Dividend Discount Model: Share Repurchase Programs
In corporate finance we studied that companies had an option when it came to compensating their equity shareholders. They could both pay these shareholders cash dividends from the earnings of the current year or alternatively they could conduct a share repurchase program and buy back some shares from the same proceeds. The monetary effect would […]
Why must corporations be taxed?
We live in a capitalist world today. This is the era of multinational corporations. Today, there are many companies that are more powerful as compared to entire nations. This is the reason that they sometimes lobby hard to avoid taxes. Many times, when these companies are in a dominant position, they even threaten governments that […]
How Corporate Taxes Impact Corporate Behaviour?
Corporate taxes form a significant portion of the expenses borne by multinational corporations. These corporations are almost obsessed with efficiency. They continuously try to reduce their expenses so that their profitability can be increased. This is the reason why these companies are very sensitive even to minor changes in the tax regime. In this article, […]
Arguments against Tax Competition
Proponents of the free market generally believe that competition is good for the economy. They argue in favor of the competition every time. Hence, it is natural for them to feel that competition in taxes is also good. The general argument is that competition forces the governments to rationalize and become more efficient. However, there […]
Cash Flow Types in Fixed Income Securities
The first thing that any investor related to fixed income markets first notices about the market is the sheer variety of the instruments being traded. A large variety also means that the trading in bonds becomes more complex. Investors need to understand the different types of fixed-income securities that are available in the market. Fixed […]
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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