Technical and stock pitch Flashcards
what are different types of risks
liquidity risk (real estate difficult to sell at any given moment), market risk, currency risk, interest rate risk, business risk, credit risk
what are some common ratios that analysts use to compare companies *
price to earnings (P/E), price-to-cash flow return on equity (ROE), return on assets (ROA), debt-equity ratio, current ratio, dividend yield, earnings per share (EPS)
how do you calculate price earnings ratio (P/E)
current stock price / EPS
how do you calculate EPS
net income - preferred dividends / outstanding shares
how do you calculate price-to-cash flow
current stock price / operating cash flow
how do you calculate return on equity (ROE)
net income / average of last two years’ total shareholders’ equity
how do you calculate return on assets (ROA)
net income / total assets
how do you calculate the current ratio
current assets / current liabilities
dividend yield equation
annual dividend / current stock price
how do you do a DCF
take results and strip out outliers,
project free cash flow forward for 10 yrs (after 10 assume constant, terminal value),
take cash flows and discount using weighted average cost of capital (how expensive it is to fund the company),
sum discounted values and arrive at value for company
what are the advantages of DCF
independent from market fluctuations (intrinsic value),
small tweakings of growth rate and WACC can achieve a wide range of valuations,
relies on free cash flow which is considered to be a reliable measure that eliminates subjective accounting policies
how do you do comparable company analysis
find comparable company,
say comparable company has £10 eps and share price of £100 they have a 10x price to earnings,
say your company has eps of £20, you could apply this multiple and arrive at a valuation of £200 (20x10),
would use many companies and use many metrics,
Price/sales, price/book, EV/EBITDA)
what are pros and cons about comparable company
simple and reflects the market,
hard to find set of comparable companies cause companies are all so different,
if market overvalued it will lead to overvaluation (and vice-versa)
what are cons of dcf
very sensitive to assumptions (estimates can vary widely),
dcf more time intensive compared to other techniques,
involves forecasting future performance which is difficult
inflation UK, US and Canada
UK 1.8%
US 1.5%
Canada 1.4%
