Financial Analysis Tools and Techniques
23.9K views | +11 today
Financial Analysis Tools and Techniques
Best practices and effective ways to generate, understand and act upon key financial information.
Curated by Fatima Patova
Your new post is loading...
Your new post is loading...
Scooped by Fatima Patova!

Corporate Takeover Defense: A Shareholder's Perspective

Corporate Takeover Defense: A Shareholder's Perspective | Financial Analysis Tools and Techniques |
Find out the strategies corporations use to protect themselves from unwanted acquisitions.
No comment yet.
Scooped by Fatima Patova!

What is the Monetary Policy Rate?

Fatima Patova's insight:
Business runs on credit. Mortgages, auto loans and credit cards make the "good life" we otherwise could not afford possible. Banks borrow too on a daily basis from each other or their central bank. The latter sets the baseline interest rates every other interest rate adds on to. Its rates control the amount of money in circulation at any given time. Raise them and the money supply shrinks; lower them and it expands. "Tight" money slows economic activity down; "loose" money speeds it up. The decision to do either comes after careful deliberation about what monetary policy a central bank should pursue given prevailing economic conditions.
No comment yet.
Scooped by Fatima Patova!

Starbucks – an example of vertical integration

Starbucks – an example of vertical integration | Financial Analysis Tools and Techniques |
Fatima Patova's insight:

After my brief stint into the world of McDonalds, I decided to learn about what I thought was another franchise, but a more modern one:Starbucks. Turns out I was mistaken and it is not a franchise at all. Instead, the company is immensely vertically integrated for one purpose alone, maintaining perfect quality throughout the value-chain. At least that’s what its founder, Howard Schultz, claims in his book ‘Pour Your Heart Into It.’ I agree that when you have a globally orientated company, with both suppliers all around the world and coffee-shops now too, and you are selling a premium product, that this is a good strategy. 


How did Starbucks get this way? Its organisational structure is ingrained in the strange history of the company. It originally started as a roaster and retailer of coffee-beans, when Schultz joined the company as a young salesman. He later left it to pursue his real passion, setting up coffee-shops, and a few years later returned to buy Starbucks the company, including the name. Had he not succeeded, his strategy of expansion may well have been very different.

In business, you’ll often come across the concept of transaction costs, or the make-or-buy decision. Transaction cost theory stipulates that you should keep the things in-house that constitute your core-competencies, and outsource those that do not. In other words, make it yourself versus buy it externally. In the case of Starbucks, the core-competencies is quality coffee which sells at premium prices. To them, it is vital to own the components and have the people that create this quality.


Being vertically integrated is both rewarding and risky. One the negative side, you have a lot of dependancies and there is a great risk of stagnancy in a dynamic market-place. The more people you have working for you and the more business-units you have to manage, the higher the complexity level and the more layers are necessary in a command-structure. Therefore everything happens much slower and is also much more expensive.


The best way to circumvent that is to focus on your core-values and the bottom-line. If your core-value is high quality coffee, you can also charge higher prices for it, off-setting some of the costs of vertical integration. But similarly, it pays off to slim down the complexity, make the process of creating your product as (cost-)efficient as possible.


And by controlling the value-chain, you can essentially control the experience, maintain the level of quality much better than if you are dependant on external partners. This is especially an issue in the world of coffee, where you would frequently deal with suppliers in developing nations with varying standards of quality. Starbucks does not grow its own coffee, but it does keep its buyers awfully close to those that do. Similarly, other industries like IT or retail face similar concerns. Do we hire programmers elsewhere or train them ourselves?

So why doesn’t a company like McDonalds integrate vertically? On a virtual level, you could say they do. They have created McDonalds university, which offers training to franchisees, in order to share the same values throughout the company-name. They keep their R&D in-house, but share the results throughout the virtual chain. They advertise on a national and regional level. And they maintain good relationships with suppliers to buywhat they call premium-products at far-less-than premium prices.


As the last sentence suggests, that is perhaps where the difference lies. The core-value of McDonalds is not the same as that of Starbucks. The first started with offering hamburgers for $ 0.15, now around $1; the latter offered premium beans and later coffee for $3.50. This is again a superficial observation, but higher prices translate into a higher budget for quality. Just like Apple maintains high margins for it’s hardware, vs. other PC-makers, it can offer a higher quality of design and customer service than most of its competitors. Similarly, Starbucks can focus on training the best people, buying the best equipment, run innovative marketing campaigns and strategies. And it can afford to be vertically integrated.

No comment yet.
Scooped by Fatima Patova!

Spotting Profitability With ROCE

Spotting Profitability With ROCE | Financial Analysis Tools and Techniques |

Think of return on capital employed (ROCE) as the Clark Kent of financial ratios. Most investors don’t take a second look at a company’s ROCE, but savvy investors know that, like Kent’s alter ego, ROCE has a lot of muscle. In fact, ROCE can help investors see through growth forecasts, and it can often serve as a reliable measure of corporate performance. In this article we'll reveal the true nature of ROCE and how to calculate and analyze it. Read on to find out how this often overlooked ratio can be a superhero when it comes to calculating the efficiency and profitability of a company's capital investments.


Defining ROCE
Put simply, ROCE reflects a company’s ability to earn a return on all of the capital that the company employs. ROCE is calculated by determining what percentage of a company's utilized capital it made in pre-tax profits, before borrowing costs. To calculate ROCE, you determine what percentage of a company's invested capital it made in pre-tax profit before borrowing costs. The ratio looks like this:

= Profit Before Interest and Taxation / Capital Employed


The numerator, or the return, includes the profit before tax, exceptional items, interest and dividends payable. These items are located on the income statement. The denominator, the capital employed, is the sum of all ordinary and preferred-share capital reserves, all debt and finance lease obligations, as well as minority interests and provisions. These items are all found on the balance sheet. The denominator shows how much capital is being employed in the operation of the business. (For further reading, see Reading The Balance Sheet and Understanding The Income Statement.)


