Fundamental assessment of the company. Comparative assessment. Revenue multipliers

Fundamental assessment of the company. Comparative assessment. Revenue multipliers

Comparative assessment of companies

Traditionally, there are three methods of evaluating companies:

  • On discounted cash flows ("income method");
  • By assets ("cost method");
  • By multipliers (comparative evaluation).

In this section, we will focus in more detail on the last of the listed methods.

The evaluation by multipliers is comparative or relative, that is, an evaluation in comparison with (or in relation to) a group of analogous companies. Multipliers allow you to bring to a single scale the share prices of companies that differ in size and the number of shares into which their authorized capital is divided. This is done by recalculating the company's indicators (for example, revenue, profit, etc.) per share.

The comparative assessment consists of three main steps:

  • Making a decision about which multiplier or group of multipliers is best used to evaluate the company.
  • Selecting an analog and calculating the values of multipliers.
  • The actual valuation of the company (or shares of companies) based on the found multipliers.

Let's consider the main types of multipliers:

  • Profitable 1. Based on capitalization (P/E, Shiller P/E, P/S)
  • Profitable 2. Based on business value (EV/EBITDA, EV/Sales)
  • Balance sheets (P/BV, P/TBV)
  • Taking into account cash flows (P/OCF, P/FCF)
  • Industry-specific (natural)
  • Taking into account the future (Forward, PEG)

P/E multiplier (Price to earnings — "Price/profit")

Let's start with the most famous P/E multiplier, which is the ratio of the price of one share to the net profit per share (for the year) and is equal, respectively, to the market capitalization of the company divided by the net profit of the company as a whole. In other words, P/E shows how many times more investors are willing to pay for a company compared to the net annual profit it earns. If the P/E multiplier is 7, it means that investors who buy shares of the company are willing to pay 7 dollars for 1 dollar of the company's annual net profit.

The P/E coefficient has a number of disadvantages.

  • Firstly, it is more often than others that it is not defined, which leads to the lack of logic of the indicator and, accordingly, its inapplicability. Why more often than others? Because net profit is more often negative than EBITDA or EBIT.
    Also, the P/E indicator does not take into account the difference in taxation, debt burden and the specifics of the company. Let's say that company X, whose business is relatively stable, has a P/E equal to 80. Does this mean that this multiplier value is the correct basis for evaluating similar companies? Extremely unlikely. Most likely, we are dealing with a company that, for some specific reasons, had a bad year, and its net profit this year is close to zero.
  • It should also be noted that net profit is subject to greater random fluctuations than, say, EBITDA, which also introduces an error in the P/E estimate.

The first disadvantage can be compensated by calculating other indicators: such as P/S or, say, EV/EBITDA. The second drawback, related to fluctuations in the economy, fluctuations in the economy and an increase in inflation, is solved using the Shiller P/E coefficient.

Read more: Causes of inflation and scientific approaches to their study

Shiller P/E Multiplier (CAPE)

The Shiller P/E coefficient was proposed and developed by Yale University professor Robert Shiller, author of the book Irrational Exuberance ("Irrational Optimism"). The method of its calculation involves adjusting the values of current stock prices (Cse, P) or an index (for example, S&P 500) and their earnings (Earning, E) adjusted for inflation over the past 10 years (CPI).

Read more: What is the Consumer price index CPI

It is assumed that this approach smooths out the cyclical nature present in the companies 'business and more accurately tracks the "real" (adjusted for inflation) values of the S&P 500 broad market index. Shiller himself calls this coefficient cyclically adjusted P/E (Cyclically Adjusted Price Earnings, CAPE), and the abbreviation P/E10 is often used for its designation.

P/S Multiplier (Price to Sales)

Price Multiplier/Revenue (Price/Sales), with which a company is evaluated by sales, is one of the most common. However, according to financial theory, the multiplier "business value/revenue" (EV/S) is considered more correct, since the company's revenue serves as a source of income for both shareholders and creditors, as well as a source of tax payment.

EV (Enterprice Value) = (Market Cap + Total Debt) — Cash & Cash equivalent
Enterprise value = (Market capitalization + Total debt) - Cash and cash equivalents

But in practice, the P/S multiplier is still more widely used, which is explained by its simplicity. The reason for the widespread use of P/S and EV/S is that the company's revenue cannot be negative, which means that we solve the problem of the P/E ratio without excluding companies with negative profits from our analysis.

