The abnormal earnings valuation model is used by investors to forecast a company's future stock price by analyzing its book value and earnings.

The abnormal earnings valuation model is a method for determining a company's equity value based on both its book value and its earnings. The model is used to forecast future stock prices and concludes that investors should pay more than book value for a stock if earnings are higher than expected and less than book value if earnings are lower than expected. In the case of the book value per share used in the abnormal earnings valuation, a company's book value can be affected by events such as a share buyback and this must be factored into the model. There are two components to equity value in the model: a company's book value and the present value of future expected residual incomes. The starting point will be book value; the range of total equity value after adding the present value of future residual incomes would thus be narrower than, say, a range derived by a DCF model.

Abnormal Earnings Valuation Model

The addition rule for probabilities is the probability for either of two mutually exclusive events or two non-mutually events happening.

The addition rule for probabilities describes two formulas, one for the probability for either of two mutually exclusive events happening and the other for the probability of two non-mutually exclusive events happening. Mathematically, the probability of two non-mutually exclusive events is denoted by:
P ( Y  or  Z ) \= P ( Y ) \+ P ( Z ) − P ( Y  and  Z ) P(Y \\text{ or } Z) = P(Y) + P(Z) - P(Y \\text{ and } Z) P(Y or Z)\=P(Y)+P(Z)−P(Y and Z)
To illustrate the first rule in the addition rule for probabilities, consider a die with six sides and the chances of rolling either a 3 or a 6. Mathematically, the probability of two mutually exclusive events is denoted by:
P ( Y  or  Z ) \= P ( Y ) \+ P ( Z ) P(Y \\text{ or } Z) = P(Y)+P(Z) P(Y or Z)\=P(Y)+P(Z) The addition rule for probabilities describes two formulas, one for the probability for either of two mutually exclusive events happening and the other for the probability of two non-mutually exclusive events happening. Non-mutually-exclusive means that some overlap exists between the two events in question and the formula compensates for this by subtracting the probability of the overlap, P(Y and Z), from the sum of the probabilities of Y and Z.

Addition Rule For Probabilities

The risk-adjusted capital ratio is used to gauge a financial institution's ability to continue functioning in the event of an economic downturn.

The risk-adjusted capital ratio is used to gauge a financial institution's ability to continue functioning in the event of an economic downturn. The risk-adjusted capital ratio measures the resilience of a financial institution's balance sheet, with an emphasis on capital resources, to endure a given economic risk or recession. The final step in determining the risk-adjusted capital ratio is to divide the total adjusted capital by the RWA. Determining total adjusted capital is the first step in figuring out the risk-adjusted capital ratio. The risk-adjusted capital ratio is used to gauge a financial institution's ability to continue functioning in the event of an economic downturn.

Risk-Adjusted Capital Ratio

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric.

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric. Common EBITDA adjustments include:
Unrealized gains or losses
Non-cash expenses (depreciation, amortization)
Litigation expenses
Owner's compensation that is higher than the market average (in private firms)
Gains or losses on foreign exchange
Goodwill impairments
Non-operating income
Share-based compensation
This metric is typically calculated on an annual basis for a valuation analysis, but many companies will look at adjusted EBITDA on a quarterly or even monthly basis, though it may be for internal use only.
Analysts often use a three-year or five-year average adjusted EBITDA to smooth out the data. N I \+ I T \+ D A \= E B I T D A E B I T D A \+ / − A \= Adjusted  E B I T D A where: N I   \=   Net income I T   \=   Interest & taxes D A   \=   Depreciation & amortization \\begin{aligned} &NI+IT+DA=EBITDA\\\\ &EBITDA +\\!\\!/\\!\\!-A = \\text{Adjusted }EBITDA\\\\ &\\textbf{where:}\\\\ &NI\\ =\\ \\text{Net income}\\\\ &IT\\ =\\ \\text{Interest \\& taxes}\\\\ &DA\\ =\\ \\text{Depreciation \\& amortization}\\\\ &A\\ =\\ Non-recurring income and expenses such as one-time startup costs that usually reduce EBITDA should also be added back when computing the adjusted EBITDA.
Adjusted EBITDA should not be used in isolation and makes more sense as part of a suite of analytical tools used to value a company or companies. Standardizing EBITDA by removing anomalies means the resulting adjusted or normalized EBITDA is more accurately and easily comparable to the EBITDA of other companies, and to the EBITDA of a company's industry as a whole.

Adjusted EBITDA

Adjusted surplus is one indication of an insurance company's financial health. It is the statutory surplus adjusted for a possible drop in asset values. 

Adjusted surplus is one indication of an insurance company's financial health. Insurance companies must follow Statutory Accounting Principles (SAP) that are established by the National Association of Insurance Commissioners (NAIC).
Adjusted surplus is the statutory surplus (the excess of assets over liabilities) adjusted for a possible drop in asset values.
Adjusted surplus is one indication of an insurance company's financial health.
The adjusted surplus grows when the insurance company makes an operating profit and/or experiences gains in its investment portfolio.
Insurance companies are required by the National Association of Insurance Commissioners (NAIC) to maintain reserves as a cushion for potential losses. Like the asset valuation reserve, the interest maintenance reserve is an amount that insurance companies are required to maintain to protect against a possible loss in the value of their assets that may occur as a result of a rise in interest rates. Adjusted surplus takes the statutory surplus and adds to it the interest maintenance reserve and the asset valuation reserve. Similar to owners' equity or net worth, the statutory surplus is the excess of assets over liabilities as determined by the accounting treatment of assets and liabilities by state insurance regulators.

Adjusted Surplus

All-in costs refer to the sum of all fees, interest, and charges that will be included covering a financial transaction.

An all-in cost consists of each and every cost involved in a financial transaction or business operation. Credit cards often display their interest rate as an annual percentage rate (APR), which is a rate that includes all-in costs, such as fees and other costs, and not just the interest rate. All-in costs comprise the entire cost of a financial transaction or business operation, including all taxes and fees such as closing costs, origination fees, or commissions. In terms of loans, consumers need to understand the true cost of their loans, including closing costs and interest, in order to evaluate both their ability to repay and whether the item is worth that expense. Loans and credit card companies present the annual percentage rate (APR) to display the all-in costs as an interest rate.

All-In Cost

Alternative Depreciation System is a depreciation schedule with a straight-line recovery period that generally better reflects the asset's income.

An alternative depreciation system (ADS) is one of the methods the Internal Revenue Service (IRS) requires taxpayers to use to determine the depreciation allowed on business assets. Taxpayers who elect to use the alternative depreciation system feel that the alternative schedule will allow for a better match of depreciation deductions against income than the recovery period under the general depreciation system. The general depreciation system allows companies to accelerate the asset's depreciation rate by recording a larger depreciation amount during the early years of an asset's useful life and smaller amounts in later years. The general depreciation system (GDS) allows taxpayers to accelerate the asset's depreciation rate by recording a larger depreciation amount during the early years of an asset's useful life. The alternative depreciation system offers depreciation over a longer period of time than the general depreciation system, which is a declining balance method.

Alternative Depreciation System (ADS)

Analysis of variance (ANOVA) is a statistical analysis tool that separates the total variability found within a data set into two components: random and systematic factors.

Analysis of variance (ANOVA) is an analysis tool used in statistics that splits an observed aggregate variability found inside a data set into two parts: systematic factors and random factors. F \= MST MSE where: F \= ANOVA coefficient MST \= Mean sum of squares due to treatment MSE \= Mean sum of squares due to error \\begin{aligned} &\\text{F} = \\frac{ \\text{MST} }{ \\text{MSE} } \\\\ &\\textbf{where:} \\\\ &\\text{F} = \\text{ANOVA coefficient} \\\\ &\\text{MST} = \\text{Mean sum of squares due to treatment} \\\\ &\\text{MSE} = \\text{Mean sum of squares due to error} \\\\ \\end{aligned} ​F\=MSEMST​where:F\=ANOVA coefficientMST\=Mean sum of squares due to treatmentMSE\=Mean sum of squares due to error​
The ANOVA test is the initial step in analyzing factors that affect a given data set. The t- and z-test methods developed in the 20th century were used for statistical analysis until 1918, when Ronald Fisher created the analysis of variance method.﻿﻿﻿﻿﻿ ANOVA is also called the Fisher analysis of variance, and it is the extension of the t- and z-tests. If no true variance exists between the groups, the ANOVA's F-ratio should equal close to 1.
A researcher might, for example, test students from multiple colleges to see if students from one of the colleges consistently outperform students from the other colleges. The result of the ANOVA formula, the F statistic (also called the F-ratio), allows for the analysis of multiple groups of data to determine the variability between samples and within samples.