What Does ROCE Say?
For starters, ROCE is a useful measurement for comparing the relative profitability of companies. But ROCE is also an efficiency measure of sorts; ROCE doesn’t just gauge profitability as profit margin ratios do, it measures profitability after factoring in the amount of capital used. To understand the significance of factoring in employed capital, let’s look at an example. Say Company A makes a profit of $100 on sales of $1,000, and Company B makes $150 on $1,000 of sales. In terms of pure profitability, B, having a 15% profit margin, is far ahead of A, which has a 10% margin. However, let’s say A employs $500 of capital and B $1,000. A has an ROCE of 20% [100/500] while B has an ROCE of only 15% [150/1,000]. The ROCE measurements show us that Company A makes better use of its capital. In other words, it is able to squeeze more earnings out of every dollar of capital it employs. A high ROCE indicates that a larger chunk of profits can be invested back into the company for the benefit of shareholders. The reinvested capital is employed again at a higher rate of return, which helps to produce higher earnings-per-share growth. A high ROCE is, therefore, a sign of a successful growth company. (See, The Bottom Line On Margins.)


ROCE in Relation to the Cost of Borrowing
A company’s ROCE should always be compared to the current cost of borrowing. If an investor puts $100 into a bank for a year at 5% interest, the $5 received in interest represents a reasonable return on the capital. To justify putting the $100 into a business instead, the investor must expect a return that is significantly higher than 5%. To deliver a higher return, a public company must raise more money in a cost effective way, which puts it into a good position to see its share price increase; ROCE measures a company's ability to do this. There are no firm benchmarks, but as a very general rule of thumb, ROCE should be at least double the interest rates. An ROCE any lower than this suggests that a company is making poor use of its capital resources.


Some Guidelines for Analyzing ROCE
Consistency is a key factor of performance. In other words, investors should resist investing on the basis of only one year’s ROCE. Take a look at how ROCE behaves over several years and follow the trend closely. A company that, year after year, earns a higher return on every dollar invested in the business is bound to have a higher market valuation than a company that burns up capital to generate profits. Be on the lookout for sudden changes; a decline in ROCE could signal the loss of competitive advantage. (For more insight, see Competitive Advantage Counts.)

Global Cloud Computing - 30 Days FREE
Because ROCE measures profitability in relation to invested capital, ROCE is important for capital-intensive companies, or firms that require large upfront investments to start producing goods. Examples of capital-intensive companies are those in telecommunications, power utilities and heavy industries. ROCE has emerged as the undisputed measure of profitability for oil and gas companies, which also operate in a capital-intensive industry. In fact, there is often a strong correlation between ROCE and an oil company's share price performance.


Things to be Aware Of
While ROCE is a good measure of profitability, it may not provide an accurate reflection of performance for companies that have large cash reserves, which could be funds raised from a recent equity issue. Cash reserves are counted as part of capital employed even though these reserves may not yet be employed. As such, this inclusion of the cash reserves can actually overstate capital and reduce ROCE.

Consider a firm that has turned a profit of $15 on $100 capital employed, or 15% ROCE. Of the $100 capital employed, let’s say $40 was cash it recently raised and has yet to invest into operations. If we ignore this latent cash in hand, the capital is actually around $60. The company’s ROCE, then, is a much more impressive 25%. Furthermore, there are times when ROCE may understate the amount of capital employed. Conservatism dictates that intangible assets - such as trademarks, brands and research and development - are not counted as part of capital employed. Intangibles are too hard to value with reliability, so they are left out. Nevertheless, they still represent capital employed.

Like all performance metrics, ROCE has its difficulties, but it is a powerful tool that deserves attention. Think of it as a tool for spotting companies that can squeeze a high a return out of the capital they put into their businesses. ROCE is especially important for capital-intensive companies. Top performers are the firms that deliver above-average returns over a period of several years and ROCE can help you to spot them.

No comment yet.
Scooped by Fatima Patova!

Capitalizing Your Company

Capitalizing Your Company | Financial Analysis Tools and Techniques |

Capitalizing a company doesn't just happen in the beginning. Every company, new ones and operating ones, must deal with capitalizing issues. Especially the successful ones, because success begets growth, and growth requires capital. If your company needs capital, as the owner, you are the one who has to get it.
Webster: capital, n, any asset, tangible or intangible, that is held for long term investment. Capital, blended with cashflow, is the financial fuel your company's engine uses to, among other things:

• Buy equipment, vehicles, R&D, etc.;
• Fund growth by purchasing inventory, hiring employees, financing receivables, etc.;
• Provide reserves for those inevitable rainy days.

Three Kinds Of Capital
1. Investment Capital
This capital comes from you or someone else. It's like buying stock in the stock market except for one thing: When you make an investment in a small, closely held corporation, there is no market for your shares. Therefore, you typically won't get your invested capital out until you sell or otherwise dissolve the company. Consequently, most small businesses will have a nominal amount of shareholder capital - typically from $1,000 to $10,000 - and this investment will usually be made only at the point of incorporation.

2. Retained Earnings
This is the profits your company has made, and which you have left to accumulate in the company; which is to say, the profits you didn't take out as salary, bonus, dividend, or other distribution. Of all the forms of capital your company could have, this is the best kind, because you got it the old fashioned way, your company earned it.

Your banker will like seeing retained earnings on your balance sheet even more than equity capital because it says two things:

a) your company had the ability to produce retained earnings by operating profitably;
b) as the owner, you had the discipline to leave this capital in the company instead of distributing it.

3. Borrowed Funds
This is plain old debt; money you borrow from a bank or an individual. Debt can be an excellent way to capitalize your company. But there is one annoying little detail about borrowed money: Unlike investment capital or retained earnings, debt accrues interest, and requires debt service - payments - which creates an incremental drain on your company's liquidity.

