses and operations, and “net” profits would also subtract taxes. Continue reading...
What is Dividend Per Share?
Dividend payments are allocated on a per-share basis. The company issuing them may announce the dividend in terms of the dollar value, but investors and analytical services will translate that into a percentage yield. When calculating the dividend from a company perspective, the total dividend amount that they are comfortable declaring is divided by the number of outstanding shares. The dividend per share is an important number, and the growth of this number is the dividend growth rate. Continue reading...
What Rights Does Owning Shares of Corporation Give You?
Shareholders of a company are part-owners of the company, and they are entitled to two things: voting for board members, and participation in earnings. Owning shares (even one single share!) of a publicly-traded corporation entitles you to the right to vote in elections for the Board of Directors, as well as the right to receive a proportional amount of all the profits of the company. These rights apply to common stock, which is generally the kind of stock traded on exchanges. Of course, you also have the right to sell your shares on the stock exchange at any time, in what is known academically as the Secondary Market. Continue reading...
What does 'Outstanding Shares' mean?
Outstanding shares refers to all of the shares of company held in total, which includes all ownership - retail investors, institutional, the company’s officers, insiders, and so on. Outstanding shares are listed on the balance sheet under “Capital Stock,” and are used in calculating market capitalization, earnings per share, and other critical per share calculations. The amount of outstanding shares can fluctuate over time on the basis of corporate actions, such as share buybacks (reduces overall count) or new share issuance (increases overall count). Continue reading...
What Does 'Buy to Cover' Mean?
‘Buy to Cover’ is a term that applies when an investor buys shares of a security that they had previously sold short. When an investor sells a security short, it means they are selling shares they do not actually own, in hopes that the price of the stock falls. If the price does fall, an investor could then ‘buy to cover’ at a lower price and then return the shares to the broker that lent them, thus realizing the profit in the price difference. Continue reading...
What is an Accelerated Share Repurchase?
An Accelerated Share Repurchase (ASR) is a method by which companies can buy back a significant amount of their outstanding shares with the help of an investment bank. By enlisting the help of an investment bank to accelerate a buy-back, a company can cleanly retire a large bulk of shares at once. These agreements have come into use in the last 10 years, and there is of course some variation in their composition. They fall under a category of buybacks known as structured buybacks. Continue reading...
What is secondary market?
The secondary markets are where most trading goes on today, where the trades are made investor-to-investor using shares that were issued sometime before, and profits are made by investors and not the underlying company who issued the shares originally. The secondary market is a term used to describe the market created by those who are selling and buying shares which were issued some time ago in what's called the primary market. Continue reading...
What are Fully Diluted Shares?
Fully Diluted Shares are a calculation used to show how much the existing shares of common stock could potentially be diluted if all the convertible securities and employee stock options, were exercised. Fully Diluted Shares is a calculation used to show the potential number of shares that could hypothetically be called into existence instantaneously by the holders of convertible securities, warrants, employee stock options and so forth. Continue reading...
What is Net Operating Profit After Tax?
Net Operating Profit After Tax (NOPAT) is a way to measure profits that excludes the impact of debt financing (via tax benefits and costs). The easiest way to think about Net Operating Profit After Tax is as a company’s profit if it were unleveraged, i.e., if it had no debt. There are costs associated with debt but also tax benefits, so there’s some give and take. The reason an analyst might use NOPAT is to gain a more accurate look at the operating efficiency of a leveraged companies, since it excludes the tax savings many companies get because of existing debt. Continue reading...
What is Diluted Earnings Per Share?
If all the convertible securities a company had issued were converted at once to common stock, the stock would be diluted; Diluted EPS reveals by how much. Companies will sometimes entice investors to buy bonds or preferred stock by giving them an option to convert them into shares of common stock. If a bond is converted, shareholders equity increases on the balance sheet and liabilities go down, since a debt liability is being retired. Continue reading...
What is Sharpe Ratio?
The Sharpe Ratio is a risk-weighted metric for returns on investment. It measures whether an investment offers a good return for the amount of risk assumed by the investor. The risk/return trade-off is a positive linear relationship in most theoretical depictions – if an investor seeks greater returns, they will have to take on greater risk. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...