Analysis of Variance (ANOVA)  & Formula

Appreciative inquiry is an analysis mode that focuses on the best, most essential, and effective aspects of living systems and organizations.

Appreciative inquiry (AI) is a positive approach to leadership development and organizational change. So, choosing the topic of inquiry can change the organization).
4.  The anticipatory principle (understanding that our actions are guided by our vision of the future, and creating a positive image of the future to shape present action).
5.  The positive principle (positive organizational change requires positive sentiments, such as hope, inspiration, camaraderie, and the strengthening of social bonds).
Appreciative inquiry has been used by many global public and private organizations. For example, non-profit and non-governmental organizations (NGOs) might design initiatives across global regions and industry sectors after analysis using appreciative inquiry.
Appreciative inquiry (AI) is a positive and collaborative group of techniques aimed at improving effective leadership and organizational and societal change. For example, Merck used the approach to examine and improve its sales growth, British Airways improved customer service using this approach, and Wal-Mart implemented initiatives for sustainable value creation after applying appreciative inquiry. Appreciative inquiry (AI) is a positive approach to leadership development and organizational change.

Appreciative Inquiry

The adjusted present value is the net present value (NPV) of a project or company, if financed solely by equity, plus the present value (PV) of any financing benefits, which are the additional effects of debt.

The adjusted present value is the net present value (NPV) of a project or company if financed solely by equity plus the present value (PV) of any financing benefits, which are the additional effects of debt. The adjusted present value is the net present value (NPV) of a project or company if financed solely by equity plus the present value (PV) of any financing benefits, which are the additional effects of debt. The present value of the interest tax shield is therefore calculated as: (tax rate \debt load \* interest rate) / interest rate.
To determine the adjusted present value: Adjusted Present Value = Unlevered Firm Value + NE where: NE = Net effect of debt \\begin{aligned} &\\text{Adjusted Present Value = Unlevered Firm Value + NE}\\\\ &\\textbf{where:}\\\\ &\\text{NE = Net effect of debt}\\\\ \\end{aligned} ​Adjusted Present Value = Unlevered Firm Value + NEwhere:NE = Net effect of debt​
The net effect of debt includes tax benefits that are created when the interest on a company's debt is tax-deductible. While the adjusted present value method is similar to the discounted cash flow (DCF) methodology, adjusted present cash flow does not capture taxes or other financing effects in a weighted average cost of capital (WACC) or other adjusted discount rates.

Adjusted Present Value (APV)

Asset valuation is the process of determining the fair market value of assets.

Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables. The net asset value – also known as net tangible assets – is the book value of tangible assets on the balance sheet (their historical cost minus the accumulated depreciation) less intangible assets and liabilities – or the money that would be left over if the company was liquidated. Absolute value models value assets based only on the characteristics of that asset, such as discounted dividend, discounted free cash flow, residential income and discounted asset models. The value of a company's fixed assets – which are also known as capital assets or property plant and equipment – are straightforward to value, based on their book values and replacement costs. Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables.

Asset Valuation  and Example

Autocorrelation shows the degree of correlation between variables over successive time intervals. 

Table of Contents
What Is Autocorrelation?
Understanding Autocorrelation
Autocorrelation in Technical Analysis
Example of Autocorrelation Day
% Gain or Loss
Next Day's % Gain or Loss
When calculating autocorrelation, the result can range from -1 to +1.
An autocorrelation of +1 represents a perfect positive correlation (an increase seen in one time series leads to a proportionate increase in the other time series). Values closer to 0 indicate a greater degree of positive correlation, values closer to 4 indicate a greater degree of negative autocorrelation, while values closer to the middle suggest less autocorrelation. ![Positive Autocorrelation](data:image/gif;charset=utf-8;base64,R0lGODlhCwAGAPQAAET7EdsgLdhRZNJddaupq7CvsbGwsZ7pm6DSoaPmo6zoqazwrP+9vtbVz9fW1//Z2vTz9Pr////8///9//7////+/////0T7EUT7EUT7EUT7EUT7EUT7EUT7EUT7EUT7ESwAAAAACwAGAEQIMgArVJhAUCDBCRUOIFDgwEKDAgkIGIAgsGLFAQICWLRoASGFCAwqSHhgwcKCCgA2qgwIADs=)
On the other hand, an autocorrelation of -1 represents a perfect negative correlation (an increase seen in one time series results in a proportionate decrease in the other time series). It's conceptually similar to the correlation between two different time series, but autocorrelation uses the same time series twice: once in its original form and once lagged one or more time periods.

Autocorrelation

Basic earnings per share (EPS) tells investors how much of a firm's net income was allotted to each share of common stock.

Stocks trade on multiples of earnings per share, so a rise in basic EPS can cause a stock's price to appreciate in line with the company's increasing earnings on a per share basis.
Increasing basic EPS, however, does not mean the company is generating greater earnings on a gross basis. **Basic EPS = (Net income - preferred dividends) ÷ weighted average of common shares outstanding during the period.**
Net income can be further broken down into 'continuing operations' P&L and 'total P&L' and preferred dividends should be removed as this income is not available to common stockholders. Basic earnings per share (EPS) tells investors how much of a firm's net income was allotted to each share of common stock. Basic earnings per share (EPS) tells investors how much of a firm's net income was allotted to each share of common stock.

Basic Earnings Per Share (EPS)

A Bonferroni Test is a type of multiple comparison test used in statistical analysis.

The Bonferroni test is a type of multiple comparison test used in statistical analysis. When performing a hypothesis test with multiple comparisons, eventually a result could occur that appears to demonstrate statistical significance in the dependent variable, even when there is none.
If a particular test, such as a linear regression, thus yields correct results 99% of the time, running the same regression on 100 different samples could lead to at least one false positive result at some point. This is formally called a Type I error, and as a result, an error rate that reflects the likelihood of a Type I error is assigned to the test. Using the 5% error rate from our example, two tests would yield an error rate of 0.025 or (.05/2) while four tests would therefore have an error rate of .0125 or (.05/4). The Bonferroni test is a statistical test used to reduce the instance of a false positive.

Bonferroni Test

The book-to-ship ratio measures the ratio of orders being shipped for immediate delivery, and therefore billed, to orders booked for future delivery.

The book-to-ship ratio measures the ratio of orders being shipped for immediate delivery, and therefore billed, to orders booked for future delivery. The formula for the book-to-ship ratio is:
Book-To-Ship Ratio \= Value of Orders Received Value of Orders Shipped where: Value of Orders Received  \= Monetary value of all sales in a given period Value of Orders Shipped  \= Monetary value of all purchased products shipped in a given period \\begin{aligned} &\\text{Book-To-Ship Ratio} = \\frac { \\text{Value of Orders Received} }{ \\text{Value of Orders Shipped} } \\\\ &\\textbf{where:} \\\\ &\\text{Value of Orders Received } = \\text{Monetary value of all sales} \\\\ &\\text{in a given period} \\\\ &\\text{Value of Orders Shipped } = \\text{Monetary value of all} \\\\ &\\text{purchased products shipped in a given period} \\\\ \\end{aligned} ​Book-To-Ship Ratio\=Value of Orders ShippedValue of Orders Received​where:Value of Orders Received \=Monetary value of all salesin a given periodValue of Orders Shipped \=Monetary value of allpurchased products shipped in a given period​
If the book-to-ship ratio is greater than 1, then it indicates that a company has not sent out all of its orders. A book-to-ship ratio of 1 indicates a company is meeting its orders in a timely fashion, while a book-to-ship ratio greater than 1 indicates a company is not meeting its orders quickly enough and needs to reevaluate its processes, and a book-to-ship ratio below 1 indicates excess inventory. Depending on the average number of the book-to-ship ratio for the companies evaluated, analysts and strategists are given a clear and effective indication of whether orders for chips are rising or falling and at what price. Long- and short-term estimates can then be derived for chip demand, which can drive stock prices for semiconductor and technology stocks alike.
For example, if the average book-to-ship ratio for the semiconductor industry was less than 1, then this would indicate excess supply, meaning that demand has not been high for semiconductors. The book-to-ship ratio is similar to the book-to-bill ratio, which measures the number of orders being placed to the number of orders being shipped, as opposed to the monetary value of the orders.

