The best Financial Calculations and how to use them?

Below are key Investment Calculations that I use for calculating returns, using in my valuation and modelling work as well as ratio analysis. These are not the end all, there are many ways to determine similar calculations, these I have found are the most useful for me.

I have placed these here as a quick reference where I often come back to when refreshing my own knowledge. There are a lot of financial calculations out there, the majority I have found not relevant when on the hunt for investment opportunities or for measuring performance.

FINANCIAL CALCULATIONS CONTENTS:

Click the Title or Chalk Board to see the ratio.

Calculating Portfolio Returns

Below are key Investment Calculations that investors use for calculating returns or for utilising when working on modelling and valuation | The Stoic Investors.

Compounded Annual Growth Rate

Below are key Investment Calculations that investors use for calculating returns or for utilising when working on modelling and valuation | The Stoic Investors.

Portfolio Turnover Ratio

The Portfolio Turnover Ratio is a vital metric in portfolio management that indicates the frequency at which securities are bought and sold over a given period. The turnover rate of assets in a portfolio can provide insights into the investor, fund, or strategy type.

Risk-Free Rate

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.

Capital Asset Pricing Model

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.

Alpha and Beta

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.

Shareholder Yield

Discount Factor

Below are key Investment Calculations that investors use for calculating returns or for utilising when working on modelling and valuation | The Stoic Investors.

The Rule of 72

Below are key Investment Calculations that investors use for calculating returns or for utilising when working on modelling and valuation | The Stoic Investors.

Inflation-Adjusted Returns

The Inflation Adjusted Return, also known as the Real Rate of Return, is the Return on Investment after accounting for inflation. Inflation refers to purchasing power of money decreasing due to a general increase in the prices of goods and services.

Risk Premium

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.

Weighted Average Cost of Capital

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.

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. 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.

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