Here we also solve the issue of increased profit volatility, because the company's revenue is subject to much less random factors. Therefore, the multipliers P/S and EV/S will depend less on the momentary situation.
Perhaps this is one of the few indicators by which you can compare different companies, including those that use different accounting standards.
Finally, it is much easier to find information on revenue than on a number of other indicators.

Read more: Volatility: types, how to track and how to use

However, it should be understood that the main criterion for a developed business is its profitability. This is the main drawback of P/S. To compare mature enterprises by this criterion, it is often necessary to have a similar return on sales (margin). A low P/S does not mean that the company is undervalued by the market, that is, it is cheap — for the reliability of this information, it is also necessary to check the profitability of operations (if it is normal, you can draw conclusions about the undervaluation of the paper in question). Therefore, P/S and EV/S can only be considered as complementary coefficients in their analysis. Their use in its pure form can lead to a distorted picture.

EV/EBITDA Multiplier

EBITDA = Net profit + Tax paid + Depreciation + Interest paid (for example, on a loan).

EBITDA is a very important indicator and was not designed by chance. It has a clear financial meaning, because it shows what resources remain at the disposal of the company to repay interest on loans.

  • Depreciation is the only significant amount deducted from revenue when calculating taxable profit, which is not a cash outflow, but a kind of "virtual" deduction, so EV/EBITDA is especially useful when evaluating capital-intensive enterprises.
  • Interest on loans is charged to the cost price, i.e. income tax is paid only on the part of the profit that the company has left after paying interest, and thus it also does not affect the company's ability to service its debt.

So, the EV/EBITDA indicator evaluates the company across the entire cash flow, and, basically, it is used to compare companies with different levels of debt.
Let's also pay attention to the fact that all the variables listed above are published in company reports and they are quite easy to find.