Book-To-Ship Ratio

Capacity utilization rate measures the percentage of potential output levels that is being achieved. It can identify the slack in production.

Industrial Production and Capacity Utilization

Industrial Production and Capacity Utilization: The 2021 Annual Revision

Table of Contents
What Is Capacity Utilization Rate?
How Capacity Utilization Rate Works
How It Works in Corporate
Historical Data In the fourth quarter of 2020, deep in the COVID-19 pandemic, the Fed calculated a revised capacity utilization rate for all U.S. industry at 73.4%
Capacity utilization overall fluctuates with the business cycle. Manufacturing capacity utilization is a somewhat narrower term than capacity utilization. But in times when demand is strong, the capacity utilization rate informs them how much they can step up production without incurring additional per-unit costs. Calculating the capacity utilization rate pinpoints the degree to which an organization is achieving its full production potential.

Capacity Utilization Rate

The term "capital intensive" refers to industries that require large amounts of capital investment and thus have a high percentage of fixed assets.

The term "capital intensive" refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment (PP&E). Because capital-intensive industries have high depreciation costs, analysts that cover capital-intensive industries often add depreciation back to net income using a metric called earnings before interest, taxes, depreciation, and amortization (EBITDA). Their high operating leverage makes capital-intensive industries much more vulnerable to economic slowdowns compared with labor-intensive businesses because they still have to pay fixed costs, such as overhead on the plants that house the equipment and depreciation on the equipment. Besides operating leverage, the capital intensity of a company can be gauged by calculating how many assets are needed to produce a dollar of sales, which is total assets divided by sales. 1:26
Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fixed costs to variable costs.

Capital Intensive

Capitalization of earnings is a method of assessing an organization's value by determining the net present value (NPV) of expected future profits or cash flows.

Capitalization of earnings is a method of determining the value of an organization by calculating the worth of its anticipated profits based on current earnings and expected future performance. The net operating income is then divided by the investment's/property's purchase price to identify the capitalization rate.
Evaluating a company based on future earnings has disadvantages. First, the method in which future earnings are projected may be inaccurate, resulting in less than expected yields. Extraordinary events can occur, compromising earnings and therefore affecting the investment's valuation. Also, a startup that has been in business for one or two years may lack sufficient data for determining an accurate valuation of the business.
Because the capitalization rate should reflect the buyer’s risk tolerance, market characteristics, and the company’s expected growth factor, the buyer needs to know the acceptable risks and the desired ROI. This is an income-valuation approach that determines the value of a business by looking at the current cash flow, the annual rate of return, and the expected value of the business. This method is accomplished by finding the net present value (NPV) of expected future profits or cash flows, and dividing them by the capitalization rate (cap rate).

Capitalization of Earnings

Capitalized interest is the cost of borrowing to acquire or construct a long-term asset, which is added to the cost basis of the asset on the balance sheet.

Capitalized interest is the cost of borrowing to acquire or construct a long-term asset. In the next year, when the production facility is used, the company books a straight-line depreciation expense of $275,000 ($5.5 million of the facility's book value divided by 20 years of useful life) of which $25,000 ($500,000 of capitalized interest divided by 20 years) is attributable to the capitalized interest. Because many companies finance the construction of long-term assets with debt, Generally Accepted Accounting Principles (GAAP) allow firms to avoid expensing interest on such debt and include it on their balance sheets as part of the historical cost of long-term assets. Capitalized interest shows up in installments on a company's income statement through periodic depreciation expense recorded on the associated long-term asset over its useful life. Unlike an interest expense incurred for any other purpose, capitalized interest is not expensed immediately on the income statement of a company's financial statements.

Capitalized Interest

Capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases.

Capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases, also known as share buybacks. The act of capital reduction may also be enacted in response to a decline in a company's operating profits or a revenue loss that cannot be recovered from a company's expected future earnings. Capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases, also known as share buybacks. After a capital reduction, the number of shares in the company will decrease by the reduction amount. Second, the company has to then submit an application for entry of the reduction of share capital no earlier than three months after publication of the initial notice.

Capital Reduction

A capital reserve is an account on the balance sheet which represents the accumulated capital surplus of a company earmarked for future capital losses or purchases.

A capital reserve is an account in the equity section of the balance sheet that can be used for contingencies or to offset capital losses. It is created through transactions of a capital nature, such as selling fixed assets, the upward revaluation of assets to reflect their current market value, issuing stock in excess of par value (share premium), profits on the redemption of debentures, and the reissue of forfeited shares.
Sums allocated to a capital reserve are permanently invested and cannot be used to pay dividends to shareholders. The term capital reserve is sometimes used for the capital buffers that banks have to establish to meet regulatory requirements and can be confused with reserve requirements, which are the cash reserves the Federal Reserve requires banks to maintain. A capital reserve is an account in the equity section of the balance sheet that can be used for contingencies or to offset capital losses. A capital reserve is an anachronism because the term “reserve” is not defined under generally accepted accounting principles (GAAP).

Capital Reserve

The Cass Freight Index available from Cass Information Systems is a measurement of the monthly aggregate shipment of freight.

The Cass Freight Index is a measurement of the monthly aggregate deliveries of U.S. freight. The Cass Freight Index is a measure of North American intra-continental freight volumes compiled by Cass Information Systems, one of the largest invoice processors in the U.S.
The index readings provide valuable insight into freight trends as they relate to other economic and supply chain indicators and the overall economy.
The index is updated with monthly freight expenditures and shipment volumes from the entire Cass client base.
All domestic modes of transit are included, with trucking accounting for more than 75% of all activity.
​​​​​​​Cass Freight Index reflects freight volumes for organizations that spend anywhere from $1 million to more than $1 billion per year in the movement of freight. Several competing index and data providers include:
**Morgan Stanley Proprietary Truckload Freight Index** tracks the supply and demand balance of truckload freight.
**DAT RateView** follows specific sectors of the freight industry, such as truckload freight, and provides real-time broker-buyer prices.
* According to Cass, one of the nation’s largest processors of freight bills, the diversity of shippers and the aggregate volume of transactions included in the index represent a statistically meaningful representation of North American shipping activity as a whole. The index comprises the actual freight expenses of the underlying companies whose freight transactions Cass processes annually.

Cass Freight Index

The consumption capital asset pricing model (CCAPM) is an extension of the capital asset pricing model but one that uses consumption beta instead of market beta.

The consumption capital asset pricing model (CCAPM) is an extension of the capital asset pricing model (CAPM) that uses a consumption beta instead of a market beta to explain expected return premiums over the risk-free rate. The formula for CCAPM is:
R \= R f \+ β c ( R m − R f ) where: R \= Expected return on a security R f \= Risk-free rate β c \= Consumption beta R m \= Return on the market \\begin{aligned} &R = R\_f + \\beta\_c ( R\_m - R\_f ) \\\\ &\\textbf{where:} \\\\ &R = \\text{Expected return on a security} \\\\ &R\_f = \\text{Risk-free rate} \\\\ &\\beta\_c = \\text{Consumption beta} \\\\ &R\_m = \\text{Return on the market} \\\\ \\end{aligned} ​R\=Rf​+βc​(Rm​−Rf​)where:R\=Expected return on a securityRf​\=Risk-free rateβc​\=Consumption betaRm​\=Return on the market​ The consumption capital asset pricing model (CCAPM) is an extension of the capital asset pricing model (CAPM) that uses a consumption beta instead of a market beta to explain expected return premiums over the risk-free rate. Consumption beta is the coefficient of the regression of an asset's returns and consumption growth, where the CAPM's market beta is the coefficient of the regression of an asset's returns on the market portfolio returns. The quantity of risk related to the consumption beta is measured by the movements of the risk premium (return on asset and risk-free rate) with consumption growth.

Consumption Capital Asset Pricing Model (CCAPM)

A cash flow return on investment (CFROI) is a valuation metric that acts as a proxy for a company's economic return. 

A cash flow return on investment (CFROI) is a valuation metric that acts as a proxy for a company's economic return. The formula for CFROI is:
CFROI = OCF / Capital Employed
OCF = Operating Cash Flow
Capital Employed = Total Equity + Short Term Debt + Capital Lease Obligations + Long Term Debt
HOLT expanded the concept of a single project internal rate of return (IRR) versus a hurdle rate, applying a similar calculation for the whole firm, whereby all of a company's projects are run through the valuation exercise and averaged to come up with a firm-wide CFROI.
The proprietary methodology removes what are believed to be distortions in a company's income statement and balance sheet, and makes adjustments for inflation, to create a clean comparison basis for historical analysis of an individual firm's value creation or destruction over time. A cash flow return on investment (CFROI) is a valuation metric that acts as a proxy for a company's economic return. Cash flow return on investment (CFROI) is a valuation metric that looks at cash flow, relative to a company's cost of capital. CFROI can be used to look at a company's performance over time or to compare a company's performance with peers in its sector.

