What is Illusion of Control Bias and How to Avoid it
Any stock market around the world is huge in size. It is made up of many participants who regularly buy and sell assets. Since there are so many buyers and sellers, and the money is spread out amongst them, none of them has complete control over the events that take place in the market. The […]
Dividend Discount Valuation: H Model
The dividend discount model makes a lot of assumptions. Some of these assumptions are not considered to be viable by analysts. For instance, consider the assumption regarding growth rates. During the horizon period, the analyst estimates that the growth rate will be high, let’s say 10% or 12%. Then, when the terminal value is to […]
Capital Controls: Meaning, Types, Benefits and Downside
What are Capital Controls ? Capital controls are when the governments of nations restrict the inflow and outflow of capital into the economy. In a free market economy, there should be and would be no borders. However, this is not the case in reality. Countries want to ensure that their economies stay relatively stable in […]
Assumptions Used In Equity Valuation
Equity valuation is about guessing what the value of an organization is expected to be a decade from now or an even bigger time horizon. Obviously, the financial future, just like future in general is difficult to predict. However, in equity valuation, one cannot proceed further until some assumptions are made about the future. Every […]
The TikTok Business Model
When we talk about social media, we often refer to companies like Facebook, Instagram, Twitter, and LinkedIn. However, in the past few years, another company has emerged as a huge player in the social media space. This company has created an application that is known for having high levels of user engagement. The application being […]
Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt
The cash flow to debt ratio tells investors how much cash flow the company generated from its regular operating activities compared to the total debt it has. For instance if the ratio is 0.25, then the operating cash flow was one fourth of the total debt the company has on its books. This debt includes interest payments, principal payments and even lease payments to cover off balance sheet financing.
However, this may not be the case. Companies have access to a variety of financing schemes. Some of these schemes include interest only payments, bullet payments, balloon payments, negative amortization, so on and so forth. In such innovative amortization, there may be years when the company has to pay a lot of interest and other years when it has to pay none. Hence the present years figures may not be indicative of the future.
Earlier analysis used earnings because at that time credit periods were small or nonexistent and therefore earnings to some extent meant cash flow. However, with the proliferation of credit, the distinction has been widened.
A company may book earnings immediately and not receive cash for years on end. Thus creditors have their eyes set on cash flow ratios.
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