One of the ways to assess the quality of a business is to look at its historical return on capital. Although there are various ways that investors calculate return on capital, the one that I use is: Return on capital = Operating income (EBIT) / Invested capital In addition to assessing the quality of a … Continue reading Thoughts on invested capital – Part 1
My father-in-law and niece both have their birthdays on the same day, so usually, 1 February is a day of double celebration in our family. This year however, it was also the day the Finance Minister had some not-so-good news for us (and equity investors)… Currently, long term capital gains arising on sale of listed … Continue reading What Budget 2018 could mean for the stock market
Whilst preparing for my CFA Level II examinations, I was really perplexed by the calculation of the free cash flow to firm (“FCFF”) especially with regard to the tax saving from interest expenses. Let me elaborate. The definition of FCFF as per the CFA curriculum is: "Free cash flow to the firm is the cash … Continue reading Why are tax savings from interest ignored when computing free cash flow to firm?
In November, we wrote a post on the biggest mistake in a Discounted Cash Flow (“DCF”) model. There are, of course, a number of other mistakes (albeit smaller in comparison) that can creep into a DCF. And surprisingly, you would find these mistakes being committed by amateurs and professionals alike. Yes, even investment bankers and equity … Continue reading Top 10 mistakes in a DCF
In this post, we discuss the distinction between returns on legacy vs. new investments and how they may be useful in assessing the impact of disruption. Last week, we wrote a post on what according to us is the biggest mistake that people commit while doing a DCF valuation. In that post, we took a … Continue reading A follow up to the “biggest mistake in a DCF”
Valuation is an exciting area and at the heart of it lies the often derided discounted cash flow (DCF) method of valuing businesses. Many people make only half-hearted attempts at a DCF valuation but do it anyway because: it sounds “cool” to do it; it gives the illusion of precision; and it can be used … Continue reading The biggest mistake in a DCF valuation
My thoughts on Prof. Sanjay Bakshi’s talk on “What happens when you don’t buy quality” In 2013, Prof. Sanjay Bakshi gave a seminal talk tilted, “What happens when you don’t buy quality”. The crux of the talk was that market participants are unable to delay gratification and thus, heavily discount cash flows occurring far into … Continue reading Is delayed gratification the primary reason why investors end up undervaluing high quality companies?