Investor’s Guide to Incremental Invested Capital (ROIIC)
Updated 5/29/2023 Focusing on the returns on invested capital a company produces helps us better understand how well it sets itself up to grow. A company with strong returns on invested capital is the unicorn we all look for, especially when they efficiently use the capital to grow over time. A great way to measure […]
Using 65 Years of Statistics to Make an Intelligent Cash Flow Projection
In valuation, the name of the game is expected future cash flows. It’s not about the past, it’s about the future. So in trying to estimate the value of an asset, an intelligent cash flow projection is critical. And it’s rife with pitfalls. As we know, there’s a myriad of destructive biases and ideas that […]
ROIC Analysis: Value Destruction From Growth and Other Pitfalls
Something that might shock the average investor is that growth can actually lead to value destruction for a company, depending on how a company is achieving that growth. Using ROIC analysis and comparing it to a company’s cost of capital, we can quickly determine when that is happening and steer clear from these types of […]
How to Use Reinvestment Rate to Project Growth for Valuation
Updated 5/22/2023 “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter Finding companies that compound their returns on invested capital over long periods while growing simultaneously […]
The Role of Underwriting of Shares When a Company Goes Public
Underwriting is a process that essentially involves a company or group of people that are willing to take on a certain amount of risk in exchange for compensation or a service. You likely are familiar with underwriting in the insurance industry, but it is also very common in investing with the underwriting of shares. Essentially, […]
REIT Cap Rate Formula with Real-Life Examples [STOR, ADC, NNN]
The REIT Cap Rate formula, along with Funds From Operations (FFO), are two critical REIT ratios to understand and implement when analyzing REIT (Real Estate Investment Trust) stocks. REITs require special ratios, of course, because of the unique features and structure of their business models. In contrast to more traditional corporations, REITs derive their revenues […]
Walking Through a Valuation Including Share-Based Compensation
Updated 2/7/2024 The use of stock-based compensation has grown over the last twenty years, not only among CEOs and other C-suite management but also among the lower tiers of employees. As many of the newer companies become public, the increase of stock-based compensation continues to grow. It makes sense when you consider it; enticing employees […]
Making a 3-Variable DCF Sensitivity Analysis in Excel
A DCF sensitivity analysis is a fantastic way to estimate valuation on a company because it gives you a range of intrinsic values instead of just one steady state number. DCFs inherently rely on future assumptions, and we can’t be precise on these (because the future is unknown), so it’s better to estimate them with […]
How Bonds Are Rated – Your In-Depth Guide to Understanding Credit Risk
Updated 6/7/2023 Have you ever tried to buy a car or home? If you have, you have gone through having your credit checked, which is not always a fun process. When companies borrow or lend money to raise funds, they go through the same process known as bond ratings. Many investors have heard the term […]
Inflation in a DCF Valuation: Use Nominal Cash Flows Only
Does inflation impact a DCF valuation? How? We need to go back to the basics of a DCF valuation to understand the answers to these questions. The bottom line is that you’ll want to use nominal cash flows instead of inflation-adjusted “real” cash flow estimates. It’s a minor detail, but could tip the scales on […]