Your business has to be able to generate the cashflow to make these payments. If it can't, you shouldn't be asking for the loan. You should know if you can service the debt before you get to the bank with your request. But if you don't, your banker will.

One of the individuals your company could borrow from is you. Instead of investing your money in your business as investment capital, you could lend it to your company. Unlike equity capital, which stays with the stock and only pays a return if you declare dividends (a rare event in small business), a loan from you to your company produces a return through interest payments, which are made by your company.

You could loan money to your company as a personal income strategy. If your company needs money and you have it, why let a bank make the interest? Plus, since you are essentially the bank, the approval process is very short. Talk to your CPA about this.

The Retained Earnings Sermon
In my opinion, the way to wealth and independence for the average person in America who wasn't born with it, is through the accumulation of equity, not the earning of personal income.

If you are an employee of someone else's company, all of your compensation from your efforts comes in the form of personal, earned income, and it is reported on your W-2 form. Yes, many companies do offer stock options. And while this practice seems to be increasing, employees who have this opportunity are still in the minority nationwide.

As a business owner you will receive a W-2 for the salary and bonus you take. But all of your financial benefit doesn't have to be earned income. You have the opportunity to leave some of the company's earnings in the company in the form of retained earnings, which becomes equity. Your equity. Some of this equity will be in the form of cash, but most of it will be in inventory, equipment, fixtures, vehicles, real estate, good will through market penetration and brand development, etc.

As long as you are in business, every dollar of retained earnings capital is making you money. Retained earnings is:

• the working capital that you don't have to borrow from the bank, or dilute your ownership with by taking in other investors' capital.

• your safety net during the inevitable period(s) of slow sales or other problems that can befall a small business,

• your financial homerun when you sell your business.

Involvement Or Commitment
Another reason to maximize retained earnings in your company is that bankers like to see a nice number on the balance sheet of a company they are considering for a loan. A history of retained earnings in a company says commitment, and bankers like their borrowers to be committed in their business, not just involved. Do you know the difference between involvement and commitment?

When you look at a plate of bacon and eggs, you can see that the chicken was involved in your breakfast, while the pig made more of a commitment. Bankers like it when you are committed.

The Smart Money
If you want to demonstrate that you practice sound management fundamentals, leave every nickel you can in your business. Think of it as paying your business first. By taking care of your business now, it will take care of you later.

So, if retained earnings are so great, why would anyone ever invest money or borrow to capitalize a company? Unfortunately for most businesses, accumulating working capital through retained earnings is a slow process. In today's marketplace, most businesses need working capital to fund growth faster than their profits will generate as retained earnings.

I think the best plan is to incorporate all three methods of capitalization. It's really very simple: Leave every cent of earnings that you can in your company, and invest and/or borrow the balance of what you need to grow your business.

If you want to own your company outright one day, which is to say no debt, you will have to begin a disciplined, long-term process of accumulating retained earnings. By amortizing your debt, you will be replacing debt capital with retained earnings capital. As I said earlier, talk with your CPA about the best combination of capital options for you.

Write this on a rock... Understanding the benefits of accumulating retained earnings is one of the most critical perspectives a small business owner can acquire. Don't get discouraged. It is a long term process, but it's worth it.

No comment yet.
Scooped by Fatima Patova!

Managerial Accouting - Activity Analysis, Cost Behavior & Cost Estimation

Managerial Accouting - Activity Analysis, Cost Behavior & Cost Estimation | Financial Analysis Tools and Techniques |


1. Cost Estimation - process of determining cost behaviour, often focusing on historical data.

2. Cost Behavior - relationship between cost and activity.

3. Cost Prediction - using knowledge of cost behavior to forecast level of cost at a particular activity. Focus is on the future.



The relevant range is the range of activity within which managers expect a company to operate and within which managers can predict cost behavior with some certainty.



Having ascertained the cost behavior, cost prediction can be made. Segregating into fixed and variable costs is a must before many cost prediction or forecasting techniques can be used such as:

(i) accounting method,

(ii) high low method,

(iii) linear regression

(iv) curvilinear regression



Annual growth rate is widely used in cost prediction as in large number of cases where the growth or decline is gradual.



A case where cause and effect relation is certain, one can use High low method.

*Determine high and low cost/units produced and divide cost by units produced. This should give you cost for producing one unit in various years. If such a cost is identical, we would say that it is fixed. If the unit rates is not uniform, the relevant cost is partly variable and partly fixed.

*Find difference between high and low costs and units produced and divide one by another to determine Rate Per Unit. 

*The fixed part can be segregated and a cost formula can be arrived as:

Total Cost = Fixed Cost +(Numbers of Units Produced x Rate Per Unit).



Linear Regression is a powerful tool for forecasting. It uses a formula i.e Y = a + bX which is the same as described in High Low Method. The difference is that How-Low is a crude way which cares for only the highest and the lowest. The linear regression takes into account each and every figure, calculate average and standard deviations and only then processes it further.



Curvilinear is a much advance tool which takes into more than one factors. 

Let us taken an example: Suppose a university has enrolled 30 fresh students for 2-year MBA program. The university is interested to know what would be GPA of each student at the end. It would decided on factors or causes effecting GPA, the dependent variables and may would arrive at the following equation:

Y = a + bX + cW + dZ + E, where Y= GPA, bX= Weighted Average of Marks in Matric, Intermediate and Graduation, cW is marks in Aptitude Test and dZ is Interview score while E is error factors based previous actual GPA and predicted GPA.



When past data is not available and some one wants to how how much 100 chairs would cost, one can resort to task analysis whereby a item would be broken into its components, each component would be measured and its cost obtained from the market sources. This is called bottom up approach. (On the contrary, in bottom-down approach, an estimated is obtained from experts to total budget and later is it is distributed to various factors. One may want to know how much a university for 2,500 students would cost. The experts can tell us that it would cost around Rs. 350 million. This amount can be split into land, building, laboratories, libraries and play grounds etc based on past pattern or proportion ( land to be 20% of total cost) to be given by the same experts.



