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?
Here's a snapshot of how to estimate a risk free rate for India:
We recently came across a question on Quora about why Prof. Damodaran subtracts “depreciation from capex when computing the reinvestment rate of a business.” It further goes on to state the following: "In his book, [Prof. Damodaran] seems to argue that depreciation is a cash inflow that pays for a part of capex, but I don't … Continue reading Why net depreciation from capex for computing reinvestment rate
What had been a fairly decent year for the equity markets till September 2016 was marred by demonetization in the last two months of the year. The markets gave up most of the gains and ended up marginally positive for the year. Nifty 500 (the index which we feel represents the broader Indian market) reached … Continue reading Demonetization Blues: Mutual Fund Performance during the latest Correction
Welspun India has been marred in a controversy over supply of fake Egyptian cotton to its US customers like Target and Walmart. Given this controversy, investors are running away from the company using adages such as 'there is never just one cockroach in the closet'. Investors using such adages as crutches without considering the monetary … Continue reading Putting numbers to the Welspun scandal
The problem of inconsistency and how it can lead to erroneous conclusions... Ratios (or multiples) are a popular tool that many analysts employ to identify cheap stocks. Similar ratios (such as a Price-to-Earnings, Price-to-Sales, etc.) are compared across firms and a company with a lower multiple is considered cheap relative to one that has a … Continue reading The Biggest Problem with Price-to-Sales Ratio
Note: The concept of implied equity risk premium has been developed by Prof. Aswath Damodaran. In this article, we apply his methods to determine an implied equity risk premium for India. One of the most popular ways of valuing a company is to do a discounted cash flow valuation. According to this method, the value … Continue reading Estimating an Equity Risk Premium for India