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
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What Budget 2018 could mean for the stock market
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
Why are tax savings from interest ignored when computing free cash flow to firm?
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?
Top 10 mistakes in a DCF
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
A follow up to the “biggest mistake 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”
The biggest mistake in a DCF valuation
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
Is delayed gratification the primary reason why investors end up undervaluing high quality companies?
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[1] 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?
How I learned the craft of valuation and ended up assisting Prof. Aswath Damodaran
In 2007, I graduated from college without having a clue as to what I wanted to do with my life. So I just followed what others were doing and enrolled in the Chartered Accountancy (CA) program. The Indian CA program is rigorous not just because of its tough exam structure, but also because you have … Continue reading How I learned the craft of valuation and ended up assisting Prof. Aswath Damodaran
Why do investors not get compensated for diversifiable risk?
One of the tenets of modern finance is that risk is seen from the perspective of the marginal investor[1]. In publicly traded firms, it is highly likely that the marginal investor is well diversified[2] and hence concerned about only about market risk[3]. It follows therefore, that all investors must also consider only market risk no … Continue reading Why do investors not get compensated for diversifiable risk?
Can equity risk premiums predict market direction?
Equity risk premiums are useful. But can they alone tell whether the market is over- or under-valued? We take a closer look in the below article... A fellow student in the online valuation class of NYU recently requested my thoughts on a report from a top bank regarding equity risk premiums (“ERP”). The crux of … Continue reading Can equity risk premiums predict market direction?