Investment, Coding and Actuary

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Ratios rattle: Price to Book, DSO and Turns

Price to Book is probably the less value ratio, with many companies nowadays do not need a lot of land and factories to make a very high-margin product. But here’s how we can do the ratio nevertheless:

EV/SE = ((Shares Out x Price) + Debt-Cash) / Shareholders’ equity

As a rule of thumb, some value investors will shun any companies that trade above 2 times book value or more.

DSO: Days Sales Outstanding is a measure how many days worth of sales the current accounts receivable (A/R) represents.

A company with a lower amount of days worth of sales outstanding is getting its cash back quicker and hopefully putting it immediately to use, getting an edge on the competition.

Step 1: Calculate Accounts Receivables Turnover

A/R Turnover = Sales for period / Average A/R for period Continue reading


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Working, working, working Capital!

The Working Capital, as is commonly known as “the capital that actually gets to work” (James, 2014), is simply the current assets minus current liabilities.

It’s the best way to judge how much a company has in liquid assets to build its business, fund its growth, and produce shareholder value.

We can divide Working Capital by the market capitalization (outstanding shares * share price – long-term debt – preferred shares). If the ratios is greater than 50% then the company is in great shape. However for some retailers it is better to take inventories from working cap before doing the ratio.

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Ratio Rattles: Current Ratio and Quick Ratio

Let’s look at two very easy ratios to detect the short term liquidity of the company: Current Ratio and Quick Ratio.

Current Ratio = Current Assets / Current Liabilities

As a general rule of thumb from The Morley Fool:

As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business — not the worst thing in the world, but it’s something that could affect long-term returns.

The information should be used again its competitors.

Since companies can manipulate and often bloat the inventory book value, I can use a second ratio:

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going.

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Balance Sheet: A review of the B/S

Most of the information in this post is from:

The balance sheet is a record of a company’s assets and liabilities — in short, what it’s already got or expects to get soon, and what it owes to others.

Shareholder value ultimately comes from liquid assets — assets that can easily be converted into cash. The amount of liquid assets a company can amass ultimately determines its value. Better yet, if a company generates more liquid assets than it needs to fund its operations, it can give the excess back to shareholders in the form of dividends or share buybacks.

There are two ways to measure liquid assets. The first is terminal value — how much the company would return to shareholders if, at some future point, it closed down all its operations and turned everything into cash. The second is tangible shareholder value — the returns on invested capital generated by the company’s operations.

Most investors spend too much time obsessing over a company’s earnings, and too little time studying the balance sheet and its cousin, the statement of cash flows. The balance sheet can tell you whether a company’s got enough money to keep funding growth, or whether it’ll have to take on debt or issue bonds or additional stock to sustain itself. Does a company have too much of its money tied up in inventory? Is the company collecting money from its customers reasonably quickly? The balance sheet knows all. Continue reading

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Starting with the basics – Investment 101

Yes, yes, yes… I know I have been taking Corporate Finance, Accounting and Economics classes and even sat a CFA exam already, but what do I really know about investment? Yes I have participated in stock investment competition during university before, but what do I REALLY know what was I doing? Hardly so.

So it does not hurt to admit that I know probably no more than a layman of finance. But I believe just like everything else, learning to invest is a thing that I can pick up from scratch and become good at it as time goes on. It is healthy to feel the competition and the noise around shouting should and shouldn’t, buys and sells, but at the bottom do I really trust what I read? I believe in personal judgement and that is something I can be good at. Plus the fact that I am young and smart. And I will do this myself.

Then let’s begin, at the beginning. Continue reading