Cash Flow Return on Investment (CFROI)

A characteristic line is a line formed using regression analysis that summarizes a particular security's risk and return profile.

A characteristic line is a straight line formed using regression analysis that summarizes a particular security's systematic risk and rate of return. The characteristic line is also known as the security characteristic line (SCL).
The characteristic line is created by plotting a security's return at various points in time. All of these systems use various constructions of risk, excess return, overall market performance, security beta, and individual security performance to assess the risk/return tradeoff and inform investment decisions. Other analytic tools in the Modern Portfolio Theory family are the security market line (SML), the capital market line (CML), the capital allocation line (CAL), and the capital asset pricing model (CAPM). A characteristic line is a straight line formed using regression analysis that summarizes a particular security's systematic risk and rate of return.

Characteristic Line

Calculated intangible value is a method of valuing a company's intangible assets. Intangible assets include patents and other intellectual property.

Calculated intangible value is a method of valuing a company's intangible assets. On the other hand, the calculated intangible value takes additional factors into consideration, such as the company's pretax earnings, the company's average return on tangible assets, and the industry's average return on tangible assets. The CIV takes into consideration factors such as a company's pretax earnings, a company's average return on tangible assets, and the industry's average return on tangible assets. Because intangible assets are more difficult to value, companies may choose to hire a third-party business evaluator or appraiser to perform the intricate task of identifying the company's unique assets and placing a value on them. A calculated intangible value (CIV) is a method of valuing a company's intangible assets, which are assets that are not physical in nature.

Calculated Intangible Value (CIV)

The current market value is the present value of a financial instrument, which can be the closing price or the bid price depending on the item.

Within finance, the current market value (CMV) is the approximate current resale value for a financial instrument. The current market value (CMV) gives parties interested in making a transaction the approximate current resale value for a financial instrument or asset. An owner of a liquid asset will be able to convert it easily to cash and will receive a value for the asset equal to or very close to the current market value. Within finance, the current market value (CMV) is the approximate current resale value for a financial instrument. Brokerage firms use the current market value of an asset to determine if an investor's brokerage account has fallen below the required margin amount, which could then result in a margin call.

Current Market Value (CMV)

A comparable company analysis is used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry.

A comparable company analysis (CCA) is a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry. The most common valuation measures used in comparable company analysis are enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S).
Comparable company analysis starts with establishing a peer group consisting of similar companies of similar size in the same industry or region. The most common valuation measures used in comparable company analysis are enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S). If all companies in a particular industry are selling for an average of 1.5 times market value or 10 times earnings, it gives the analyst a way to use the same number to back into the value of a peer company based on these benchmarks. A comparable company analysis (CCA) is a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry.

Comparable Company Analysis (CCA)

Comparables are used in a valuation technique in which a recently sold asset is used to determine the value of a similar asset.

Comparables (comps) are used in valuations where a recently sold asset is used to determine the value of a similar asset. For example, a real estate agent may appraise the value of a home-based on the most recent selling price of a house in the same neighborhood with similar attributes, such as square footage and the number of bedrooms and bathrooms. Comparables, often used in real estate to find the fair value of a home, are a list of recent asset sales that reflect the characteristics of the asset an owner is looking to sell. The seller is able to gather data from the nearby neighborhoods on comparable homes, and then proceed to list the home price accurately. With access to many different real estate listing websites, it can be very easy to do a comparable search while sitting at home in pajamas.

Comparables

Compustat is a comprehensive market database published by Standard and Poor's. 

Compustat is a comprehensive database of fundamental financial and market information on both active and inactive global companies, indices, and industries. Compustat Data including Compustat North America, Compustat International, Compustat Global, and Compustat Point-in-Time data sets
Industry classification and universe management by GICS, NAICS, and SIC
Key market identifiers, including CUSIP, ISIN, and SEDOL
Monthly and daily pricing data
Standard & Poor's and other leading Index Data
Estimates data from Capital IQ and Thomson I/B/E/S
Qualitative content including business descriptions, officer information, and executive compensation
Corporate Actions and Insider and Institutional Holdings
Capital IQ qualitative data
Standard & Poor’s Stock Reports
Standard & Poor’s Industry Surveys
Standard & Poor’s Issuer Credit Ratings
How Compustat Works
Some fun facts about the Compustat database:
Covers 56,000+ companies worldwide
Covers 88,000+ securities, more than 45,500 of them non-North American securities
Includes companies from 112 nations
Represents 98% of the world's total market capitalization
Has annual data dating back to 1950; quarterly data from 1962 (U.S. companies)
Has data dating back to 1979 for global companies The type of information published by Compustat includes Global Industry Classification Standards (GICS), pricing data, earnings data, insider and institutional holdings, and other information directed at investors, analysts, economists, academics, and other researchers. For example, revenue in an annual report normally reflects the accumulated total of all incoming cash, but in a Compustat report, it may be adjusted to distinguish between revenue from actual operations and revenue that resulted from one-time-only events (which the corporate report might only list in footnotes or supplements). In addition to publicly available information, Compustat includes datasets proprietary to Standard & Poor's, including stock reports and credit ratings issued by the firm.

Compustat

Conditional probability is the chances of an event or outcome that is itself based on the occurrence of some other previous event or outcome.

Conditional probability is defined as the likelihood of an event or outcome occurring, based on the occurrence of a previous event or outcome. This _revised_ probability that an event _A_ has occurred, considering the additional information that another event _B_ has definitely occurred on this trial of the experiment, is called the _conditional probability of_ _A_ _given_ _B_ and is denoted by P(A|B).
> _P(B|A) = P(A and B) / P(A)_
> _P(B|A) = P(A∩B) / P(A)_
As another example, suppose a student is applying for admission to a university and hopes to receive an academic scholarship. Conditional probability is calculated by multiplying the probability of the preceding event by the updated probability of the succeeding, or conditional, event. **Conditional probability**: p(A|B) is the probability of event A occurring, given that event B occurs. P (Accepted and dormitory housing) = P (Dormitory Housing | Accepted) P (Accepted) = (0.60)\*(0.80) = 0.48.
A conditional probability would look at these two events in relationship with one another, such as the probability that you are both accepted to college, _and_ you are provided with dormitory housing.

Conditional Probability

Conditional Value at Risk (CVaR) quantifies the potential extreme losses in the tail of a distribution of possible returns.

Conditional Value at Risk (CVaR), also known as the expected shortfall, is a risk assessment measure that quantifies the amount of tail risk an investment portfolio has. It is the average of the values that fall beyond the VaR:
C V a R \= 1 1 − c ∫ − 1 V a R x p ( x ) d x where: p ( x ) d x \= the probability density of getting a return with   value “ x ” c \= the cut-off point on the distribution where the analyst       sets the  V a R  breakpoint \\begin{aligned} &CVaR=\\frac{1}{1-c}\\int^{VaR}\_{-1}xp(x)\\,dx\\\\ &\\textbf{where:}\\\\ &p(x)dx= \\text{the probability density of getting a return with}\\\\ &\\qquad\\qquad\\ \\text{value \`\`}x\\text{''}\\\\ &c=\\text{the cut-off point on the distribution where the analyst}\\\\ &\\quad\\ \\ \\ \\text{sets the }VaR\\text{ breakpoint}\\\\ &VaR=\\text{the agreed-upon }VaR\\text{ level} \\end{aligned} ​CVaR\=1−c1​∫−1VaR​xp(x)dxwhere:p(x)dx\=the probability density of getting a return with value “x”c\=the cut-off point on the distribution where the analyst   sets the VaR breakpoint​
Safer investments like large-cap U.S. stocks or investment-grade bonds rarely exceed VaR by a significant amount. Since CVaR values are derived from the calculation of VaR itself, the assumptions that VaR is based on, such as the shape of the distribution of returns, the cut-off level used, the periodicity of the data, and the assumptions about stochastic volatility, will all affect the value of CVaR. Conditional Value at Risk (CVaR) attempts to address the shortcomings of the VaR model, which is a statistical technique used to measure the level of financial risk within a firm or an investment portfolio over a specific time frame. CVaR is derived by taking a weighted average of the “extreme” losses in the tail of the distribution of possible returns, beyond the value at risk (VaR) cutoff point.

