JackHammer

I have to write my term paper and I have to write about the valuation of a public company. I intend on looking up wth P/E ratio do a comparison of with other companies. I also want to do a cash valuation of the company. What else can I write about?

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VTGreg

You may get a response here as well, but you would probably get a better answer if you got to the Finance and Careers forum.

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zippyjuan

http://www.fool.com/school/introduct...m?source=InvAg
might be a good place to start.

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LegendKiller

How in depth does it need to be? What are the limitations of the paper, how much is it worth, does the professor give extra credit...etc?

There are many ways you can proceed.

gear02

Are you talking about stock price valuation or how much a company is worth?

I'm not a finance guy, but based from my finance and accounting classes this year I think you can take a look at the company's financials and see how much assets and debts they have (asset to debt ratio), how much leverage they have, and many see if you can figure out their brand's value.

JackHammer

Well I have a company I just need to do some financial valuation on it. I've researched the earning per share but I don't know what it means. Now leverage means that if you have more asset then debt you can finance more? How do you figure out brand value?

gear02

Brand value is very difficult. I would just see if that information is listed somewhere. If not, try to find an equivalent company and use that. I think business week did a brand value study recently (6 months or so ago).

You're right about leverage. It indicates the company's borrowing potential or borrowing state.

Earnings per share is a measure of how much profit they made compared to how much stock they have issued. Essentially it's a measure of ROI (I think).

But really, I'm not a finance guy...just a marketing guy trying to recall what he learned in school.

gear02

http://en.wikipedia.org/wiki/Earnings_per_share

Use wikipedia and you can find some neat definitions!

JackHammer

I did but they don't tell you what they are for. I mean they give you a definition but I still don'tknow their significance.

LegendKiller

Apply leverage to regular physics. If you have a bolt that is stuck and a wrench with a short handle, the amount of energy you can focus on that bolt isn't great.

However, apply a breaker bar, something which can increase the handle length and gain more leverage, you can move the bolt easily.


Financial leverage is the ability to do a lot with very little. Debt allows companies to buy assets at a cheap rate, increasing the amount of work they can do. Equity is expensive and requires actual ownership over an asset, while debt, unless it is secured borrowing, is nothing more than a promise of payment.

Thus, if a company is highly levered, they are using cheap funds to increase their capacity to do work. However, leverage comes with a downside, the risk that you cannot make your payments. Equity, unlike debt, doesn't require payments today. In most cases equity is a promise to pay dividends tomorrow (or payment through capital gains). However, debt requires timely *cashflows*, if you over lever yourself, your ability to pay that cashflow is decreased and your risk multiplies.

Now, there is no standard for measuring leverage. Some industries require very high leverage, others require very low leverage. Thus, if you are leveraged low in an industry with high leverage, you aren't taking advantage of cheap funds and therefore are disadvantaging your company. Conversely, if you are in an industry of low debt and you have high debt, you are risking your company's future.

To guage relative debt measurements, you can use something like the financial leverage measurement, which is assets/equity.

If we were to look at the DuPont analysis for Return On Equity, you would notice the following...


ROE =(Net Income / Sales) * (Sales / Assets) * (Assets / Equity)

Analyzing each factor, we see that NI/Sales will come up with a %, the higher the better.

The next factor, which is Total Asset Turnover, measures how effectively you utilize your assets. If you have a lot of assets that do not contribute to sales, then your TAT will be lower.

Then consider the final factor, leverage. If you have less equity and more assets, you use more debt. That means that the chunk of returns that will be given to equity holders is higher.

For example, 20% * .5 * 1.5 compared to 20% * .5 * 1 is 15% compared to 10%.

That tells us that higher leverage = more returns for equity investors, provided that your leverage is within your ability to pay. Also keep in mind, that just like any debt, the more you have, the more it costs. The next dollar you raise in debt will be more expensive than the last dollar. Banks don't want to extend too much credit to you.
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Lets consider EPS. EPS tells us how much a company earned per share. If you have a million shares and you only earned a million dollars, then each share earned $1. Lets say that you have the following...

Intel = 2 million shares
Earinings = $5 million


AMD = 5 million shares
Earnings = $6 million

Intel EPS = $2.5
AMD EPS = $ 1.2

So, even though Intel made *LESS* money over all, per share, they made more. This is a huge reason why it's imperative to look at numbers in relative to another number. If one were to look at AMD's earnings, they'd be saying "Wow, AMD rocked", but if you look at it in relative, they actually made *HALF* as much for their shareholders as Intel did. That isn't good.

Help?

gear02

Leave it to the expert well done LK

thresher

Don't forget "Blue Sky" value. http://www.ibgbusiness.com/glossary_of_terms.htm

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JackHammer

I was wondering when this was gonna get moved. GAM you guys are On It!

gwilks98

Not sure if you use it, but Yahoo's finance site kept me going during a lot of these reports.

So did Free Edgar, but I don't think he's so free anymore.

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cocojambo

current assets and liabilities of the company? inventory turnover? look at the financial ratios, there are tons of them