Posts Tagged → Ratios

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 Inventory Turnover?

The Inventory Turnover Ratio (ITR) is a metric that measures a company's efficiency in managing inventory. The ratio shows how many times a company has sold or replaced its inventory within a year. In simpler terms, a higher inventory turnover ratio means a company is effectively converting inventory into revenue. On the other hand, a low ratio indicates that stock is not moving as quickly and may be sitting on shelves or in storage for too long.

The Inventory Turnover Ratio (ITR) is a metric that measures a company’s efficiency in managing inventory. The ratio shows how many times a company has sold or replaced its inventory within a year. In simpler terms, a higher inventory turnover ratio means a company is effectively converting inventory into revenue. On the other hand, a… Continue reading →

What is the FCF Yield and how to use it?

The Free Cash Flow Yield explained. The Free Cash Flow Yield is a “solvency ratio” that measures how much money a company makes in free cash flow relative to its market capitalisation. Many stakeholders, including myself, believe that free cash flow is a more reliable measure than Earnings Per Share.

The Free Cash Flow Yield explained. The Free Cash Flow Yield is a “solvency ratio” that measures how much money a company makes in free cash flow relative to its market capitalisation. Many stakeholders, including myself, believe that free cash flow is a more reliable measure than Earnings Per Share. This is because Cash flow… Continue reading →

What is the OCF Ratio and how to use it?

The Operating Cash Flow Ratio explained. The OCF Ratio (coverage ratio) is a liquidity ratio that measures whether a business generates enough cash from its core operations to pay off its short-term obligations (Current Liabilities). As an investor, assessing a company’s short-term liquidity can provide valuable insights into its financial viability.

The Operating Cash Flow Ratio explained. The OCF Ratio (coverage ratio) is a liquidity ratio that measures whether a business generates enough cash from its core operations to pay off its short-term obligations (Current Liabilities). As an investor, assessing a company’s short-term liquidity can provide valuable insights into its financial viability. The OCR ratio indicates… Continue reading →

What is the Current Ratio and how to use it?

The Current Ratio (CR) is a “liquidity ratio” that measures a company’s ability to meet its short-term obligations. It is calculated by comparing the current assets to current liabilities. This ratio is used alongside the Quick Ratio to see the short-term obligations coming due within one year.

The Current Ratio explained. The Current Ratio (CR) is a “liquidity ratio” that measures a company’s ability to meet its short-term obligations. It is calculated by comparing the current assets to current liabilities. This ratio is used alongside the Quick Ratio to see the short-term obligations coming due within one year. The term “Current” refers… Continue reading →

What is the Debt-to-Equity ratio and how to use it?

The Debt-to-Equity ratio (D/E) is a “leverage ratio” that measures the weight of total debt and liabilities against total shareholder equity. A company’s financial leverage is an important metric to monitor as debt can make or sink companies.

The Debt-to-Equity Ratio explained. The Debt-to-Equity ratio (D/E) is a “leverage ratio” that measures the weight of total debt and liabilities against total shareholder equity. A company’s financial leverage is an important metric to monitor as debt can make or sink companies. It is an indirect way to assess the degree to which a company… Continue reading →