An accountant studies the past records and classifies each cost component into fixed, variable, semi variable, step fixed and step variable. One this done, fixed component is extracted from semi-variable, step-fixed and step variable. This leaves only two components i.e. fixed and variable. Later, same approach as in Linear Regression can be adopted.



This is graphical presentation where a pattern can be noted and extend for prediction.



An understanding cost behavior helps manager in anticipation of changes in cost when there is a change in their activities like production, sales, inventory pile up etc. It provides good assistance in planning, cost management and decision making.


A number of behavior patterns exist ranging from fixed to variable and from linear to curvilinear. Many cost predictions techniques are used to forecast sales and costs or any other factor.

No comment yet.
Rescooped by Fatima Patova from Small Business Issues!

Manage your cash flow and get paid on time

Manage your cash flow and get paid on time | Financial Analysis Tools and Techniques |

Getting paid on time is essential to minimising cash flow problems, especially for new businesses. Here are seven simple techniques to help you avoid cash flow roadblocks.


1. Be paid in advance

2. Only send correct invoices

3. Communicate with both customer and the person who pays

4. Snail mail your invoices

5. Make paying easy

6. Receive and check payments vigilantly

7. Get tough on repeat offenders

Via Steve Cassady
No comment yet.
Scooped by Fatima Patova!

Equity Investments. Advantages and Disadvantages

Equity Investments. Advantages and Disadvantages | Financial Analysis Tools and Techniques |

The investment is usually in the form of stocks whereby profits are in the form of capital gains or dividends. The investor considers equity investment as a long-term strategy of maximizing his wealth. The investor recovers his money only when he sells his shares to others.


Advantages And Disadvantages Of Equity Investments


There is no interest charged on the committed fund and if required, knowledge and skill of the investors is an added advantage for the firm.

The investor has an opportunity for a higher return on the principal sum rather than investing in a bank.

The main disadvantages of equity investments are some loss in control of management to the firm and a considerable risk factor for the investor.


Equity Investment Instruments


*Common Stock is where the investor holds some shares of the company and earns money as dividends, which is not a guarantee. It is a risky venture but possible to make higher returns on equity investment in a short duration.


*Buying Preferred Stock is a more stable equity investment with no power in decision-making. Dividends are regular and independent of the market. The dividends may be predetermined or floating.


*Warrants are unique such that common stock is available at a specific price during a stipulated time-period. If is not purchased, it will become worthless and will return higher dividends when bought.


*Convertible Debt is a bond without collateral that is exchanged for common stock. These debentures are priced at rates lower than stock-prices.


*Equity line of credit is similar to bank line of credit. It is a commitment by the investor to purchase common stock over a period of time. The firm has the benefits of flexibility, control, security, speed and market timing. The major advantage to the investor is he pays a discounted rate for the stocks.


*Sales of restricted shares refer to stock of the company that may be transferred to another person only after meeting certain criteria.


Checklist for Investors before making an equity investment

*Good record of accomplishment and expertise of the management.

*An impressive business plan that is detailed and accurate.

*Return on investment and the time duration.

*Details on the limited control after investing.




Equity investments meet the fund requirements of an organization. Here, the investor realizes equity instead of the traditional interest on the capital amount. Businesses must be convinced that equity investment is the right finance option before they finally decide upon. This is because the process is cumbersome and the management may lose some control of their power to the investor. On the other hand, the investor gains high returns only if the company performs well; the proposition is risky.


There are mutual benefits if the business plan is sound, the top management is performance-oriented and the investor can share his investment and expertise for the growth of the company.

No comment yet.
Scooped by Fatima Patova!

8 Core Beliefs of Extraordinary Bosses

8 Core Beliefs of Extraordinary Bosses | Financial Analysis Tools and Techniques |

A few years back, I interviewed some of the most successful CEOs in the world in order to discover their management secrets. I learned that the "best of the best" tend to share the following eight core beliefs.



1. Business is an ecosystem, not a battlefield.

Average bosses see business as a conflict between companies, departments and groups.


Extraordinary bosses see business as a symbiosis where the most diverse firm is most likely to survive and thrive. They naturally create teams that adapt easily to new markets and can quickly form partnerships with other companies, customers ... and even competitors.



2. A company is a community, not a machine.

Average bosses consider their company to be a machine with employees as cogs. They create rigid structures with rigid rules and then try to maintain control by "pulling levers" and "steering the ship."


Extraordinary bosses see their company as a collection of individual hopes and dreams, all connected to a higher purpose. They inspire employees to dedicate themselves to the success of their peers and therefore to the community–and company–at large.



3. Management is service, not control.


Average bosses want employees to do exactly what they're told. They're hyper-aware of anything that smacks of insubordination and create environments where individual initiative is squelched by the "wait and see what the boss says" mentality.


Extraordinary bosses set a general direction and then commit themselves to obtaining the resources that their employees need to get the job done. They push decision making downward, allowing teams form their own rules and intervening only in emergencies.



4. My employees are my peers, not my children.


Average bosses see employees as inferior, immature beings who simply can't be trusted if not overseen by a patriarchal management. Employees take their cues from this attitude, expend energy on looking busy and covering their behinds.


Extraordinary bosses treat every employee as if he or she were the most important person in the firm. As a result, employees at all levels take charge of their own destinies.



5. Motivation comes from vision, not from fear.


Average bosses see fear - of getting fired, of ridicule, of loss of privilege - as a crucial way to motivate people. As a result, employees and managers alike become paralyzed and unable to make risky decisions.


Extraordinary bosses inspire people to see a better future and how they'll be a part of it. As a result, employees work harder because they believe in the organization's goals, truly enjoy what they're doing and (of course) know they'll share in the rewards.



