Convertible Notes and Startup Funding
Startup firms usually receive their funding in the form of debt or equity. Some newer ways of providing funding to the startups, which are different from both debt and equity, are still being explored. However, there are many creative ways of funding startups within the debt-equity realm as well. One of these ways is called […]
Portfolio Management Models
Portfolio management refers to the art of managing various financial products and assets to help an individual earn maximum revenues with minimum risks involved in the long run. Portfolio management helps an individual to decide where and how to invest his hard earned money for guaranteed returns in the future. Portfolio Management Models Capital Asset […]
Modeling Discounted Cash Flows
Discounted Cash Flow (DCF) analysis is the bedrock of modern-day financial analysis. It is for this reason that financial modelers use discounted cash flow analysis extensively. In fact, the DCF analysis may have been the reason why the field of financial modeling came into existence in the first place. In this article, we will have […]
How Business Cycles Affect Start-Up Companies
Start-up businesses are affected by a wide variety of factors. Macroeconomic factors such as business cycles affect start-up organizations as much as they affect any other businesses. In fact, since start-ups are in a nascent stage, they face a bigger impact from these business cycles. Start-ups that face recession or slowdown early after their inception […]
Longevity Bonds and Longevity Derivatives
In the previous article, we have already seen how pension funds have been adversely affected by an increasing amount of longevity risk. The increase in the average lifespan of people is definitely a positive development. However, it has an adverse impact on the financial situation of most pension funds. In order to mitigate longevity risks, […]
Most investors do not invest directly in the company i.e. they are not promoters of the company. Rather they invest in the company through the stock market. This means that they buy shares at a certain value and make a profit only when the price of the shares go up or they get regular dividends from their investments or a combination of both. This is the reason why investors are particularly interested in how the current share price of the company compares with its fundamentals. Market related ratios help investors use the numbers stated on the balance sheet to better their understanding of the same.
Market related ratios compare the current stock price of the company which is being quoted on the stock exchange to various balance sheet, income statement and cash flow items. One component of all market related ratios is the current stock price.
It is important to understand that the quoted stock price is not the actual price of the share. The stock price just means the price that you are paying to obtain a fraction of the earnings of the company. So if you are buying 1 share at USD 10 and there are 100 shares, you own 1% of the company. This 1% ownership means you get 1% of the profit, which in our case is let’s say USD 2. Hence the actual price you are paying is USD 10 to buy a future recurring profit stream of USD 2 per share. Of course these profits subject to risks and that is what makes investing challenging.
Since the quoted stock price is not the actual price, market related ratios offer a window to analysts using which they can gauge whether a stock is over or under valued and then act accordingly.
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