Read more: P/E Ratio: what it is needed for and how it is calculated


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Swing trading - strategy of successful traders
Swing trading - strategy of successful traders One of the most successful trading strategies that traders use in their trading is swing trading.Today we will try to figure out what this concept is and how to apply it.What is swing trading?The essence of the swing trading strategy is as follows:Since the markets move cyclically, the speculator's task is to determine a market cycle lasting 3-5 days, open a deal at the beginning of the cycle and hold it for one to five days in order to maximize profit, trying to take most of the main movement of the cycle.A swing trader should be a generalist and a highly qualified specialist. He should perfectly understand the current market picture. At the same time, act clearly, quickly and flexibly, using the entire arsenal of your knowledge and tactics to work both in the trend and in the flat.There are very few such specialists on the market, but they are the ones who achieve outstanding success, and their trading account is constantly growing.In fact, swing trading boils down to trend trading. The main thing is to correctly identify the trend that you are going to trade, identify its beginning and join it.Trends - three different typesAs taught by old man Doe, the founder and inspirer of technical analysis, trends are of 3 types:Long-term trendIt can be seen on annual, monthly and weekly charts. But such trends are more suitable for strategic investors. Agree, we, small speculators, have to hold a position for months and years, waiting for its implementation, sitting out huge kickbacks, somehow out of hand. Of course, I admit that there are strategic investors among you. But this is not my style of trading.Medium-term trendIt can be seen on the daily and 4-hour charts. This is exactly what we need for swing trading. And this is exactly the trend that we want to take into work. The only point is that you should not try to look for a trend reversal before it happens. I have been beaten more than once for such attempts and it hurts a lot! Successful traders warn with one voice – "Never fight the trend! He can kill you." But we will talk about the rules of the trade below…Short-term trendIt can be seen inside the day on hourly, 5-minute and 15-minute charts. This is the domain of scalpers.  And it is interesting to us because it helps to determine the end of the medium-term trend and the beginning of a new one in the opposite direction.Read more: Dow Theory: Six basic principles of Technical analysisGeneral rules of swing trading and its advantagesWhat can be attributed to the advantages of swing trading?With the right input and output, we can get the most out of the medium-term price movement.We get the optimal number of transactions. One entrance-exit per day, allows you to avoid excessive psychological pressure.With an optimal number of transactions (unlike scalpers), we do not overpay the broker for the spread and commission.There is no need to monitor the market 24 hours a day, as a result, there is more free time.With the right exit in a sluggish, stagnant market, the chance to hang with a position on your hands is reduced to zero, you will never turn from a speculator into an investor.Now, a little bit about the general rules of swing trading. I will emphasize the general rules, since the trading technique itself is not the subject of this article. So, the rules:Before entering the market, make sure that you understand the direction of the medium-term trend well and are in its initial stage.With the right entry, your position should almost immediately move in a profitable direction for you.If the position makes a profit, but it has not reached its intended goals, move it to the next day.The opposite rule is that if a position brings a loss, do not carry it through the night. Close it at the first possible rollback and open a more profitable position (if the entry conditions have not changed dramatically) tomorrow.If the market offers you a bigger profit than you originally planned (as an example, the movement on the news), take it without hesitation.If the position is in a small plus, and you see clear signs of stopping, tighten the stop loss to reduce the possible loss or exit the transaction. Your goal is to minimize risks and transfer the transaction to a break-even state as soon as possible.Be able to wait for your profit. This point, at first glance, contradicts the previous one, but this is not entirely true. This is the skill of a trader (not for nothing is the topic of the article – the strategy of successful traders), in order to correctly determine the best moment to exit a deal.Speaking of rules, we must remember that a number of conditions are necessary for the successful application of this strategy. Namely, fast and clear execution of orders using "one-click" technology without slippage and requotes, low spreads, acceptable rates for transferring a position to the next day (swap technology), etc. All this depends on the quality of services provided by your broker.Read more: Demo account with a Forex broker: is it worth using?Trade successfully, earn money, have fun trading. You will succeed, you just have to want it!
Aug 06, 2022
How a trader's psychology can defeat his fierce enemies – fears and emotions