6. Change equals growth, not pain.


Average bosses see change as both complicated and threatening, something to be endured only when a firm is in desperate shape. They subconsciously torpedo change ... until it's too late.


Extraordinary bosses see change as an inevitable part of life. While they don't value change for its own sake, they know that success is only possible if employees and organization embrace new ideas and new ways of doing business.



7. Technology offers empowerment, not automation.


Average bosses adhere to the old IT-centric view that technology is primarily a way to strengthen management control and increase predictability. They install centralized computer systems that dehumanize and antagonize employees.


Extraordinary bosses see technology as a way to free human beings to be creative and to build better relationships. They adapt their back-office systems to the tools, like smartphones and tablets, that people actually want to use.



8. Work should be fun, not mere toil.


Average bosses buy into the notion that work is, at best, a necessary evil. They fully expect employees to resent having to work, and therefore tend to subconsciously define themselves as oppressors and their employees as victims. Everyone then behaves accordingly.


Extraordinary bosses see work as something that should be inherently enjoyable–and believe therefore that the most important job of manager is, as far as possible, to put people in jobs that can and will make them truly happy.

No comment yet.
Scooped by Fatima Patova!

Turnover Is Vanity Profit Is Sanity Cash Is Reality

Turnover Is Vanity Profit Is Sanity Cash Is Reality | Financial Analysis Tools and Techniques |

Turnover, sales, revenue, fee income - whatever you care to call the top line - doesn't matter in finance terms.


It's what you get to keep after covering the costs that matters and most important of all, how much money is in the bank.


In big business, where ownership and management is separated, there are huge issues.


The senior managers are driven by emotion and being CEO of a big business boosts the ego so much more than being the CEO of a smaller business, even if the small business is making more money.


You will hear "I am the CEO (or MD) of a £25 million turnover electrical wholesale business."

What you won't hear is "I am the CEO of a £25 million turnover electrical wholesale business and we are losing £800k per year."




It's profit and cash that matter. So remember:

"Turnover is vanity, profit is sanity but cash is reality"


"Turnover is vanity, profit is sanity but cash is king"

No comment yet.
Suggested by The WallStreetRanter!

Wall Street Rant: The Lovely World of S&P Analyst Price Targets

Wall Street Rant: The Lovely World of S&P Analyst Price Targets | Financial Analysis Tools and Techniques |

If you want a good chuckle you can always turn to a S&P stock report. Take for example their recent research report on Netflix. Right at the top of the report they blessed the stock with a "Buy" rating and slapped a 12-month price target of $135 on it. Who can complain with a 17% gain? Looks like it's time to buy!

Oh wait, what is this?


"Analysis of the stock's current worth, based on S&P's proprietary quantitative model suggests that NFLX is overvalued by $48.24 or 41.9%"


Gotta love it! So on the one hand their analyst is saying 'Buy" because with a price target of $135 it is 17% undervalued. Then your later being told that, by the way, our "proprietary quantitative model" says you should lose about 42% listening to that Analyst.

No comment yet.
Scooped by Fatima Patova!

Reporting Your Investment Earnings

Reporting Your Investment Earnings | Financial Analysis Tools and Techniques |
Lower earning rates ease the pain of sharing your investment income with the IRS. Learn more at
No comment yet.
Scooped by Fatima Patova!

Suppliers asking to see management accounts...?

Suppliers asking to see management accounts...? | Financial Analysis Tools and Techniques |

Small businesses are increasingly being asked to share their management accounts with suppliers following requests from trade credit insurers, research has shown.


More than 670,000 small and medium-sized firms were asked to provide their manaccs to suppliers in the last 24 months.


77% of small and medium-sized businesses were able to secure trade credit or extend existing credit facilities over the past two years after complying with such a request.


More than 47,000 had credit facilities cancelled or denied after refusing to share financial information.


“Insurers and businesses are adopting new strategies for financial risk mitigation to ensure they minimise their exposure to bad debt and defaulted payment,”

No comment yet.
Scooped by Fatima Patova!

Is Your Business Leaking Cash?

As a business owner there is one thing you understand more than anything else - cash flow. It’s what keeps you awake at night because it is the life blood of your business. It is also a key determinant as to whether your business can grow and prosper or if it is stagnating and possibly heading towards insolvency.

So now that you have reached the end of the financial year you will soon be talking to your accountant to get an indication of how much profit you have made for the year. But how much will this really tell you because you never seem to have the money the business is supposed to have made actually in the bank? The one common question that accountants get asked is “well if we made that much profit, where is it”?

The answer lies in having a mechanism to identify how you have managed your sales growth (or decline). It doesn’t matter whether your sales have increased or declined, both scenarios need to be managed to ensure that you don’t leak cash. If your sales increase by ten percent you need to make sure that variable overheads, debtors, and cost of sales (COGS) do not increase by more than ten percent. Any increase over ten percent means that you are leaking cash.

Conversely, if your sales decrease by ten percent, you need to make sure that variable overheads, debtors, and cost of sales (COGS) decrease by at least ten percent to ensure no cash leakages. Cash leakage can contribute to unsustainable cash flow arising in a business. Knowledge of this can avert bankruptcy in advance.

If your COGS were to rise by more than ten percent (let’s say fifteen percent) then your inventory and work in progress should not rise by more than fifteen percent. Anything over fifteen percent also indicates a cash leakage.

We recently wrote an article entitled “Growing Broke” because we often find that businesses experiencing cash flow problems have allowed one or more of their variable overheads, debtors, COGS, inventory or work in progress (WIP) to grow disproportionately to the rate of sales increase. What many business owners fail to see is the need to manage these areas equally closely in times of falling sales. 

No comment yet.
Scooped by Fatima Patova!

6 Bad Stock Buyback Scenarios

Fatima Patova's insight:

Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings and, even worse, a signal that the company has run out of good ideas. This means that investors can't afford to take buybacks at face value. Find out how to examine whether a buyback represents a strategic move by a company or a desperate one. 