Conditional Value at Risk (CVaR)

A confidence interval, in statistics, refers to the probability that a population parameter will fall between two set values.

A confidence interval, in statistics, refers to the probability that a population parameter will fall between a set of values for a certain proportion of times. Confidence level refers to the percentage of probability, or certainty, that the confidence interval would contain the true population parameter when you draw a random sample many times. Confidence level refers to the percentage of probability, or certainty, that the confidence interval would contain the true population parameter when you draw a random sample many times. For example, a researcher selects different samples randomly from the same population and computes a confidence interval for each sample to see how it may represent the true value of the population variable. For example, a researcher selects different samples randomly from the same population and computes a confidence interval for each sample to see how it may represent the true value of the population variable.

Confidence Interval

The cost of revenue is the total cost of manufacturing and delivering a product or service and is found in a company's income statement.

The term cost of revenue refers to the total cost of manufacturing and delivering a product or service to consumers. The cost of revenue takes into account the cost of goods sold (COGS) or cost of services provided plus any additional costs incurred to generate a sale. The costs considered part of the cost of revenue include a multitude of items, such as the cost of labor, commission, materials, and sales discounts. A company with a low cost of revenue to total revenue percentage indicates that it is in stable financial health and may have strong sales. Although the cost of revenue factors in many costs associated with sales, it does not take into account the indirect costs, such as salaries paid to managers.

Cost of Revenue

Cross-correlation is a measurement that tracks the movements over time of two variables relative to each other.

Cross-correlation is a measurement that tracks the movements of two or more sets of time series data relative to one another. Cross-correlation is used in portfolio management to measure the degree of diversification among the assets contained in a portfolio. Above all, cross-correlation is used in portfolio management to measure the degree of diversification among the assets contained in a portfolio. Variables Y and Z can be said to be cross-correlated because their behavior is positively correlated as a result of each of their individual relationships to variable X.
Cross-correlation can be used to gain perspective on the overall nature of the larger market. Modern portfolio theory (MPT) uses a measure of the correlation of all the assets in a portfolio to help determine the most efficient frontier.

Cross-Correlation

The dividend discount model (DDM) is a system for evaluating a stock by using predicted dividends and discounting them back to present value.

Table of Contents
What Is Dividend Discount Model?
Understanding the DDM , the formula for valuing a stock using the dividend discount model is mathematically represented as,
Value of Stock \= EDPS (CCE − DGR) where: E D P S \= expected dividend per share C C E \= cost of capital equity \\begin{aligned}&\\textit{\\textbf{Value of Stock}}=\\frac{\\textit{\\textbf{EDPS}}}{\\textbf{(\\textit{CCE}}-\\textbf{\\textit{DGR})}}\\\\&\\textbf{where:}\\\\&EDPS=\\text{expected dividend per share}\\\\&CCE=\\text{cost of capital equity}\\\\&DGR=\\text{dividend growth rate}\\end{aligned} ​Value of Stock\=(CCE−DGR)EDPS​where:EDPS\=expected dividend per shareCCE\=cost of capital equity​
Since the variables used in the formula include the dividend per share, the net discount rate (represented by the required rate of return or cost of equity and the expected rate of dividend growth), it comes with certain assumptions.
Since dividends, and its growth rate, are key inputs to the formula, the DDM is believed to be applicable only on companies that pay out regular dividends. the estimated value of next year’s dividend r \= the company’s cost of capital equity \\begin{aligned}&D = \\text{the estimated value of next year's dividend}\\\\&r = \\text{the company's cost of capital equity}\\\\&g = \\text{the constant growth rate for dividends, in perpetuity}\\end{aligned} ​D\=the estimated value of next year’s dividendr\=the company’s cost of capital equity​
Using these variables, the equation for the GGM is:
Price per Share \= D r − g \\text{Price per Share}=\\frac{D}{r-g} Price per Share\=r−gD​
A third variant exists as the supernormal dividend growth model, which takes into account a period of high growth followed by a lower, constant growth period. While not accurate for most companies, the simplest iteration of the dividend discount model assumes zero growth in the dividend, in which case the value of the stock is the value of the dividend divided by the expected rate of return. For example, if a company has paid a dividend of $1 per share this year and is expected to maintain a 5 percent growth rate for dividend payment, the next year’s dividend is expected to be $1.05.

Dividend Discount Model – DDM

Debt/EBITDA is a ratio measuring the amount of income generation available to pay down debt before deducting interest, taxes, depreciation, and amortization.

Debt/EBITDA—earnings before interest, taxes, depreciation, and amortization—is a ratio measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortization expenses. Debt to EBITDA \= Debt EBITDA \\text{Debt to EBITDA}= \\frac{\\text{Debt}}{\\text{EBITDA}} Debt to EBITDA\=EBITDADebt​
_Debt =_ Long-term and short-term debt obligations
_EBITDA_ = Earnings before interest, taxes, depreciation, and amortization
To determine the debt/EBITDA ratio, add the company's long-term and short-term debt obligations. Banks and investors looking at the current debt/EBITDA ratio to gain insight on how well the company can pay for its debt may want to consider the impact of interest on debt-repayment ability, even if that debt will be included in new issuance. The debt/EBITDA ratio compares a company's total obligations, including debt and other liabilities, to the actual cash the company brings in and reveals how capable the firm is of paying its debt and other liabilities. This metric is commonly used by credit rating agencies to assess a company's probability of defaulting on issued debt, and firms with a high debt/EBITDA ratio may not be able to service their debt in an appropriate manner, leading to a lowered credit rating.

Debt/EBITDA

The Delphi method is a forecasting process framework based on the results of several rounds of questionnaires sent to a panel of experts.

An Experimental Application of the Delphi Method to the Use of Experts

The Delphi method is a forecasting process framework based on the results of multiple rounds of questionnaires sent to a panel of experts. The Delphi method is a process of arriving at group consensus by providing experts with rounds of questionnaires, as well as the group response before each subsequent round. The group facilitator selects a group of experts based on the topic being examined and sends them a questionnaire with instructions to comment on each topic based on their personal opinion, experience, or previous research. Several rounds of questionnaires are sent out to the group of experts, and the anonymous responses are aggregated and shared with the group after each round. The Delphi method is a forecasting process framework based on the results of multiple rounds of questionnaires sent to a panel of experts.

Delphi Method

The degree of financial leverage (DFL) is a ratio that measures the sensitivity of a company’s earnings per share to fluctuations in its operating income, as a result of changes in its capital structure.

A degree of financial leverage (DFL) is a leverage ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. EPS for BigBox in Year 1 would thus be:
Operating Income of $100 Million  −  $10 Million Interest Expense 100 Million Shares Outstanding \= $ 0 . 9 0 \\frac{\\text{Operating Income of \\$100 Million }-\\text{ \\$10 Million Interest Expense}}{\\text{100 Million Shares Outstanding}}=\\$0.90 100 Million Shares OutstandingOperating Income of $100 Million − $10 Million Interest Expense​\=$0.90
The degree of financial leverage (DFL) is:
$100 Million $100 Million  −  $10 Million \= 1 . 1 1 \\frac{\\text{\\$100 Million}}{\\text{\\$100 Million }-\\text{ \\$10 Million}}=1.11 $100 Million − $10 Million$100 Million​\=1.11
This means that for every 1% change in EBIT or operating income, EPS would change by 1.11%.
Now assume that BigBox has a 20% increase in operating income in Year 2. EPS for BigBox in Year 2 would thus be:
Operating Income of $120 Million  −  $10 Million Interest Expense 100 Million Shares Outstanding \= $ 1 . 1 0 \\frac{\\text{Operating Income of \\$120 Million }-\\text{ \\$10 Million Interest Expense}}{\\text{100 Million Shares Outstanding}}=\\$1.10 100 Million Shares OutstandingOperating Income of $120 Million − $10 Million Interest Expense​\=$1.10 DFL \= % change in EPS % change in EBIT \\text{DFL}=\\frac{\\%\\text{change in EPS}}{\\%\\text{change in EBIT}} DFL\=%change in EBIT%change in EPS​
DFL can also be represented by the equation below:
DFL \= EBIT EBIT  −  Interest \\text{DFL}=\\frac{\\text{EBIT}}{\\text{EBIT }-\\text{ Interest}} DFL\=EBIT − InterestEBIT​
The higher the DFL, the more volatile earnings per share (EPS) will be. A degree of financial leverage (DFL) is a leverage ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure.

