200706-01

We can assess the effect of whether the company invests its cash balances efficiently on value

200706-02

When we analyze the investments of a firm or assess its value, we need to know the cost that the firm faces in raising equity

200706-03

A firm, as we define it, includes both investments already made - we will call these assets-in-place - and investments yet to be made - we will call these growth assets

200706-04

To capitalize and value research assets, you make an assumption about how long it takes for research and development to be converted

200706-05

The gap between the earnings reported by firms to the Internal Revenue Service and that reported to equity investors has been growing over the last decade

200706-06

Investments in marketable securities generate two types of income

200706-07

How much a firm is reinvesting back for future growth

200706-08

It can be argued that governments provide tax breaks for investments only because firms are exposed to higher costs or more risk in these investments

200706-09

A large investment in one year can be followed by small investments in subsequent years

200706-10

The second component of reinvestment is the cash that needs to be set aside for working capital needs

200706-11

The problems are exacerbated for firms that invest in research because the book value will not include the most important asset at these firms the research asset

200706-12

These acquisitions accounted for almost 80% of their reinvestment that year

200706-13

Given that institutional investors are the biggest clients of equity research analysts

200706-14

To derive the relationship between net income growth and fundamentals, we need a measure of how investment that goes beyond retained earnings

200706-15

The reinvestment rate is often measured using the most recent financial statements for the firm

200706-16

It should also include acquisitions of other firms, partnerships, investments in distribution and marketing capabilities

200706-17

Divide it by the total capital invested in that firm in that year

200706-18

Firms that reinvest substantial portions of their earnings and earn high returns on these investments should be able to grow at high rates

200706-19

The value of such a firm can then be written as the sum of the capital invested today and the present value of the returns that the firm will earn

200706-20

The negative cash flows from operations, when combined with significant reinvestment needs, can result in rapid depletion of cash reserves

200706-21

When an investor buys stock, she generally expects to get two types of cashflows dividends during the period she holds the stock

200706-22

Vornado Realty Trust owns and has investments in real estate in the New York area

200706-23

Re-estimating the return on equity can sometimes yield a more reasonable estimate of the return on equity on investments

200706-24

The value of the stock is then the present value of expected dividends during the high growth and the transitional periods and of the terminal price

200706-25

How much the model adds in value to investment strategies that use PE ratios or dividend yields to screen stocks

200706-26

Increases in working capital drain a firms cash flows, while decreases in working capital increase the cash flows available to equity investors

200706-27

Free cash flows to equity, like dividends, are cash flows to equity investors and you could use the same approach that you used to estimate the fundamental growth rate

200706-28

Equity reinvestment rate

200706-29

The normalized reinvestment can then be estimated

200706-30

It reflects different assumptions about reinvestment and growth in the two models

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Previous Issues

200705

As an investor, would you invest your entire portfolio in one asset

200704

The analysis will be done from the perspective of equity investors

200703

The key to profitable investing

200702

Small stocks are running up, with large bounces at bottoms

200701

Institutional traders are raising cash and selling stock

200612

The first mistake: investing without a plan. The second mistake: using the wrong investment strategy

200611

Does the speculation in stocks ever disappear