Post Category → Valuation

Using a Margin of Safety can be one of the most practical ways to invest.

Margin of Safety is a term used to describe the difference between the current share price of a stock and its intrinsic value. In other words, it is the discount at which the stock is trading in comparison to its actual worth. The Margin of safety is not necessarily an equation but a guiding philosophy grounded in investment discipline. It invokes logical decision-making, fundamental analysis, a long-term mindset with a focus on risk management.

Margin of Safety is a term used to describe the difference between the current share price of a stock and its intrinsic value. In other words, it is the discount at which the stock is trading in comparison to its actual worth. The Margin of safety is not necessarily an equation but a guiding philosophy… Continue reading →

What is the meaning of Intrinsic Value and why its one of the most important terms?

This is where the concept of Intrinsic Value comes in. It is a measure of the true worth of an asset. This is independent of the Market Value which is determined by what investors are willing to pay.

What is Intrinsic Value? Knowing whether you are paying a fair price for a stock can be challenging. This is where the concept of Intrinsic Value comes in. It is a measure of the true worth of an asset. This is independent of the Market Value which is determined by what investors are willing to… Continue reading →

If you want better investment results you need to understand Stock Valuation.

Stock valuation is the process of determining the intrinsic value of a business. This involves analysing the financial statements and understanding the business model, assets, liabilities, revenue, and other key quantitative and qualitative metrics. By doing so, we can assess whether an asset represents a viable investment opportunity or not. The underlying factor of stock valuation is that the true worth of a company may be different than its current trading price.

Stock valuation is the process of determining the intrinsic value of a business. This involves analysing the financial statements and understanding the business model, assets, liabilities, revenue, and other key quantitative and qualitative metrics. By doing so, we can assess whether an asset represents a viable investment opportunity or not. The underlying factor of stock… Continue reading →

Why is the Shareholder Yield one of the most powerful ways to look at returns?

The Shareholder Yield is a metric that measures how a company rewards its shareholders through three ways. Issuing dividends, conducting share buybacks, or reducing the company's debt. This formula helps in evaluating how effectively a company distributes its resources, which ultimately benefits its shareholders.

The Shareholder Yield Explained. The Shareholder Yield is a metric that measures how a company rewards its shareholders through three ways. Issuing dividends, conducting share buybacks, or reducing the company’s debt. This formula helps in evaluating how effectively a company distributes its resources, which ultimately benefits its shareholders. When analysing distributions, shareholders usually focus on… Continue reading →

What is the best way to calculate the Terminal Value and why is it important?

Terminal Value (TV) is a significant metric used by investors and finance professionals to determine the long-term value of a company. The Terminal Growth Rate is the estimated pace at which a company is expected to grow beyond the forecast period. In valuation theory, a company's value equals all future free cash flows derived from that business. Cash Flows are discounted to the present value at a Discount Rate representing the Weighted Average Cost of Capital. The DCF (Discounted Cash Flow) model consists of two components: the Forecasted period and the Terminal Value.

Terminal Value (TV) is a significant metric used by investors and finance professionals to determine the long-term value of a company. The Terminal Growth Rate is the estimated pace at which a company is expected to grow beyond the forecast period. TABLE OF CONTENTS: The Terminal Value explained. In valuation theory, a company’s value equals… Continue reading →

Alpha and Beta: What is the best way to use them and why are they important?

Alpha denotes the returns that exceed the initial investment return or benchmark. While Beta measures the correlation between a stock and the overall market. Beta helps in predicting the returns of an asset using the Capital Asset Pricing Model, while Alpha is the measurement of the absolute return exceeding that prediction.

Investment and financial markets frequently use the terms “Chasing Alpha” and “Market Beta”. Although they may seem like complicated financial concepts, all investors should understand how Alpha and Beta function in the investment world. Alpha and Beta are often used as measures to evaluate the performance and risk of an investment portfolio or an individual… Continue reading →

What is the best way to measure the weighted average cost of capital and why is it important?

The WACC is the average rate at which a company can expect to finance its business from both equity and debt. This means that it represents the average overall return that both shareholders and debt holders demand to provide the capital the company needs to grow and operate. When using the Discounted Cash Flow (DCF) modelling technique, the WACC is often used as the discount rate to calculate the net present value of a business. To calculate the WACC, the cost of each capital source, such as debt, preferred shares, and common shares, is weighted by its percentage of total capital before they are added together to create an overall weighted average.

The Weighted Average Cost of Capital (WACC) is a crucial financial metric that investors use to determine the value of a company’s combined pool of capital, debt and equity. TABLE OF CONTENTS: The Weighted Average Cost of Capital explained. The WACC is the average rate at which a company can expect to finance its business… Continue reading →

Why is the Capital Asset Pricing Model important?

The Capital Asset Pricing Model (CAPM) is a way to measure the cost of equity of a firm and the expected returns from an investment. Investments come with risk, the higher the return the higher the risk. The CAPM model helps establish the relationship between the expected return and the systematic risk of the company.

The Capital Asset Pricing Model (CAPM) is a way to measure the cost of equity of a firm and the expected returns from an investment. TABLE OF CONTENTS: The Capital Asset Pricing Model explained. Investments come with risk, the higher the return the higher the risk. The CAPM model helps establish the relationship between the… Continue reading →

What is the best way to calculate Risk Premium and why is it important?

The Risk Premium (RP) is the additional rate of return that investors expect to receive for taking on more risk when investing in stocks. This premium is above the Risk-Free Rate, which is the return that investors expect from a risk-free investment.

The Risk Premium explained. The Risk Premium (RP) is the additional rate of return that investors expect to receive for taking on more risk when investing in stocks. This premium is above the Risk-Free Rate, which is the return that investors expect from a risk-free investment. Investors should be compensated for taking on additional risk… Continue reading →

What is the best way to calculate the Risk-Free Rate and why is it important?

The Risk-Free Rate is a theoretical interest rate of return that carries zero risk. Although technically all investments carry some level of risk, investors want a way to measure the rate of return against other safer alternatives to ensure that the payoff to risk-reward is in their favour.

The Risk-Free Rate explained. The Risk-Free Rate is a theoretical interest rate of return that carries zero risk. Although technically all investments carry some level of risk, investors want a way to measure the rate of return against other safer alternatives to ensure that the payoff to risk-reward is in their favour. The Risk-Free rate… Continue reading →