Understanding Finance

A question I am frequently asked is how do we analyse stocks? How much emphasis do we place on valuation? And how much do we place on company analysis, in terms of assessing quality and growth…

Return on capital metrics are closely watched by managers and investors alike.

A dual-listed company (DLC) is a company that is listed on multiple exchanges.

Conceptually we have a reasonable understanding of inflation. As an economic term, inflation represents the general price rise of goods and services over a predetermined time.

Usually, your bank would pay interest on your savings accounts. Negative interest rates turn this around and mean customers have to pay banks to hold their savings.

Another word for duration could be the average life of a bond. Most bonds pay annual or semi-annual coupons and have a redemption date. So whilst a bond maturing in three years and with a £5 annual…

There are many models to choose from when valuing a company and your choice depends on the company as well as what your aims are.

The accounting industry hasn’t always had the best reputation for providing financial transparency, but its origins are based on providing consistency to company reporting. Given the millions of…

Businesses that benefit from the network effect are said to see the value of their product or service increase with the number of users. This may sound simple, but it is actually quite uncommon and is…

The first of his McKinsey Awards was for "How Competitive Forces Shape Strategy" in which he highlights his five forces that identify how competitive and potentially attractive an industry is. Once…

Contemporary corporate finance theory says that the value of something is (a) the future expected cash flows discounted back to (b) their net present value.

The balance sheet is a list of (a) what a company owns less (b) what it owes with the balance being (c) the value that is attributable to shareholders.

As a general starting point, more debt makes a company more valuable to its owners.

If you buy a bit of metal for £90, turn it into widgets and sell them for £270 then you have made a cash profit of £180….

= Number of shares * Price per share

EBITDA is the cash profit and actually stands for Earnings Before Interest Tax Depreciation and Amortisation (“D&A”).

Profit is Revenue less Costs.

= Free cash flow/Revenue

Price/Earnings Ratio or PER is a measure of value for a company’s shares.

Revenue is Volume times Price.

= (Debt-cash)/Earnings before interest, tax, depreciation and amortisation

An expression of Profit as a percentage of Revenue.

= Net income/Shareholders’ equity

When a company requires external financing there are three main options; Borrow from a bank (usually from pre-existing bank facilities) 

Borrow from investors (issue corporate bonds)
A rights issue
…

You may have heard of a "rights issue" being referred to as a last resort for a business who is looking to raise capital. This is often true and is the issuing of shares by a company at a discounted…

When assessing the profitability of a company, it is important to concentrate not on its reported earnings but on the cash flows that it generates. Earnings can be easily manipulated through…

Whilst an increase in dividends per share tends to be viewed as a positive by investors, it must be considered in proportion to earnings per share. This is an equation known as the dividend pay-out…

Suppose you are consistent in the times that you eat your three wholesome meals: at 8am, 12:30pm, and 6pm. Twice a year, the setting sun will correlate with you tucking into your dinner. Were an…

So what’s the yield? Well, the “7%” coupon income comes as two semi-annual payments of £3.50 in April and October for a total of £7. So you might say that the yield is £7 ÷ £105.90 or 6.61%. That is…

Index-linked gilts, or “Linkers”, are sold by the Debt Management Office (DMO) on behalf of the UK government and have both the coupon and the capital elements linked to inflation.  I’ll use the…

The truest picture of how well a company is doing comes from understanding not just the profit and loss statement and the balance sheet, but how these describe what is happening to cash in the…

So, here is an easy way to raise money at your next charity auction. Get a large glass jar, fill it with at least one hundred one pound coins and auction it.

Previously, I have explored the notion that financing companies with debt made them more valuable to the owners because interest payments were tax deductible and so saved the company tax.