Behavioral Finance – An Introduction
As investors, we are often perplexed by the behavior of the markets. For instance, we may find a stock to be overvalued. Hence, ideally, the stock should drop in value and become fairly priced. However, in reality, it may keep on increasing in value, and the quantum of overvaluation may increase vastly. Similarly, we may […]
Level Based Sponsorship (Tiered Sponsorship)
In the previous articles, we have already seen what sponsorship is and what are the various advantages and disadvantages which are associated with sponsorship. However, up until now, we have been assuming a one-to-one relationship between sponsors and the sporting league. However, it is possible to have multiple sponsors which sponsor the same league. This […]
Steps to Create a Financial Model
Financial modeling is not a perfect science. In fact, it would be fair to say that financial modeling is part art and part science. This is because the specific steps required to create a financial model cannot be chalked out. However, there is a broad framework which needs to be followed in order to create […]
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 […]
Dollar-Cost Averaging
There are two predominant schools of thought about the stock market. The views of these schools of thought are somewhat contradictory. There is one school of thought which advises investors to stay away from stock market investments since they are inherently volatile. You will often see people who believe in this school of thought advocating […]
Return on Equity (ROE) is probably the most important number in the financial universe. Every company is driven by profit and Return on Equity (ROE) is considered to be the best indicator of the profitability of a company. Debt holders just want to get their interest and principle back i.e. they will obtain a fixed rate of return. On the other hand equity holders get a variable return. For this reason, this number is considered more important than Return on Assets or Return On Invested Capital.
Return On Capital Invested = Profit After Tax (PAT) / Equity
Return on Equity (ROE) is one of the few ratios that uses after tax profits
Return on equity tells the shareholders how many dollars of post-tax earnings, the company generated for every dollar of equity capital it had.
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