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What is Book Value?
Book value is based on an accounting method that only considers certain factors, generally the more tangible or easily quantifiable ones, and excludes the more ethereal factors such as ‘goodwill.’ Book value can apply to an individual asset, a security, or a company, and tends to be pretty straightforward. Whatever value an asset is given on a balance sheet is its book value. For a tangible asset, this is calculated as the cost of the asset minus accumulated depreciation. Continue reading...
What is Net Present Value?
Net Present Value (NPV) is the difference between present value of net inflows versus the present value of outflows (expenses). The net present value is a good analyst tool for measuring the profitability of a company’s project or new undertaking, like expansion into a new market. It measures the anticipated cash inflows (revenues) from the undertaking versus the anticipated costs of the new project (also in present value terms). Continue reading...
What is Discounted Cash Flow?
Discounted Cash Flow (DCF) uses an estimated future cash flow amount and a Discount Rate to determine the Present Value (PV). An investor or business executive might project an estimated future cash flow for a business based on recent growth rates, industry information, futurism, estimated inflation, etc. The most common future cash flow to use is free cash flow, which takes out capital expenditures. Continue reading...
What is Return on Net Assets?
Return on Net Assets is a calculation used to determine how well a company performs, relative to its resources. Return on Net Assets gives investors an idea of how well a company uses its resources to generate profits. Net assets includes not only fixed, tangible assets, but also the net working capital of a business. Working capital is defined as Current Assets minus the Current Liabilities of the business. The net profits for a period are divided by the net assets to arrive at the Return on Net Assets. Continue reading...
What is the 'Fixed Assets to Net Worth' Ratio?
The fixed assets to net worth ratio is a calculation intended to measure the solvency of a company. It generally tells the analyst what percentage of a company’s assets are cash vs. fixed assets. To calculate the ratio, you divide net fixed assets into net worth. A fixed assets to net worth ratio greater than 0.75, generally, means that a company has too much of their net worth tied up in assets like equipment, machinery, land, and so on. Continue reading...
What are Net Tangible Assets?
Net Tangible Assets represent a company’s total amount of physical assets less its intangible assets, like intellectual property and equipment, and also less the fair market value of its liabilities. Tangible assets can include things such as cash, inventory, and accounts receivable, versus liabilities like accounts payable, long-term debt and loans. This measurement of a company's tangible assets is important because it allows a firm's management team to analyze its asset position without including obsolete or difficult to value intangible assets. A company's return on assets (ROA) can be more accurate when net tangible assets are used in the calculation. Continue reading...
What Is Net Present Value (NPV)?
What is the 'Non-Current Assets to Net Worth' Ratio?
The non-current assets to net worth ratio will give the analyst an idea of how much of a company’s value is tied-up in non-current assets. As a quick refresher, ‘non-current assets’ are those that most likely will not convert to cash within a year’s time, also known as a long-term asset. Where a company’s non-current asset to net worth ratio lies depends on the industry, but generally speaking a company wants to avoid having that ratio rise above 1 to 1.5. That means the company is highly illiquid, and could be vulnerable in the event of an economic shock. Continue reading...
What is Net Income?
Net income is the amount of earnings left over once expenses have been deducted from sales. In short, it is the net amount of profit or loss. It is calculated by taking total earnings in a period (such as a quarter), and deducting all elements of the cost of doing business (labor, depreciation, fixed expenses, overhead, etc…) Net income is ultimately a measure of a company’s profitability, and its calculation should be scrutinized closely to ensure all expenses are being accounted for accurately. Continue reading...
What is Net Worth?
Net worth is the total value of a person or entity’s assets, minus all of their outstanding liabilities. Net worth is most often used in personal finance, with the simple calculation of Net Worth = Assets - Liabilities. In the business context, net worth is also known as book value or shareholder’s equity, and those with rising book value mean they are generating more revenue and obtaining property more quickly than they’re accumulating debt. A rising market value does not necessarily correlate to a rising net worth, as the market may bid up a company’s market capitalization absent profit growth. Continue reading...
What is Tangible Net Worth?
Tangible Net Worth is another word for Book Value or Net Asset Value. Only the tangible assets and cash are included, and any liabilities are subtracted. Any depreciation that would otherwise be included for accounting purposes is added back in. Tangible net worth, or book value, is the remaining balance after intangible assets and all liabilities are deducted from net assets. This is the amount that will be divided among shareholders in the event of a company liquidation, and the minimum that the company would be purchased for by an acquiring company. Shareholders can use this as a bare-minimum estimation of the value of their shares. Continue reading...
