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Beta

Beta

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Published by: abhijeet1828 on Feb 03, 2010
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07/12/2013

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Where do you see this?
In technical analysis reports.
What does it mean?
Beta is the statistical measure of the risk of an investment. It measures the volatility of, say, astock or a fund, in relation to the overall market.Beta is used by investors to assess risk in the stocks they buy or sell.The overall market has a beta of 1 and individual stocks are ranked according to how much theydeviate from the market.A stock that swings more than the market over time has a beta above 1. And if a stock moves lessthan the overall market, its beta is less than 1.In a nutshell, a stock with a beta above 1 is more volatile than the market, while one with a betabelow 1 is less volatile.
Why is it important?
High-beta stocks are supposed to be riskier but provide potential for higher returns. Examples of high-beta Singapore stocks are DBS Group Holdings, Keppel Corp and CapitaLand. Low-beta stockspose less risk but also lower returns. Some examples are ComfortDelGro, ST Engineering andSingapore Post.
So you want to use the term? Just say...
'I like stocks that have strong balance sheets and are low beta as they will be resilient even in themidst of uncertainty.'
What Does
Leverage
Mean?
1. The use of various financial instruments or borrowed capital, such as margin, toincrease the potential return of an investment.2. The amount of debt used to finance a firm's assets. A firm with significantly more debtthan equity is considered to be highly leveraged.Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.
Leverage
is a business term that refers to borrowing. If a business is "leveraged," itmeans that the business has borrowed money to finance the purchase of assets. Theother way to purchase assets is through use of owner funds, orequity.One way to determine leverage is to calculate theDebt-to-Equity ratio,showing howmuch of the assets of the business are financed by debt and how much byequity(ownership).
 
Leverage is not necessarily a bad thing. Leverage is useful to fund company growthand development through the purchase of assets. But if the company has too muchborrowing, it may not be able to pay back all of its debts.The degree to which aninvestororbusinessis utilizing borrowedmoney.Companies  that are highly leveraged may beat riskof bankruptcyif they are unable to make paymentson theirdebt; they may also be unable to find newlendersin the future. Leverage is not always bad, however; it can increase the shareholders'returnontheirinvestmentand often there aretaxadvantages associated withborrowing.
alsocalled
Free cash flow to equity:
This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. ...
Calculated as:
FCFE = Net Income - Net Capital Expenditure - Change in NetWorking Capital + New Debt - Debt Repayment
 
Investopedia explains
Free Cash Flow to Equity - FCFE 
FCFE is often used by analysts in an attempt to determine the value of a company.This alternative method of valuation gained popularity as the dividend discount model'susefulness became increasingly questionable.
What Does
Free Cash Flow For The Firm - FCFF 
Mean?
 A measure of financial performance that expresses the net amount of cash that isgenerated for the firm, consisting of expenses, taxes and changes in net working capitaland investments.Calculated as:
Investopedia explains
Free Cash Flow For The Firm - FCFF 
This is a measurement of a company's profitability after all expenses and reinvestments.It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negativevalue, on the other hand, would indicate that the firm has not generated enough revenueto cover its costs and investment activities. In that instance, an investor should digdeeper to assess why this is happening - it could be a sign that the company may havesome deeper problems.
What Does
Free Cash Flow Yield 
Mean?
 An overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio iscalculated by taking the free cash flow per share divided by the share price. To illustrate:
 
Investopedia explains
Free Cash Flow Yield 
Free cash flow yield is similar in nature to the earnings yield metric, which is usuallymeant to measure GAAP earnings per share divided by share price. Generally, the lower the ratio, the less attractive the investment is and vice versa. The logic behind this is thatinvestors would like to pay as little price as possible for as many earnings as possible.Some investors regard free cash flow (which takes into account capital expenditures andother ongoing costs a business incurs to keep itself running) as a more accuraterepresentation of the returns shareholders receive from owning a business, and thusprefer to free cash flow yield as a valuation metric over earnings yield.
What Does
Discount Cash Flow - DCF 
Mean?
 A valuation method used to estimate the attractiveness of an investment opportunity.Discounted cash flow (DCF) analysis uses future free cash flow projections anddiscounts them (most often using the weighted average cost of capital) to arrive at apresent value, which is used to evaluate the potential for investment. If the value arrivedat through DCF analysis is higher than the current cost of the investment, the opportunitymay be a good one.Calculated as: Also known as the Discounted Cash Flows Model.
Investopedia explains
Discounted Cash Flow - DCF 
There are many variations when it comes to what you can use for your cash flows anddiscount rate in a DCF analysis. Despite the complexity of the calculations involved, thepurpose of DCF analysis is just to estimate the money you'd receive from an investmentand to adjust for the time value of money.Discounted cash flow models are powerful, but they do have shortcomings. DCF ismerely a mechanical valuation tool, which makes it subject to the axiom "garbage in,garbage out". Small changes in inputs can result in large changes in the value of acompany. Instead of trying to project the cash flows to infinity, terminalvalue techniques are often used. A simple annuity is used to estimate the terminal valuepast 10 years, for example. This is done because it is harder to come to a realisticestimate of the cash flows as time goes on.

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