Degree of Financial Leverage – DFL

Discounted future earnings is a method of valuation used to estimate a firm's worth. Discover more about the term "discounted future earnings" here.

Discounted future earnings is a valuation method used to estimate a firm's worth based on earnings forecasts. As with any estimate based on forecasts, the estimated value of the firm using the discounted future earnings method is only as good as the inputs – the future earnings, terminal value, and the discount rate. The discounted future earnings method uses these forecasts for the earnings of a firm and the firm's estimated terminal value at a future date, and discounts these back to the present using an appropriate discount rate. Instead, it assumes that cash flows are reinvested and that the firm can grow at a constant rate in perpetuity.
The discounted earnings model is similar to the discounted cash flows (DCF) model, which does not include a terminal value for the firm (see the formula below). Year 1
$750,000 (terminal value)
Using a discount rate of 10%, the present value of the firm is $657,378.72.

Discounted Future Earnings

For noncontrolling, nonmarketable ownership interest, a discount for lack of marketability is often applied to security and investment valuations.

The restricted stock method purports that the only difference between a company's common stock and its restricted stock is the lack of marketability of the restricted stock. Various methods have been used to quantify the discount that can be applied including the restricted stock method, IPO method, and the option pricing method. The option pricing method uses the option's price and the strike price of the option as the determinants of the DLOM. The theory behind DLOM is that a valuation discount exists between a stock that is publicly traded and thus has a market, and the market for privately held stock, which often has little if any marketplace.

Discounts For Lack Of Marketability (DLOM)

A company's earnings are its after-tax net income, meaning its profits. Earnings are the main determinant of a public company's share price.

Form 10-Q Filed 7/23/2001 for Period Ending 6/30/2001

A company's earnings are its after-tax net income. The price-to-earnings ratio, calculated as share price divided by earnings per share, is used by investors and analysts to compare the relative values of companies in the same industry or sector. The earnings yield, or the earnings per share for the most recent 12-month period divided by the current market price per share, is another way of measuring earnings. Earnings are the main determinant of a public company's share price because they can be used in only two ways: They can be invested in the business to increase its earnings in the future, or they can be used to reward stockholders with dividends.
Earnings refer to a company's profits in a given quarter or fiscal year. Since corporate earnings are such an important metric and have a direct impact on share price, managers may be tempted to manipulate earnings figures.

Earnings

An event study is a statistical methodology used to evaluate the impact of a specific event or piece of news on a company and its stock.

An event study is an empirical analysis that examines the impact of a significant catalyst occurrence or contingent event on the value of a security, such as company stock. An event study, also known as event-history analysis, employs statistical methods, using time as the dependent variable and then looking for variables that explain the duration of an event—or the time until an event occurs. An event study, or event-history analysis, examines the impact of an event on the financial performance of a security, such as company stock. Other event studies, such as an interrupted time series analysis (ITSA), compare a trend before and after an event to explain how, and to what degree, the event changed a company or a security. An event study analyzes the effect of a specific event on a company by looking at the associated impact on the company's stock.

Event Study

The expanded accounting equation is derived from the accounting equation and illustrates the different components of stockholder equity in a company.

The expanded accounting equation is derived from the common accounting equation and illustrates in greater detail the different components of stockholders' equity in a company. Paid-In Capital) BRE \= Beginning Retained Earnings, earnings not distributed to stockholders from the previous period R \= Revenue, what’s generated from the ongoing operation of the company E \= Expenses, costs incurred to run operations of the business D \= Dividends, earnings distributed to the stockholders of the company \\begin{aligned}&\\text{Assets} = \\text{Liabilities} + \\text{CC} + \\text{BRE} + \\text{R} - \\text{E} - \\text{D} \\\\&\\textbf{where:}\\\\&\\text{CC} = \\text{Contributed Capital, capital provided by} \\\\&\\text{the original stockholders (also known as Paid-In Capital)} \\\\&\\text{BRE} = \\text{Beginning Retained Earnings, earnings not} \\\\&\\text{distributed to stockholders from the previous period} The common form of the accounting equation is:
Assets \= Liabilities \+ Owner’s Equity where: Liabilities \= All current and long-term debts and obligations Owner’s Equity \= Assets available to shareholders after all liabilities \\begin{aligned} &\\text{Assets} = \\text{Liabilities} + \\text{Owner's Equity}\\\\ &\\textbf{where:}\\\\ &\\text{Liabilities} = \\text{All current and long-term debts} \\\\ &\\text{and obligations}\\\\ &\\text{Owner's Equity} = \\text{Assets available to shareholders} \\\\ &\\text{after all liabilities}\\\\ \\end{aligned} ​Assets\=Liabilities+Owner’s Equitywhere:Liabilities\=All current and long-term debtsand obligationsOwner’s Equity\=Assets available to shareholdersafter all liabilities​
The expanded accounting equation decomposes equity into component parts:
Assets \= Liabilities \+ CC \+ BRE \+ R − The accounting equation whereby Assets = Liabilities + Shareholders' equity is calculated as follows:
**Accounting equation** = $157,797 (total liabilities) + $196,831 (equity) equal $354,628, which equals the total assets for the period.
We could also use the expanded accounting equation to see the effect of reinvested earnings ($419,155), other comprehensive income ($18,370), and treasury stock ($225,674). * This is the capital provided by the original stockholders (also known as paid-in capital).
**Beginning retained earnings:** Retained earnings are the earnings not distributed to the stockholders from the previous period.

Expanded Accounting Equation

Factor investing is looks at statistical similarities among investments to identify common factors to leverage in an investing strategy.

Factor investing is a strategy that chooses securities on attributes that are associated with higher returns. Since traditional portfolio allocations, like 60% stocks and 40% bonds, are relatively easy to implement, factor investing can seem overwhelming given the number of factors to choose from. Rather than look at complex attributes, such as momentum, beginners to factor investing can focus on simpler elements, such as style (growth vs. value), size (large cap vs. small cap), and risk (beta). SMB accounts for publicly traded companies with small market caps that generate higher returns, while HML accounts for value stocks with high book-to-market ratios that generate higher returns in comparison to the market. Smart beta is a common application of a factor investing strategy.
Factor investing, from a theoretical standpoint, is designed to enhance diversification, generate above-market returns and manage risk. Portfolio diversification has long been a popular safety tactic, but the gains of diversification are lost if the chosen securities move in lockstep with the broader market. There are two main types of factors that have driven returns of stocks, bonds, and other factors: macroeconomic factors and style factors.

Factor Investing

Fair value can refer to the agreed price between buyer and seller or, in the accounting sense, the estimated worth of various assets and liabilities.

Discussion Paper: Fair Value Measurements

"Fair value" is a term with several meanings in the financial world. Fair value is a broad measure of an asset's intrinsic worthwhile market value refers solely to the price of an asset in the marketplace as determined by the laws of demand and supply. Also, the fair value of an asset tends to be more static, especially in the context of financial statements, while its market value is at the whims of market forces. Fair value is a broad measure of an asset's worth and is not the same as market value, which refers to the price of an asset in the marketplace. The International Accounting Standards Board defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on a certain date, typically for use on financial statements over time.

Fair Value

Financial performance measures how well a firm uses assets from operations and generates revenues. Read how to analyze financial performance before investing.

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13 Financial Performance Measures Managers Should Monitor

Table of Contents
What Is Financial Performance?
How Financial Performance Works
Recording Financial Performance
Financial Statements The most widely used financial performance indicators include:
Gross profit /gross profit margin: the amount of revenue made from sales after subtracting production costs, and the percentage amount a company earns per dollar of sales
Net profit/net profit margin: the amount of revenue from sales after subtracting all related business expenses and taxes, and the related ratio of earnings per dollar of sales
Working capital: immediately available or highly liquid funds, used to finance day-to-day operations
Operating cash flow: the amount of money being generated by regular business operations
Current ratio: a measure of solvency—the total assets divided by total liabilities
Debt-to-equity ratio: a company’s total liabilities divided by its shareholder equity
Quick ratio: another solvency measure, that calculates the percentage of very liquid current assets (cash, securities, accounts receivables) against total liabilities
Inventory turnover: how much inventory is sold within a certain period, and how often the entire inventory was sold
Return on equity: net income divided by shareholder equity (a company’s assets minus its debts)
There are other specialized financial performance indicators that are more specific to certain industries. Other strategies include:
Improving cash flow: keep better track of income/outgoes, step up collection of accounts receivable, adjust payment options and prices if necessary
Selling unwanted/unused assets
Revamping budgets
Reducing expenses
Consolidating or refinancing current debt; applying for government loans or grants
Analyzing financial statements and performance indicators, ideally with a professional's help
While there are many types of financial statements, the big three are:
1.  Balance sheet, which lists a business’ assets/revenues, liabilities/obligations, and owners’ equity at a specific point in time. Financial statements used in evaluating overall financial performance include the balance sheet, the income statement, and the statement of cash flows. The balance sheet, the income statement, and the cash flow statement are three of the most significant financial statements used in performance analysis.