What is Asset Turnover?
Asset Turnover is a metric that investors and companies can use to determine how efficiently a business uses its assets to create revenue. Asset Turnover is a ratio of the value of a company’s sales or revenues relative to the value of its assets. It can be calculated simply by dividing sales or revenue by total assets. The higher an asset turnover ratio for a company, the better that company is performing - since it implies that the company is generating a high level of sales and revenue per unit of assets. Continue reading...
What is Return on Assets?
Return on Assets, or ROA, is an efficiency ratio which quantifies how much profit a company can generate with the assets it has. Return on Assets is a ratio of the net income of a company divided by the amount of assets it has on the books. It can also be synonymous with Return on Investment (ROI), at least at a corporate level. Theoretically this gives analysts an idea of how much profit a company could generate by buying more equipment or other assets, or how efficiently they use the assets in which they have invested. Comparing companies in a specific industry to their peers with ratios such as this one can be illuminating. Continue reading...
What does net long mean?
Investors are net long when they own more long positions than short positions in a security, derivative, or fund. It could mean that a fund manager, for instance, is net long on all of the holdings in the funds, i.e., the fund holds more long positions than short positions. Some funds could be the opposite and be net short. A long position - or to be “long a stock” - means that an investor has share ownership and will receive economic benefit if the share price rises, and vice versa. Creating and maintaining a long position is simple: an investor buys and owns the investment. Some asset managers will employ a “long-only” strategy, only buying and selling securities in the portfolio as a management strategy - they will not use options or shorting strategies as a result. Continue reading...
What are asset classes?
Asset classes are types of appreciable investments that can be grouped and distinguished from one another based on the correlation of their price movements and the structure of their cash flows. Some of the most common asset classes are stocks, bonds, cash (and cash equivalents), commodities, and real estate. Many individual securities and sub-classes will fall into each of these. Asset classes are a large consideration when creating a well-diversified portfolio. Continue reading...
What are Mutual Funds?
Mutual funds are managed portfolios of stocks and bonds, where the portfolio manager uses pooled investor funds to manage the portfolio. In the U.S., the first mutual fund was created in 1924 when three investors in Boston pooled their money and formed the Massachusetts Investors’ Trust. The essence behind Mutual Funds today is the same – a pool of money is collected from a number of investors and then professionally managed. Continue reading...
How Do I Calculate my Net Worth?
Calculating your net worth is a simple and worthwhile endeavor, and should be done once a year to measure your progress. Generally speaking, your net worth is the sum of all of your assets, minus the sum of your liabilities. For example, to calculate your net worth, you would need to add up the dollar values of all of your assets – usually consisting of your house, your cars, savings accounts, retirement accounts, CDs, cash, etc…, and your most valuable possessions (you don’t need to include your desk lamp into the calculations). Continue reading...
What is Net Operating Income?
Net Operating Income (NOI) is a measure of profitability most often used with income producing real estate businesses. In the real estate world, net operating income is calculated by taking all revenues generated by a property (rent, parking, etc…) from all of the operating expenses needed to upkeep the property, which can include insurances, taxes, maintenance, utilities, and so on. Net Operating Income is a before tax figure, so does not include principal and interest payments on loans, depreciation and amortization. If the NOI figure is negative, it is referred to as a net operating loss (NOL). Continue reading...
What is Intrinsic Value?
Intrinsic Value is the value of a security which is “built into it.” Both options and stocks have it, but it is different for each. Options and stocks have intrinsic value. For options, the intrinsic value is easy to compute, if the option is in-the-money. It is the difference between the strike price of the option and the market price of the underlying security. If an option is out-of-the-money it has no intrinsic value. Continue reading...
What is Terminal Value?
The "end" value at a specified date in the future of an investment or cash flow. Terminal value is a term used in value calculations looking forward toward the future value of an asset or cash flow, and also in calculations which start with the Terminal Value and depreciate the asset over the intervening years until one arrives at the Present Value. Can be used in calculations regarding a business, an index, a cash flow, or an asset. Horizon Value is a synonym, and is perhaps better suited to describe the way the calculation chooses a time horizon of a specific number of years, but otherwise uses the same numbers in an equation that will estimate the value if the business or index went on growing at the same rate into perpetuity. Continue reading...