When Buybacks Work

A share buyback happens when a company purchases and retires some of its outstanding shares. This can be a great thing for shareholders because after the share buyback, they will own a bigger portion of the company, and therefore a bigger portion of its cash flow and earnings.

In theory, management will pursue share buybacks because they offer the greatest potential return for shareholders - a better return than it could get from expanding operations into new markets, investing in the brand or any of the other uses that the company has for cash. If a company with the potential to use cash to pursue operational expansion chooses instead to buy back its stock, then it could be a sign that the shares are undervalued. The signal is even stronger if top managers are buying up stock for themselves. 

Most importantly, share buybacks can be a fairly low-risk approach for companies to use extra cash. Re-investing cash into, say, R&D or new a new product can be very risky. If these Investments don't pay off, that hard-earned cash goes down the drain. Using cash to pay for acquisitions can be perilous, too. Mergers hardly ever live up to expectations. Share buybacks, on the other hand, let companies invest in themselves when they are confident their shares are undervalued and offer a good return for shareholders. 

When Buybacks Fail
Some of the time, share buybacks can be a great thing. But oftentimes, they can be a downright bad idea and can hurt shareholders. This can happen when buybacks are done in the following circumstances:

1. When Shares Are Overvalued
For starters, buybacks should only be pursued when management is very confident the shares are undervalued. After all, companies are no different than regular investors. If a company is buying up shares for $15 each when they are only worth $10, the company is clearly making a poor investment decision. A company buying overvalued stock is destroying shareholder value and would be better off paying that cash out as a dividend, so that shareholders can invest it more effectively. 

2. To Boost Earnings Per Share
Buybacks can boost EPS. When a company goes into the market to buy up its own stock, its decreases the outstanding share count. This means that earnings are distributed among fewer shares, raising earnings per share. As a result, many investors applaud share buybacks because they see increasing EPS as a surefire approach to raising share value.

But don't be fooled. Contrary to popular wisdom (and, in many cases, the wisdom of company boards), increasing EPS doesn't increase fundamental value. Companies have to spend cash to purchase the shares; investors, in turn, adjust their valuations to reflect the reductions in both cash and shares. The result, sooner or later, is a canceling out of any earnings-per-share impact. In other words, lower cash earnings divided between fewer shares will produce no net change to earnings per share.

Of course, plenty of excitement gets generated by the announcement of a major buyback as the prospect of even short-lived EPS can gives share prices a pop-up. But unless the buyback is wise, the only gains go to those investors who sell their shares on the news. There is little, if any, benefit for long-term shareholders. 

3. To Benefit Executives
Many executives get the bulk of their compensation in the form of stock options. As a result, buybacks can serve a goal: as stock options are exercised, buyback programs absorb the excess stock and offset the dilution of existing share values and any potential reduction in earnings per share.

By mopping up extra stock and keeping EPS up, buybacks are a convenient way for executives to maximize their own wealth. It's a way for them to maintain the value of the shares and share options. Some executives may even be tempted to pursue share buybacks to boost the share price in the short term and then sell their shares. What's more, the big bonuses that CEOs get are often linked to share price gains and increased earnings per share, so they have an incentive to pursue buybacks even when there are better ways to spend the cash or when the shares are overvalued.

4. Buybacks That Use Borrowed Money 
For executives, the temptation to use debt to finance earnings-boosting share purchases can be hard to resist, too. The company might believe that the cash flow it uses to pay off debt will continue to grow, bringing shareholder funds back into line with borrowings in due course. If they're right, they'll look smart. If they're wrong, investors will get hurt. Managers, moreover, have a tendency to assume that their companies' shares are undervalued - regardless of the price. When done with borrowing, share buybacks can hurt credit ratings, since they drain cash reserves that can serve as a cushion if times get tough.

One of the reasons given for taking on increased debt to fund a share buyback is that it is more efficient because interest on debt is tax deductible, unlike dividends. However, debt has to be repaid at some time. Remember, what gets a company into financial difficulties is not lack of profits, but lack of cash. 

5. To Fend Off an Acquirer
In some cases, a leveraged buyback can be used as a means to fend off a hostile bidder. The company takes on significant additional debt to repurchase stocks through a buyback program. Such leveraged buybacks can be successful in thwarting hostile bids by both raising the share value (hopefully) and adding a great deal of unwanted debt to the company's balance sheet.

6. There Is Nowhere Else to Put the Money
It's very hard to imagine a scenario where buybacks are a good idea, except if the buybacks are undertaken when the company feels its share price is far too low. But, then again, if the company is correct and its shares are undervalued, they will probably recover anyway. So, companies that buy back shares are, in effect, admitting that they cannot invest their spare cash flow effectively. 

Even the most generous buyback program is worth little for shareholders if it is done in the midst of poor financial performance, a difficult business environment or a decline in the company's profitability. By giving EPS a temporary lift, share buybacks can soften the blow, but they can't reverse things when a company is in trouble.

As investors, we should look more closely at share buybacks. Look in the financial reports for details. See whether stock is being awarded to employees and whether repurchased shares are being bought when the shares are a good price. A company buying back overvalued stock - especially with lots of debt - is destroying shareholder value. Share repurchase plans aren't always bad. But they can be. So, let's be careful out there.

No comment yet.
Scooped by Fatima Patova!

Return On Capital Employed (ROCE) Ratio - Common questions

Return On Capital Employed (ROCE) Ratio - Common questions | Financial Analysis Tools and Techniques |

Historical Background on the ROCE (Return On Capital Employed) Ratio
The ROCE ratio has historically been quoted and represented as a fundamental measure by most industry investors. The Return On Capital Employed (ROCE) ratio is considered by many investors to be the primary measure of profitability. This Return On Capital Employed ratio is then compared to industry benchmark Return On Capital Employed ratios.

