Translating a Bond Indenture into Simpler Terms (Real-Life Example)
A bond indenture is simple in theory. It’s a document outlining the terms of a bond; what the issuer’s (or borrower’s) obligations are to the bondholder (lender). A common application of a bond indenture today is with publicly traded corporations who issue bonds to investors through investment banks like JP Morgan or Bank of America. […]
How Amortization of Intangible Assets Works; When it Unleashes Higher ROIC
The amortization of intangible assets can sometimes be hidden in the consolidated financial statements because amortization is grouped in with depreciation. But as the economy increasingly becomes more knowledge and intangible asset-based, investors need to more closely understand the accounting behind the amortization of intangibles. Depending on the intangible asset in question, a large amortization […]
How Schedule 13d Filings Can Help Investors Find Undervalued Stock Ideas
There are two main stock market strategies where reading schedule 13D filings is essential to success: portfolio cloning and deep value investing. In this post we’ll talk about what a schedule 13D is and why it is useful for those two strategies, by tackling the following: The Basics of the Schedule 13D Filing (vs the […]
Capitalizing R&D Expenses: How to Do It and Its Effect on Valuation
Updated 5/29/2023 Most valuation models begin with earnings to arrive at the cash flows, and when using this method, we assume that the earnings stem from expenses related to operations. But in today’s age of intangibles, those assets creating revenues are different. We must examine Items like research and development (R&D) and treat them differently. […]
Non-Cash Working Capital: A Critical Component of Valuation and FCF
Working capital is one of the engines that drives a business to profitability and growth. It is the combination of current assets and current liabilities that the company uses for short-term needs. But the combination includes cash items such as short-term cash, which is not working capital. Working capital is a critical component of valuation, […]
Sales to Capital Ratio: Measuring the Efficiency of a Company’s Reinvestments
One of Warren Buffett’s favorite metrics to measure a business’s efficiency to grow revenues is the metric, ROIC, or return on invested capital. When Buffett or Charlie Munger discuss potential investments, they mention that the best businesses can grow without investing much-invested capital. One way to measure how efficiently a company reinvests back into the […]
What is Net Book Value?
Net book value (NBV) is an accounting term which refers to the value of an asset as it can be seen on the balance sheet of the financial statements. The term carrying value is also commonly used to refer to NBV. The “net” in NBV signifies that the figure is the asset’s gross original cost […]
Interpreting Off-Balance Sheet Items: Analyzing Risks in the Finance Industry
There are two main types of off-balance sheet items for investors to consider. One regards future obligations, and one regards potential off-balance sheet risks. These can be critical towards understanding the true potential of a company’s future free cash flows, and are found in a company’s 10-k. While there’s no official categories for the two […]
Two Examples of the Law of Large Numbers – How it Affects Valuations
Compound interest is the key to all investment returns, and it especially instrumental in its role for generating massive returns on the best growth stocks. But there’s a limit to compound interest called the law of large numbers, and we’ll talk about examples of this law applied on two very big businesses—Microsoft and Amazon. This […]
Enterprise Value Formula and Definition – CFA Level I & II Fundamentals
A company’s enterprise value (EV) is an important point of understanding for investors and is a fundamental learning point in many business schools, as well as CFA level I and II. The EV figure is an all-encompassing measure of the market value of all capital and other claims against the company. The detailed formula for […]
