Valuation Terms

Low P/E Ratio Indication

- a low P/E indicates that the market sees less potential for future growth in the company -Value investors, which search for companies with hidden value, prefer to find companies with low hope for future growth and seek out indications of success that others failed to see

Beta

- a measure of a stocks risk by taking into account volatility in responsiveness to changes in the market

Free Cash Flows (FCF)

- a measurement of how much cash a company is able to generate after it has made the necessary payments to maintain and grow its asset base as it sees fit and pay off necessary expenses FCF = EBIT (1 - Tax Rate) + Depreciation + Amortization - Net Working Capital - Capital Expenditures

Working Capital Ratio

- a measurement of the company current assets to current debt =Current Assets / Current debt Ratios within the range of 1.2 to 2 are acceptable -You want to have excess assets to debt so that you can readily pay off debt in the short term -You also don't want the ratio too high, because this suggests the company is not reinvesting it assets and making the best use out of them Includes inventory, an illiquid asset

Price to Earnings Ratio (P/E)

- a multiple that compares the stock price the EPS in order to determine the amount of money an investor would have to put forth in order to see 1 dollars worth of earnings -P/E also indicates the market's estimation for the company's future growth P/E = Stock Price / EPS EPS = (Net Income - PS Dividends) /Outstanding Shares

Value Investing

- a type of investing in which people look for companies that have a higher book value than market value -Value investors generally believe that the market has a tendency to overreact to bad news and loses faith in a company too quickly -the idea is that many of these companies should be valued higher, and they search for these companies to buy stocks in

Cost of Debt

- the cost of acquiring and paying for debt (simply the interest payments) Cost of Debt = Total Interest Payments / Total Loan Amounts

Liquidity

- the measurement of a company's ability to use current assets or convert them to pay off debt in the short term

Book Value Greater than Market Value

- this means that the market has little hope in a company's ability to generate revenue and free cash flows from their existing assets - this could also mean that the market is undervaluing the stock and it could possibly be a good investing opportunity

High P/E Ratio Indication

- when the P/E is high, this means that the market in general expects a company to see sizable growth in the future, so the stock price is high even though earnings are not -Growth investors prefer a high P/E ratio, as they believe market estimations of future growth are generally accurate

EBITDA

-Earnings before interest, tax, depreciation, amortization -Operating Cash flows - measures a company's ability to simply increase revenue and decrease costs

Cash Ratio

-a measurement of a company's ability to immediately pay off all short term debt using cash and cash equivalents Cash Ratio = (Cash and Cash Equivalents) / Current Liabilities

Capital Asset Pricing Model (CAPM)

-a method of calculating cost of equity that places systematic risk and market volatility as the main determinants of a stocks rate of return Rate of Return = Risk-Free return + Beta (Market rate of return - Rf)

Dividend Growth Model

-a method of calculating cost of equity that requires that a company pays dividends regularly Cost of Equity = (Dividend per share for next year)/Stock Price + Dividend Growth Rate

Book Value of a Company

-a method of evaluating a company based on their number on the balance sheet Book Value = Total Assets - Intangible Assets - Total Liabilities -Book Value give two things.. 1. The amount of money that would be left over for shareholders to claim if the company were to be liquidated 2. A figure to compare the market capitalization to in order to determine if the stocks are over or underpriced

Enterprise Value

-a more comprehensive way of determining a company's value and their buyout price EV = Market Cap + Debt + PS + Minority Interests - Cash and Cash Equivalents

Acid Test Ratio

-a more realistic method of judging a commune's ability to pay of short term debt, because it include account receivable and marketable securities, which can easily be converted to cash Acid Test = (Cash + Accounts Receivable + Short-Term Investments) / Current Liabilties

Current Assets

-all assets that can be reasonably expected to be converted into cash within a year -Cash, Cash Equivalents, Marketable Securities, Accounts Receivable, Inventory -The

Price to Book (P/B) Ratio

-compares stock price to book value over share P/B = Stock Price / Boo Value per Share -the higher the ratio, the more confidence the market has in the company's ability to generate revenue

Enterprise Value

-gives a comprehensive acquisition valuation of a company EV = Market Cap + Minority Interest + PS + Debt - Cash and cash equivalents

Price to Earnings to Growth

-gives a figure that demonstrates whether the market has either over or underestimated a company's future growth potential PEG = (P/E) / Anticipated Earnings Growth

Weighted Average Cost of Capital (WACC)

-gives an average cost of raising capital or financing a company WACC = (percentage of financing that is debt)(Cost of debt)(1 - tax) + (percentage that is equity)(cost of equity)

Dividend Yield

-gives an expected rate of return of a company that regularly pays dividends Yield = Annual company dividends / Stock Price

Capital Structure

-how a firm finances it operations in growth -is measured by a firms Debt to Equity Ratio

EV/EBITDA

-known as the enterprise multiple, its gives potential acquirer a time estimate of how longs it would take the company's earnings to pay of its cost of acquisition

Debt to Equity

-measure a firms capital structure and the portions of the it financing that are debt or equity related D/E = Total Liabilities / Total Equity -A higher ration indicate a more aggressive capital structure

Cost of Equity

-the cost of acquiring and maintaining a sufficient amount of shareholders -can be calculated by...

Book Value Equals Market Value

-the market sees no need to distinguish BV and MV -they believe BV accurately represent the companies worth

Terminal Value

-the sum of all future free cash flows of a company once they've reached a point of stable, incumbent growth TV = [Projected cash flow for final year(1+Long Term Growth Rate)]/[Discount rate - Long term growth rate]

Time Value of Money

-the theory that a sum of money today is worth more than the same sum in the future due to the potential earning capacity of the sum today -because of this, estimated profits in the future must be discounted back to a present value

Cost of Capital

-the total amount that it cost the firm to finance their operations, whether it be through debt, equity, or both

Market Capitalization

-the total worth of a company's outstanding shares Market Cap = Individual Stock Price * Amount of Outstanding Shares

PEG less than 1

-this indicate that the market estimation of the stocks growth is too low, and the stocks are undervalued

PEG more than 1

-this indicates that the markets estimation of future growth is too high, and the stock is overvalued

Book Value Less than Market Value

-this is the most common case, where the market has confidence in the company's ability to consistently generate revenue -companies such as Coca-cola, with consistent revenue, will have a market value 5 times higher than their book value, because the market knows they are capable of consistently generating free cash flows

Percentage of Financing that is Debt

-this number is essential n calculating the WACC, uses figures from the balance sheet = Total Liabilities / Total Assets

Percentage of Financing that is Equity

=Total Equity / Total Assets

Understanding Beta Scores

Beta of 1: stock price moves in concurrence with the market Beta < 1: less volatile than the market Bet > 1: more volatile