Financial Performance

The Forbes 500 was an annual list of the top 500 U.S. companies published by Forbes magazine. It was discontinued in 2003.

Global 2000: The World's Largest Public Companies

The Forbes 500 was an annual list of the top 500 U.S. companies published by _Forbes_ magazine. In 2003, _Forbes_ stopped producing the Forbes 500 list and replaced it with a more extensive list—the Forbes Global 2000, a list of 2,000 companies. In addition to the Forbes Global 2020, the magazine provides other rankings, including the Forbes 400, a list of the wealthiest Americans, and the Forbes Real-Time Billionaires list. The Forbes 500 was an annual list of the top 500 U.S. companies published by _Forbes_ magazine. The Fortune 500 from _Fortune_ magazine is also a list of the largest 500 U.S. companies, and it was a competitor of the Forbes 500.

Forbes 500

Fourier analysis uses statistics to find patterns in a time series.

Fourier Analysis for Stock Price Forecasting: Assumption and Evidence

Fourier analysis is a type of mathematical analysis that attempts to identify patterns or cycles in a time series data set which has already been normalized. By first identifying and removing any effects of spurious trends or other complicating factors from the data set, the effects of periodic cycles or patterns can be identified more accurately, leaving the analyst with a better estimate of the direction that the data under analysis will take in the future.
Fourier analysis is a mathematical technique that decomposes complex time series data into components that are simpler trigonometric functions. The idea is to be able to remove noise or confounding factors from the data set in order to identify true patterns or trends.
Fourier analysis has been applied to stock trading, but research examining the technique has found little to no evidence that it is useful in practice.
Named after the nineteenth-century French mathematician and physicist Jean Baptiste Joseph Fourier (1768-1830) Fourier analysis is a type of mathematical analysis that attempts to identify patterns or cycles in a time series data set which has already been normalized. For example, suppose a manufacturing company wanted to know what stage of its price cycle its main raw material was in. Because inflation would constantly be increasing the dollar price of the commodity over time, an analyst would remove the effects of inflation from the commodity's historical prices first.

Fourier Analysis

Free cash flow yield is a financial ratio that standardizes the free cash flow per share a company is expected to earn as compared to its market value per share.

Free cash flow yield is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. F r e e   C a s h   F l o w   Y i e l d \= F r e e   C a s h   F l o w   p e r   S h a r e M a r k e t   P r i c e   p e r   S h a r e Free\\ Cash\\ Flow\\ Yield=\\frac{Free\\ Cash\\ Flow\\ per\\ Share}{Market\\ Price\\ per\\ Share} Free Cash Flow Yield\=Market Price per ShareFree Cash Flow per Share​
Generally, the lower the ratio, the less attractive a company is as an investment, because it means investors are putting money into the company but not receiving a very good return in exchange. For investors preferring cash flow yield as a valuation metric over valuation multiples, the free cash flow yield would be a more accurate representation of investment returns, compared to yields based on cash flow not fully returnable or accounting earnings. The free cash flow yield gives investors an idea of how financially capable a company is at having quick access to cash in case of unexpected debts or other obligations, or how much cash would be available if the company had to be liquidated. Evaluating an investment using cash flow yield can be more intuitive than a valuation multiple, as cash flow yield directly shows the cash returned as a percentage of the investment.

Free Cash Flow Yield

Funds transfer pricing (FTP) analyzes bank funding contributes to areas of strength and weakness within the bank.

Funds transfer pricing (FTP) is a system used to estimate how funding is adding to the overall profitability of a company. The single-rate and multi-rate methods provide two basic systems for internal FTP analysis. FTP sees its most significant use in the banking industry where financial institutions use FTP as a way to analyze the strengths and failings of the firm within the institution. With the single-rate method, all assets and liabilities are assigned a single transfer rate regardless of the nature of the product. In these breakouts, some of the more granular details of consideration may also include the funding liquidity spread, the contingent liquidity spread, the credit spread, the option spread, and the basis spread.

Funds Transfer Pricing (FTP)

A fully depreciated asset has already expended its full depreciation allowance where only its salvage value remains.

A fully depreciated asset is a property, plant or piece of equipment (PP&E) which, for accounting purposes, is worth only its salvage value. Assume this value is $5,000, and the company uses the straight-line method of depreciation.
Therefore, the company must subtract the residual value of zero from the $50,000 initial value and divide by the asset's useful life of 10 years to arrive at its yearly depreciation, which is ($50,000-$5,000)/10 = $4,500. If a company takes a full impairment charge against the asset, the asset immediately becomes fully depreciated, leaving only its salvage value (also known as terminal value or residual value). The depreciation method can take the form of straight-line or accelerated (double-declining-balance or sum-of-year), and when accumulated depreciation matches the original cost, the asset is now fully depreciated on the company's books. A fully depreciated asset is one which has experienced its full useful life and its remaining value is just its salvage value.

Fully Depreciated Asset

Functional decomposition is a method of analysis that dissects a complex process to show its individual elements.

Functional decomposition is a method of analysis that dissects a complex process in order to examine its individual elements. Also, the decomposition of a process or function into smaller sub-functions can help project managers to determine how the individual functions or tasks help to achieve the overall project's goal. A functional decomposition diagram contains the overall function or task as well as the necessary sub-functions or tasks needed to achieve the overall objective. Both large and small businesses use functional decomposition in their project analysis to determine whether a project is on target or if there are smaller sub-functions that are holding up the process. Functional decomposition breaks down a large, complex process into an array of smaller, simpler units or tasks, fostering better understanding of the overall process.

Functional Decomposition

Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth over time.

Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The formula for the FV of an investment earning compounding interest is:
F V \= I × ( 1 \+ R ) T where: I \= Investment amount R \= Interest rate T \= Number of years \\begin{aligned}&\\mathit{FV} = \\mathit{I} \\times ( 1 + \\mathit{R})^T \\\\&\\textbf{where:}\\\\&\\mathit{I} = \\text{Investment amount} \\\\&\\mathit{R} = \\text{Interest rate} \\\\&\\mathit{T} = \\text{Number of years}\\end{aligned} ​FV\=I×(1+R)Twhere:I\=Investment amountR\=Interest rateT\=Number of years​
Using the above example, the same $1,000 invested for five years in a savings account with a 10% compounding interest rate would have an FV of $1,000 × \[(1 + 0.10)5\], or $1,610.51. If an investment earns simple interest, then the FV formula is:
F V \= I × ( 1 \+ ( R × T ) ) where: I \= Investment amount R \= Interest rate T \= Number of years \\begin{aligned} &\\mathit{FV} = \\mathit{I} \\times ( 1 + ( \\mathit{R} \\times \\mathit{T} ) ) \\\\ &\\textbf{where:}\\\\ &\\mathit{I} = \\text{Investment amount} \\\\ &\\mathit{R} = \\text{Interest rate} \\\\ &\\mathit{T} = \\text{Number of years} \\\\ \\end{aligned} ​FV\=I×(1+(R×T))where:I\=Investment amountR\=Interest rateT\=Number of years​
For example, assume a $1,000 investment is held for five years in a savings account with 10% simple interest paid annually. There are two ways of calculating the FV of an asset: FV using simple interest, and FV using compound interest. The following year, however, the account total is $1,100 rather than $1,000; so, to calculate compounded interest, the 10% interest rate is applied to the full balance for second-year interest earnings of 10% × $1,100, or $110.

Future Value (FV)

The Graham number is the upper bound of the price range that a defensive investor should pay for a stock.