What is the ROCE Ratio?
ROCE is sometimes referred to in the financial press as the primary measure of profitability. This “primary” measure of profitability is calculated as:
Return On Capital Employed (ROCE) =((Net profit before interest & taxation) / ( Share capital + Reserves + long-term liabilities)) x 100
Industry investors quote the ROCE ratio as a percentage.

What does the Return On Capital Employed (ROCE) Ratio Mean to Industry and the Investor?
Industry and investors will possibly look at the relative size of the Return On Capital Employed ratio. This is because a high ROCE percentage that a company is profitable.

Why is Return On Capital Employed (ROCE) Considered the Primary Measure of Profitability?
Some investors consider ROCE the primary measure of profitability since it compares the inputs (total capital invested into the company) with the outputs (profits generated by the company).

What are the Key Problems With Return On Capital Employed Ratio Analysis of a Company or an Industry?
Three possible key problems with the Return On Capital Employed (ROCE) percentage are:
Investors & industry place too much emphasis on the ROCE ratio without carrying out analysis of the supporting key profitability ratios.
Investors & industry often do not carry out deep fact based comparative analysis with similar companies (eg often different accounting policies are ignored).
Investors & industry often find it difficult to get industry benchmark ROCE ratios (especially true for unquoted stock).

What are the Secondary Problems with Return-On-Capital-Employed Ratio Analysis of a Company or an Industry?
Possible secondary problems with the Return On Capital Employed ratio percentage include the following:
ROCE ratios use historical data. Historic data is not always a sound basis for future earnings.
The ROCE can vary due to short-term influences (eg recent poor historic results driven by one particularly unprofitable contract).

No comment yet.
Scooped by Fatima Patova!

How to Figure Out the Net Worth of My Company

How to Figure Out the Net Worth of My Company | Financial Analysis Tools and Techniques |

The net worth of a business may be referred to as the amount of equity owners have in the company, or the book value of the business. The net worth of your company can be calculated by determining the amount of money left over if you were to sell all assets and pay off all liabilities, as explained by the U.S. Securities and Exchange Commission website. Your company’s net worth can be calculated using the accounting equation that states that assets equal liabilities plus shareholders’ equity. This equation can be changed to state that shareholders’ equity equals assets minus liabilities.

Add up the company's total current assets. Total current assets refer to assets the company will convert to cash within one year, such as accounts receivable and inventory. Let's assume your company has $10,000 cash, $8,000 accounts receivable and $5,000 inventory. In this case, the company has total current assets of $23,000.

Add up the value of your company's total long-term assets. Long-term assets include land, buildings, equipment, computers and furniture. These are items your company expects to convert to cash in over one year. Add long-term assets to determine total long-term assets. For example, a company with $10,000 in computers, $4,000 in furniture and buildings worth $55,000 has total long-term assets equaling $69,000.

Calculate total assets. Add long-term assets with current assets. If your company has long-term assets equaling $69,000 and $23,000 in current assets, then the company has total assets equal to $92,000.

Tally current liabilities. A current liability is an obligation your company has to pay within one year or less. Current liabilities include accounts payable, interest payable, unearned income and wages payable. Assume your company has $5,500 accounts payable, $1,800 interest payable, unearned income of $3,700 and wages payable totaling $2,100. In this case, the company has current liabilities totaling $13,100.

Compute your company's total long-term liabilities. These are items your company will pay in over one year, such as mortgages payable, leases and notes payable. Let's assume your business has a $33,000 note payable and a $7,900 lease. In this scenario, the company has long-term liabilities of $40,900.

Add together your current and long-term liabilities. Let’s say your company has long-term liabilities equal to $40,900 and current liabilities that total $13,100. In this instance, your company has total liabilities equal to $54,000.

Subtract total liabilities from your company’s total assets. This final calculation indicates your company’s net worth. For example, if your company has total assets equal to $92,000 and $54,000 total liabilities, then your company’s net worth is $38,000.

No comment yet.
Scooped by Fatima Patova!

Meaning and Definition of Under-Capitalization: | Business Studies | Knowledge Hub

Meaning and Definition of Under-Capitalization: | Business Studies | Knowledge Hub | Financial Analysis Tools and Techniques |
Generally under-capitalization denotes the inadequacy of capital; i.e., the shortage of capital. It is a condition when the real value of the company based on its earnings is more than the book value. A company is said to be under-capitalized when its actual capitalization is lower than its proper capitalization as warranted by its earning capacity.  In the words of Hoagland, "Under-capitalization is an excess of true asset values over the aggregate of stocks and bonds outstanding.
In the words of Charles W. Gerstenberg, "A corporation may be undercapitalized when the rate of profits ti is making on the total capital is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry, or when it has too little capital with which to conduct its business."
Sometimes a company, on the face of it, may have insufficiency of capital but it may have large secret reserves or its promoters might have under-estimated it his situation will not be treated as Under-capitalization.
In short, under-capitalization is a state of affairs when the actual capital is short of the requirements of the company.

Causes of Under-capitalization:

There may be a number of causes of under-capitalization. However, the main causes of under-capitalization are":
(i) Under-estimation of earnings;
(ii) Under-estimation of capital requirement;
(iii) Promotion of company during the period of depression;
(iv) Unforeseen increase in earnings, such as, during boom period, the company will find itself under-capitalized when its earnings exceed the increase in the amount of capital employed;
(v) Conservative dividend policy of the company;
(vi) Sound financial management with high efficiency;
(vii) Tight conditions in the money market.

Merits of Under-capitalization:

The main advantages/ merits of under-capitalization are:
(i) Creation of secret reserves,
(ii) Higher rate of dividend,
(iii) Rapid increase in the prices of shares in the stock exchange;
(iv) Symptom of economic prosperity of the company;
(v) Increase in the rate of profits of the company;
(vi) Shares can be sold easily.