How a trader\'s psychology can defeat his fierce enemies – fears and emotions I'm not a coward, but I'm afraid. Of course, each of us has our own "butterflies in our heads", but there is something in common that unites us all. These are our fears! They significantly interfere with trading and poison the trader's life. And if one of you tells me that he is a "brave soldier Schweik" who is not afraid of anything, I will not believe it! Only idiots are not afraid of anything. And we have smart and adequate people gathered here.Therefore, today I will try to understand what prevents us from trading and talk about the psychology, fears and emotions of a trader.The key to success, as smart uncles and books written by them teach, is a profitable trading system, a good trading plan, discipline in the execution of transactions and compliance with the rules of money management. All this is so and you can't argue with it!But, there is one essential BUT – these are our emotions, and the psychological component of trading. We are not robots, but real people. Sometimes emotions get out of control and overshadow the mind that is trying to overcome them.What causes a storm of emotions in our heads? Most often, this is a primitive human feeling – fear! What is a trader afraid of?A simple person can be afraid of anything. Darkness, heights, loneliness... Yes, you never know what else… But the main fears of a trader can be formulated as follows:losing moneymaking a wrong dealmissing a profitable dealnot taking the profit on "paper".What consequences can our fears have for us? Early entry and exit, overexposure of a position – these are just a few unpleasant moments that may be a consequence of our fears in trading.Read more: What a novice forex trader needs to knowHow to overcome your fears?The psychological attitude of a trader is a great thing that can significantly improve (or worsen) your trading results. It depends on how we set ourselves up and what emotional signals will rush through our head… A lot depends!And first you need to deal with your fears and try to overcome them. I will take the liberty and offer you some solutions that help me psychologically tune in and cope with my trading emotions.How to overcome the fear of losing money?First of all. It is necessary to trade only on the money that you have already mentally lost. If the money you deposited is too valuable to you, the fear of losing it will never go away. It is better to start with the minimum possible amount, which means nothing to you (or at least, its loss is not critical for you). And gradually increase the deposit, taking into account your psychological resistance to the number of zeros on the account.Secondly. Even with a large deposit, trade with a minimum lot size. Until you feel that you are no longer afraid of losing money, put such stops (risks), the triggering of which will not cause painful sensations in the soul. Naturally, they should still be reasonable and competent, but we are now talking exclusively about their monetary equivalent. For example. If the comfortable amount of loss on a trade is $50 for you, then based on this, you need to calculate the number of points and the size of the position so that the loss does not exceed the amount of $50.Third. Never exceed the size of the allowable aggregate position and do not overload your deposit! Otherwise, you will get the following situation: a trader opens a bunch of positions, observing the allowable stop size on each one, and it seems to him that everything is fine. But when all this cumulative mass begins to move against him, he realizes that he is very close to losing the entire deposit, and then fear turns on. Then there is a series of stupidities and wrong decisions. That's all. The job is done – there is no deposit, and the fear of losing money settles in the trader's head for a long time.These tips rather relate not to the psychology of the trader, but to money management. But believe me, until you learn how to manage your capital, the fear of losing money will not go away.Read more: Forex problems – what is the "Burnout Effect"How to overcome the fear of making a wrong deal? Everything is simple. There are a couple of axioms:Only the one who does nothing is not mistaken.You can't be 100% right always and everywhere. Losing trades and getting a stop should be taken as necessary and unavoidable production costs. There is always a chance that we did not take something into account, did not notice something, or simply missed the danger warning signals.It is always necessary to find at least 3 reasons why you need to open a deal here and now. You can make mistakes in calculations, but psychologically it is much easier when a deal is opened not on a whim, but according to a clear calculation and plan.How to overcome the fear of missing a profitable deal or not taking profit?There can be only one solution – a plan, a plan, and a plan again. We plan to trade and trade according to the plan. Unfortunately, you can't think of anything else here. Plus, discipline in conducting the transaction. We have outlined the entry and exit levels and act on them according to our plan.Remember, the market is not going anywhere! He was yesterday, he will be tomorrow. And most likely, tomorrow there will be better opportunities for a safer deal. Therefore, take your time and do not be upset if you missed some movement. We have everything ahead of us.And finally, a few more general tips. Do not trade if you are upset, sick, have financial problems, or are not sure that you understand the market situation correctly.Read more: The role of luck and intuition in tradingI understand that I have given the most general recommendations regarding the psychology of a trader. But you have to fight and win with your fears.
Jul 26, 2022
The Libor rate. Is bargaining appropriate?
The Libor rate. Is bargaining appropriate? It was 2012, and nothing foreshadowed trouble. The global crisis of 2008 slowly began to subside. And then, like a bolt from the blue, the LIBOR rate scandal broke out.The British regulator FSA and the American CFTC have published data that in the period from 2005 to 2009, the British bank Barclays, along with Royal Bank of Scotland, Lloyds, HSBC, American Citigroup, Swiss UBS and German Deutsche Bank, actively tried to manipulate the LIBOR rate. Thereby hiding their own liquidity problems and earning good money on derivatives.But, as worldly wisdom says, everything secret sooner or later becomes clear. The fraud was revealed, and Barclays alone had to pay a fine of $454 million for its art.But this is already one of the final parts. And what was the essence of the question?What is LIBOR?The LIBOR rate (London Interbank Offered Rate) is a weighted average refinancing rate based on the interest rates at which banks entering the London interbank market lend to each other in different currencies and for different periods (from 1 day to 12 months).The LIBOR and EURIBOR rates are calculated at 11:00 GMT on the basis of applications for loan rates from 8-16 banks (selected by the regulators of the British Bankers Association and the Foreign Exchange & Money Markets Committee, according to the scale and reputation of the bank), for which they are ready to provide loans.  