"A great deal more fiction is written in Microsoft Excel than in Microsoft Word" - Anonymous Previously, I have written about what, according to me, is one of the biggest mistakes that people make in a DCF valuation. Two years of experience post that article has only reinforced my belief in this as I have … Continue reading How to write fiction using excel
Thoughts on invested capital – Part 1
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
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
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 net depreciation from capex for computing reinvestment rate
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
Putting numbers to the Welspun scandal
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
Demystifying Internal Rate of Return
And why firms use it as a measure of investment performance... Note: The concepts discussed in this article are meant for those who have studied finance at some point If you've studied finance at any point in your life, you would have come across the concept of Internal Rate of Return ("IRR") - the rate at which … Continue reading Demystifying Internal Rate of Return