Evils/ Demerits/ Disadvantages of Under-capitalization:

The evils of under capitalization are:
(i) Wide fluctuation in the prices of shares etc.,
(ii) Increase in competition,
(iii) Increase in speculative activities,
(iv) Increase in opportunities for manipulation by management,
(v) Industrial relations tend to be strained,
(vi) Dissatisfaction amongst consumers, they feel they are being exploited by the company,
(vii) Increase in the tax burden of the company,
(viii) Increased Government interference etc.
No comment yet.
Scooped by Fatima Patova!

Types of Trend

Types of Trend | Financial Analysis Tools and Techniques |

On the page:  Descriptions of various types of trend, and an exercise.

Instructions: Look at the graphs and read the descriptions. Important vocabulary is in bold. Then do the exercise.



*dramatically - a lot

*fluctuated - moved up and down

*gradually - slowly

*jumped - incresed quickly

*peak - the top

*rose - increased

*plateau - a flat place

*trough - a fall, then a rise.

No comment yet.
Suggested by The WallStreetRanter!

Why Is Barron's More Bullish Online Than in Print? (Picks & Pans Breakdown)

Why Is Barron's More Bullish Online Than in Print? (Picks & Pans Breakdown) | Financial Analysis Tools and Techniques |
No comment yet.
Scooped by Fatima Patova!

5 Ways to Improve Cash Flow

5 Ways to Improve Cash Flow | Financial Analysis Tools and Techniques |

If you’re looking for a quick fix for cash-flow problems, good luck. But if you’re serious about making strategic changes, read on.


SIMPLE FORMULA: collect your receivables as fast as possible and slow down your payables without jeopardizing your relationship with suppliers.


If you're just looking for a quick fix, you can extend your accounts payable period by using a credit card to pay suppliers. With a check, you only get a day or two of float – or the time between when someone deposits your check and when the amount is removed from your account. But if you pay with a credit card, your vendor gets paid and you don't have to pay the card down for several more weeks. Of course, you don't want to charge more than you can pay off in a month or you'll get slapped with some hefty interest charges.


That's a simple – and fairly short-sighted – solution. But if you're serious about improving cash flow, here are five tips.


1. Perform a Good Forecast


Quite often small and mid-sized businesses aren't prepared for all the costs associated with growing quickly. More sales could mean more employees and a bigger inventory.


2. Evaluate Your Terms


If you're having trouble with cash flow, check to see how well your customer terms and supplier terms are balanced.


If your average payable is 24 days and your average receivable is 47 days, that's 23 days that you have to float, which means you have to go out and get working capital


3. Enforce Payment Discipline


In order to shorten your receivables period, you'll need to have a good collection system in place. You should ask yourself:

*How long is it taking to get paid?
*What is your collections activity?
*Are you getting the right level of contact with your customers?
*Are you identifying disputes fast enough?
*When you identify disputes, what is your policy for getting them resolved?


Enforcing payment discipline should also be part of your payables operations.



4. Segment Your Customers, Suppliers and Inventory


When looking at your inventory, you want to observe the volatility of sales. Do you have too much cash tied up in products that sell only sporadically? Would that money be better off used in your "bread and butter" items that turnover more quickly? "You might end up having tons of money tied up in inventory without actually meeting your customers' needs. 


When breaking down your suppliers, you want to separate them into your regular suppliers versus your one-off buys. With your strategic suppliers, you'll have a better chance of negotiating better terms and discounts.


Perhaps most importantly, you should take a close look at your customers. Who really is a "key customer?" Just because your sales department thinks they're important – i.e. they generate a lot of revenue – that doesn't mean it's a profitable account. Norm Brodsky wrote last year about one business whose biggest account was actually a big money loser, ultimately adding to its cash flow woes. The solution isn't necessarily to cut that account, but to approach the customer with the situation.



5. Make it a Companywide Priority


If improving cash flow is a priority, make sure all of your employees understand that. Remember that your employees will be motivated by the targets you set for them. Obviously, collectors should have collection targets. But even your sales staff should be on board. If a salesperson only has a revenue goal, he or she will work to meet it, regardless of whether the invoices are paid on time or in full. Instead, institute a policy where, if something is written off, the revenue is backed out of commissions.


"If employees have a target, that's what they focus on," DeHaro says. "Make sure management teams support working capital objectives."

No comment yet.
Scooped by Fatima Patova!

Turnover is Vanity, Profit is Sanity

Turnover is Vanity, Profit is Sanity | Financial Analysis Tools and Techniques |

The phrase turnover is vanity, profit is sanity came to mind last week while writing the essential finance chapter of my new Double Your Business book.

Stephen, the owner of a CCTV business asked for my help with getting more sales.


When I visited them, they had a big office and a number of staff. The business had grown to a decent size turnover but they were making practically no profit at all.


I realised then that their biggest problem was not sales, but management. We sat down and spent just a couple of minutes looking at their annual accounts.

No comment yet.
Scooped by Fatima Patova!

Why Small Businesses Fail: Top 7 Reasons Startups Fail and How to Avoid Failure

Why Small Businesses Fail: Top 7 Reasons Startups Fail and How to Avoid Failure | Financial Analysis Tools and Techniques |

According to statistics published by the Small Business Administration (SBA), seven out of ten new employer establishments survive at least two years and 51 percent survive at least five years. This is a far cry from the previous long-held belief that 50 percent of businesses fail in the first year and 95 percent fail within five years.


1. You start your business for the wrong reasons.

2. Poor Management

3. Insufficient Capital

4. Location, Location, Location

5. Lack of Planning

6. Overexpansion

7. No Website

No comment yet.
Rescooped by Fatima Patova from money money money!

Economic Recovery - Who are We Kidding? :: The Market Oracle ...

However, it hasn't stopped policy makers from trying: in an effort to fight what may have been a disorderly collapse of the financial system, unprecedented monetary and fiscal initiatives were undertaken to stem against market ...

Via jean lievens
No comment yet.