Investors have been focusing on the wrong financial metrics in their analysis of Google equity securities.. Cost per click and other such highfalutin tech analyst measures are naiive indicators of a firm……..
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Ask the following 8 questions:
1-Explain, in detail, once you’ve estimated the entity’s free cash flows, how you arrive at the discount rate?
HINT: It’s not what you learned in grad school or the CFA exam.
2-Explain, again in detail, all of the adjustments you make to the published financial statements, to arrive at an estimate of free cash flow?
HINT: Lots of adjustments are required.
3-How do you define return on invested capital?
HINT: We’re looking for cash on cash.
4-How do you define economic profit and when should it be use?
HINT, Because many companies are not capital intensive
5-Explain how companies account for (s) derivatives and (b) pensions and other post-employment benefits
6-How should value be derived?
HINT: It’s not through relative value, such as a firm’s PE against its peers or some index
7-How do you account for a firms over-spending or under spending?
8-Have you read “Security Valuation and Risk Analysis?
HINT: If not, call CT Capital LLC
Imagine if surgeons used same methods as 50 years ago-Crazy, right?
Then why are investors using same tools to analyze risk, given superior methods are available?-see http://amzn.to/T4x71d
Sales, cost of sales, SG&A and tax rate stability. Free cash flows and operating cash flows with the making of proper adjustments. Self-insurance. Litigation. Credit. Derivatives. Yield Spreads, etc, etc. If you are not doing this as part of your risk analysis and much much more, you don’t know how to analyze and quantify risk. Your are using the wrong discount rate ( cost of equity) in concluding the fair valuation of the enterprise and share price.
I show you how.
Stop using the same tools as investors who continually dole out poor advise.
Order Security Valuation and Risk Analysis. After all, it took 40 years of my experience in this business to write
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