The five largest and five smallest bids are cut off, and the average value of the remaining bids is published on behalf of the British Bankers Association as the LIBOR and EURIBOR rate.Read more: What is the SOFR interest rate?What is the LIBOR rate for?Without going into the financial wilds, let's just say:The LIBOR rate is an indicator of the demand for liquidity in the banking sector, and the morning application reflects the demand for loans from a particular bank.Such financial derivatives (derivatives) as a simple interest rate swap and interest rate futures are linked to the LIBOR rate.Swaps allow you to play on the difference between fixed and floating rates calculated on the basis of LIBOR.Futures contracts with different maturities (3-month and 6-month) allow you to play for narrowing or widening the spread between these contracts.And to put it even simpler: the LIBOR benchmark rate shows the degree of confidence of banks in relation to each other.Large banks directly link loan rates for their corporate clients and mortgage loan rates to LIBOR.The essence of the scandalAs you understand, if something depends on something and something is tied to something, then there will always be kind fellows in expensive suits who will want to use it for their own purposes.This explains the desire of top managers of banks to influence the LIBOR rate to reduce losses, make profits and conceal the true state of affairs in these banks.As a result, many corporate clients did not count the profits on their assets, and the general public demanded to lynch these "fat cats". Agree, it's a shame to find out that mortgage interest does not depend on the situation in the economy, but on the machinations of a dozen dashing guys manipulating the rate.Read more: SONIA Interest Rate: calculation and applicationMoreover, it was not about a single case, but about the coordinated actions of 15-20 banks on both sides of the ocean for 4 years.We live in a world where capital rules. And it's no secret that large banks and investment funds employ people who are not distinguished by firm ethical principles and high morals.
Jul 23, 2022
Five principles of healthy indifference in the philosophy of trading
Five principles of healthy indifference in the philosophy of trading Who are we – traders? What are we doing and what are we doing? Where are we going, and what awaits us ahead?Questions, questions, questions... to which, unfortunately, there are not always answers.Well, talking about the meaning of life and your place under the sun is the topic of a separate article or even a series of articles. Today I don't want to take a swing at such global topics. Therefore, we will leave the discussion about the philosophy of trading and the profession of a trader for later, but for now we will talk about more mundane things – about the philosophy of trading.If you discard all the beautiful tinsel, then the philosophy of trading boils down to one simple thing – making money.And that's where the catch lies. The fact is that if you set making money as an end in itself, then you will not earn money in the market!A simple example.  You have set a goal for yourself – to make a 50% increase in the deposit per month. And then bam… You made a loss (within reason of course and within your money management strategy), or missed a good entry and a good deal, and the market ran away without you. I don't even know which is worse – getting a stop or missing a good move. In both cases, your worst enemies are turned on – emotions that begin to load you from the inside and put pressure on the psyche.And here comes to the trader's aid the philosophy of healthy indifference and its motto – the magic words "I DON'T CARE!"Five principles of the philosophy of trading, when everything doesn't matterI hear that others are threshing money so that only have time to substitute bags. And I don't care, I tell myself. Firstly, it is not a fact that their words are true. And secondly, the principle works in the market: do not lose – consider that you have made money. And it doesn't matter how many points I earn and how much money I take home $1 or $10,000 today. The main thing is not to lose.I hear that others are taking the whole movement from start to finish. The nasty mosquito of greed itches in the ear: "You closed earlier and didn't make a profit." And figs with him! I take a fly swatter and swat this annoying insect. Greed leads to poverty.I hear that others use a bunch of strategies and masterfully earn both on trend and in correction. So what? I don't care about all this! I choose one or two templates and trade only them. It's like hammering a nail every day for a month. In the first week, your fingers will be broken, and the nail will go crookedly into the board. But by the end of the month, you will learn how to score it with one punch blindfolded and in the dark. In no case do I urge you to stop in your development as a trader. But new strategies should be introduced into your arsenal very carefully and gradually.I hear that others always have a ready answer where the market will go and which way to trade. Well, figs with them! If I do not understand what is happening in the market, I will stay "on the fence" – the deposit will be more secure. And let me miss a good move, but I will enter the market only when there is an understanding of what is happening and at least 3 reasons to open a deal here and now.I hear that others are trading every day. And I don't care about that either! Who said that you need to trade every day? It is necessary to trade according to a pre-planned plan and only when there is synchronization with the market, and not because you just need to trade.The list can be continued indefinitely. Whether you agree with me or not is up to you. But personally, it really became easier for me to breathe in the market when I changed my goal-focused trading philosophy to a non-optimistic one.Read more: Forex problems – what is the "Burnout Effect"I'm sure each of you has your own trading philosophy. Do not take the trouble and share your thoughts on this topic in the comments.For today, I say goodbye to you. And let healthy indifference be only in your trader philosophy, and in life you will remain an active and responsive person.
Jul 23, 2022
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