5 Must Have Metrics for Value Investors Flashcards
How is free cash flow measured
Sales Revenue - (operating expenses + taxes) - capital expenditures
What does a P/E of 20 tell you how much you are paying for a company’s earnings
This means that you would pay 20 dollars for each 1 dollar of the company’s current earnings - this will ideally grow over time off and so you get this money back quicker
What does the Price to Book ratio tell you
It is a good indication of what investors are willing to pay for each dollar of a company’s net value
How do you calculate P/B ratio
Compares the net value of a company (assets-liabilities) to its market cap.
You needs to divide the stock’s share price by its book value per share (BVPS).
What does a P/B ratio of around 1 mean
Means that the underlying stock is trading at nearly book value
What does a P/B ratio of 0.5 suggest
That the company is trading at half of its book value, although keep in mind that it doesn’t account for a declining company
What does the debt to equity ratio tell us
This tells us about how a company finances its assets, the ratio shows the proportion of equity to debt a company is is using to finance its assets
What does a low debt to equity ratio suggest
That the company uses a lower amount of debt for financing versus shareholder equity, which is probably considered a good thing
Why might a high debt to equity ratio not be the worst thing
Doesn’t mean the company is run poorly as debt can be used to expand operations and generate additional streams of income.
What kinds of industries have high debt-equity ratios
Industries with lots of fixed assets like the auto and construction industries
What does free cash flow tell us
Whether the company has enough cash after operating expenses and capital expenditures to reward shareholders through dividends and share buybacks
What is the PEG ratio
This is a modified version of the P/E ratio that also takes into account earnings growth.
What PEG ratio suggests an undervalued company
PEG < 1