Table of Contents
What Is the Graham Number?
Understanding the Graham Number
Graham Number FAQs The Graham number is normalized by a factor of 22.5, to represent an 'ideal' P/E ratio of no more than 15x and a P/B of 1.5x.
22.5   ×  (earnings per share)  ×  (book value per share) \\sqrt{22.5\\ \\times\\ \\text{(earnings per share)}\\ \\times\\ \\text{(book value per share)}} 22.5 × (earnings per share) × (book value per share)​
Earnings per share (EPS) is calculated as a company's net profit divided by the number of outstanding shares of its common stock. The Graham number (or Benjamin Graham's number) measures a stock's fundamental value by taking into account the company's earnings per share (EPS) and book value per share (BVPS).
The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. The 22.5 figure is included in the calculation to account for Graham's belief that the price-to-earnings (P/E) ratio should not be over 15x and the price-to-book (P/B) ratio should not be over 1.5x (thus, 15 x 1.5 = 22.5).
The Graham number can thus be alternatively calculated as:
15   ×   1.5   ×   ( net income shares outstanding )   ×   ( shareholders’ equity shares outstanding ) \\sqrt{15\\ \\times\\ 1.5\\ \\times\\ \\left(\\frac{\\text{net income}}{\\text{shares outstanding}}\\right)\\ \\times\\ \\left(\\frac{\\text{shareholders' equity}}{\\text{shares outstanding}}\\right)} 15 × 1.5 × (shares outstandingnet income​) × (shares outstandingshareholders’ equity​)​
Essentially, this second method of calculation is equivalent to the first, wherein EPS = net income/shares outstanding, and book value is another term for shareholders’ equity. The Graham number takes a company's per-share metrics and normalizes it based on a recommended upward limit for value investors of 15x P/E and 1.5x P/B.
Benjamin Graham is one of the founding fathers of value investing, and a financial guru to many famous value investors such as Warren Buffett.

Graham Number

GMV or gross merchandise value is the total value of goods sold via customer-to-customer (C2C) or e-commerce platforms. Check out the pros and cons of GMV.

Table of Contents
What Is Gross Merchandise Value (GMV)? GMV means gross merchandise value or gross merchandise volume, usually referring to the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site. The Bottom Line
Gross merchandise value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site. Gross merchandise value (GMV) is the total value of goods sold by a customer-to-customer (C2C) exchange site, but the metric is often applied to other types of retailers. Understanding Gross Merchandise Value (GMV)
Advantages and Disadvantages of Gross Merchandise Value (GMV)
Customer-to-Customer Retailers
Example of Gross Merchandise Value (GMV)

Gross Merchandise Value (GMV)

Gross sales is a metric for the overall sales of a company, unadjusted for costs incurred in generating those sales, as well as things like discounts or returns from customers. It's calculated with a simple equation, where all sales invoices or related invoices are totaled.

Gross sales is a metric for the total sales of a company, unadjusted for the costs related to generating those sales. 1:21
Gross sales \= Sum of all sales receipts \\text{Gross sales} = \\text{Sum of all sales receipts} Gross sales\=Sum of all sales receipts Net sales are calculated by deducting sales allowances, sales discounts, and sales returns from gross sales. When gross sales are presented on a separate line, the figure is often misleading, because it tends to overstate the amount of sales performed and inhibits readers from determining the total of the various sales deductions. Gross sales is a metric for the total sales of a company, unadjusted for the costs related to generating those sales.

Gross Sales

The Hamada equation is a fundamental analysis method of analyzing a firm's cost of capital as it uses additional financial leverage and how that relates to the overall riskiness of the firm.

The Hamada equation is a fundamental analysis method of analyzing a firm's cost of capital as it uses additional financial leverage, and how that relates to the overall riskiness of the firm. The formula for the Hamada equation is:
β L \= β U \[ 1 \+ ( 1 − T ) ( D E ) \] where: β L \= Levered beta β U \= Unlevered beta\T \= Tax rate D / E \= Debt to equity ratio\* \\begin{aligned} &\\beta\_L = \\beta\_U \\left \[ 1 + ( 1 - T) \\left ( \\frac{ D }{ E } \\right ) \\right \]\\\\ &\\textbf{where:} \\\\ &\\beta\_L = \\text{Levered beta} \\\\ &\\beta\_U = \\text{Unlevered beta\*} \\\\ &T = \\text{Tax rate} \\\\ &D/E = \\text{Debt to equity ratio\*} \\\\ \\end{aligned} ​βL​\=βU​\[1+(1−T)(ED​)\]where:βL​\=Levered betaβU​\=Unlevered beta\*T\=Tax rateD/E\=Debt to equity ratio\*​
\Unlevered beta is the market risk of a company without the impact of debt.
\Debt-to-equity ratio is a measure of a company's financial leverage.
The Hamada equation is calculated by:
1.  Dividing the company’s debt by its equity.
2.  Finding one less the tax rate.
3.  Multiplying the result from no. 1 and no. 2 and adding one.
4.  Taking the unlevered beta and multiplying it by the result from no. 3. The Hamada equation is a fundamental analysis method of analyzing a firm's cost of capital as it uses additional financial leverage, and how that relates to the overall riskiness of the firm. The higher the Hamada equation beta coefficient, the higher the risk associated with the firm. The Hamada equation is a method of analyzing a firm's cost of capital as it uses additional financial leverage.

Hamada Equation

The Harvard MBA Indicator correlates market performance to Harvard MBAs who take market-related jobs.

2017 Harvard MBA Indicator Is Still Bullish

The Harvard MBA Indicator is a contrarian long-term stock market indicator that evaluates the percentage of Harvard Business School MBA graduates that accept "market sensitive" jobs. The Harvard MBA Indicator generates long-term market signals based on the proportion of new Harvard MBA's who take jobs in the securities markets. According to Soifer, the Harvard MBA Indicator produces far more sell signals than buy signals. The Harvard MBA Indicator gave sell signals in 1987 and in 2000, which were both terrible years for the stock market. The Harvard MBA Indicator generally produces more sell than buy signals, and correctly predicted the 1987, 2000, and 2008 bear markets in stocks.

Harvard MBA Indicator

Headline earnings are a basis for measuring earnings per share implemented by the Institute of Investment Management and Research.

The Definition of IIMR Headline Earnings: Issue 1 of Statement of investment practice

Merck Announces Third-Quarter 2017 Financial Results

Headline earnings refer to a method of reporting corporate earnings based entirely on operational, trading, and capital investment activities achieved during the previous period. Because headline earnings make these exclusions, it provides a better picture of a how company operates on an ongoing basis, where one-time charges or special items that are unlikely to occur again can give an unfair impression of true operations. A company's quality of earnings is important, so investors need to consider the validity of headline earnings and the exclusions that it makes on a case-by-case basis in order to avoid being misled or misinformed. By excluding asset sales, discontinued operations, restructuring charges and write-downs, the headline earnings number shows the profitability of a company's core business. Headline earnings refer to a method of reporting corporate earnings based entirely on operational, trading, and capital investment activities achieved during the previous period.

Headline Earnings

Hidden values undervalued assets not accurately reflected in a company's share price.

Hidden values are assets that are undervalued on a company's balance sheet and therefore may not be incorporated into or reflected in the company's share price. A value investor will determine a fair value in any number of ways, depending on the type of company, and then compare this intrinsic value to the value accorded to the security by the market. If the discount is attractive enough for this value investor, they will buy the shares and patiently await the potential convergence of the current market value to the intrinsic value. An asset that is assigned by a company a certain value on the balance sheet to conform to generally accepted accounting principles (GAAP) may be worth more in terms of fair market value. The value investor would separately calculate the current market value of their properties in the determination of whether or how much of a discount to intrinsic value exists.

Hidden Value

High Minus Low (HML), also referred to as the value premium, is one of three factors used in the Fama-French three-factor model.

CAPM Vs Fama-French Three-Factor Model: An Evaluation of Effectiveness in Explaining Excess Return in Dhaka Stock Exchange

The use of CAPM and Fama and French Three Factor Model: portfolios selection

Table of Contents
What Is High Minus Low (HML)?
Understanding High Minus Low (HML) Fama and French’s Five-Factor Model
HML Finance FAQs
High Minus Low (HML), also referred to as the value premium, is one of three factors used in the Fama-French three-factor model. The economists Eugene Fama and Kenneth French developed the Fama and French Three-Factor Model in order to gap the limitations posed by CAPM.﻿﻿ Empirical results from a study published in 2012 point out that the Fama and French Three-Factor Model is better than CAPM at explaining expected returns. High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio. Founded in 1992 by Eugene Fama and Kenneth French, the Fama-French three-factor model uses three factors, one of which is HML, in order to explain the excess returns in a manager’s portfolio.

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