Bank Balance Sheet: The Importance of Stress Tests for Investors
Updated 5/1/2024 Most risk associated with investing in banks is tied up in the bank’s balance sheet. All banks undergo stress, testing the bank balance sheet to ensure the bank has enough liquidity to withstand multiple stressful situations. Banks’ risk stems from credit, operational, market, and liquidity risks. Since banks face exposure from many areas […]
Required Rate of Return: A Guide to Determine Discount Rate for a DCF
Great investors from Warren Buffett, Charlie Munger, Mohnish Pabrai, and Peter Lynch all have different required rates of return they demand before investing. Using these rates helps them generate the great returns they have made over their investing careers. The debate concernings the required rate of return is a subject discussed at all levels of […]
How to Calculate NOPLAT for Operating ROIC
Both NOPLAT and ROIC can be easily misinterpreted and misused in its applications to understanding a business. NOPLAT gets especially mishandled due to its more well known cousin, NOPAT. Most of the time these are interchangeable, but when they’re not, it can really lead to a distortion in calculating ROIC. What is NOPLAT? NOPLAT stands […]
Tier 1 Capital – The Easy Way to See the Strength of a Bank’s Balance Sheet
Banks take the lead in earnings season every session, and analysts make a lot out of the bank’s ability to withstand losses if the economy is in a bad spot. A topic that comes up around that time is the Tier 1 Capital Ratio to assess a bank’s financial strength. What do we truly know […]
Average Discount Rate for the Top Companies in the S&P 500
Setting a reasonable discount rate is critical to getting a reasonable valuation. Like with history, I believe that getting context on averages, in this case the average discount rate, throughout a large portion of the stock market will help you figure out if your chosen discount rate is reasonable or not. A discount rate is […]
CAPM Assumptions, and its Practical Application to DCFs
The CAPM (Capital Asset Pricing Model) is commonly used to estimate a discount rate for cash flows in a DCF calculation (in particular, the cost of equity). This post will highlight a few of the CAPM assumptions that led to the creation of theory. What’s the CAPM trying to do? Basically, taking the conclusions from […]
Building a 3-Statement Financial Model to Estimate a DCF and Intrinsic Value
Building a 3-statement financial model is the most detailed way to create a discounted cash flow and estimate a company’s intrinsic value. By having all 3 financial statements, the balance sheet, income statement, and cash flow, investors can then seamlessly estimate a company’s value in any approach they desire. Also, with a 3-statement financial model, […]
Earnings Power Value — A Straightforward Intrinsic Value Estimator
Updated 5/1/2024 Among the many valuation methods and models, the earnings power value formula is an undervalued model, no pun intended. It helps us find undervalued companies without as much estimating as the discounted cash flows, for example. Is the earnings power value formula perfect? Unfortunately, it is not. But it is another tool in […]
Opinion: Why Merger Mania May Be on The Cusp in a Post-COVID World
Mergers and acquisitions are one and the same. It’s the classic big fish swallows the little fish. And on Wall Street, when M&A starts to really get going—well, that’s what’s called “merger mania’. I think we’re on the cusp of a new merger mania, accelerated by the COVID-19 crisis and everything that’s happened because of […]
Corporate Restructuring Basics: How Taxes and Politics Play a HUGE Role
History provides a valuable guide and lessons to finance, and the history of corporate restructuring is no exception. In particular, the Merger mania in the 1980’s provides a prime example of what can happen on Wall Street as companies struggle to survive and thrive in an ever-changing environment. While textbooks can provide fantastic explanations about […]
