From the looks of it, it looks like a well established medical company that has a strong foot hold in the global scale, they produce, make an engineer medical stuff mainly to do with sleep disorders.
Thing is, on the balance sheet its equity is only around ~400m while the cap is like ~7B
Why is it trading for more than 10x book value? I could expect something like 2-3x because of its reputation and its strong growth/presence in the industry, but seriously 10x book?
How the fuck do I tell if something is overpriced or underpriced, how do I put a monetary value on its presence and establishment??
Fuck I need help /biz/
>how do I put a monetary value on its presence and establishment??
>How the fuck do I tell if something is overpriced or underpriced
>How do I tell if people arent just riding the hype train like ethereum and ride it '2 DA MOONZ' and its actually a current bubble??
If the market puts a price on it and we dont know the fundamental reasoning or at least part of the reasoning, isnt this just gambling?
Is the truth even out there? Ive been spending days trying to conjure up a reason why but I dont even know where to begin, I just get more questions as I do more research
>If I knew the answer to the rest I would be in a much nicer place and not bother to spend my evening on 4chan.
Same here, but frankly I have no idea who to talk to about finances, 4chan is literally my best option
Whoops made a type in the OP.
Yes, market cap 4.7B, on their balance sheet provided by their website, as of 2015 their equity was ~400m (0.4B), so theyre trading at around 10x Book.
No idea hwere you got 6.8m for book value.
Price to book ratios aren't really used that often except in big established business, usually in manufacturing type industries. Instead investors typically focus on price to earning ratios, we want to know how much is it going to cost to buy earnings in a company. In growing business the rate of earnings growth becomes extremely important, even more important that current earnings.
I think that's what you're looking at here. This company has very high growth in EPS (about 12.4%,) high sales growth (27%,) and growth in cash flows from operations. Those growth rates are very, very strong. Typically we see EPS growth rates around 3-5%.
A very simple formula for a stock price is
p = e / (r-g) where;
p = stock price
e = earnings per share
r = required rate of return on stocks
g = earnings growth rate
Notice that the difference between r and g is whats most important. Even with really small earnings, as g approaches r the price increases to infinity.
Solving for g in your example:
With a price of 8.4, earnings/share of .226, a required rate of return on equity of 10.5% (assumed), g turns out to be about 8%. That means the market expects earnings to grow at about 8% indefinitely. Given that the current growth rate is 12.4%, its not really that unreasonable of a price.
I see, I see thanks for this information
But how does dividends play a role in this? With the same stock I am talking about it gives out a ~10% dividend bi-annually (not 100% sure but I know the dividend is about 10%)
Doesnt this mean that it is even better than what we expected?
Just a question about that formula though, ive seen some others and the main thing I have to ask is "is this trustable?" I ask this because lets face it, im just plugging numbers into a small formula which is going to risk my real life money, is it trustable? or is this just used as a general guideline not as your buy or sell decision
If that didnt make any sense I guess im asking "How much faith should I put into that formula"
I should address the P/E ratio too.
That's the first thing I typically look at as a quick gauge for overpriced/underpriced. They're trading at 37 which translates to a return on equity investment of 2.7%, for comparison the S&P500 is around 6%. While your stocks roe is low, its not absurd given the high rate of growth.
Investors will be willing to pay relatively little for current earnings when the growth rate is so much higher than average.
Dividends are nice on paper and important old-fashoned financial models, but in reality they have no impact. Regardless of if the earnings are paid out, retained by the company, or used for repurchases, the stock price should be exactly the same. This parity condition works out in theory and is substantiated by the latest data. When a company pays a 1$ dividend, the stock price drops by $1.
To simplify, the reason you invested in the company is because you thought they could earn a higher rate of return on your money than you can. Given that, why would you want them to give it back to you? Aren't you just going to reinvest it anyway?
>is this trustable
Yes, this is a fundamental formula taught in beginning finance classes and included all the way up to the highest levels of CFA institute curriculum, it's an extremely solid model.
However, as I mentioned it is "very simple." It's assuming earnings are an annuity growing in perpetuity, which they are not. The company will not sustain a constant growth rate, g will decrease over time due to competition until they reach a much lower economic profit. In practice we estimate a decreasing rate of earnings over some period of time, starting with the current rate and diminishing to a steady state growth rate. We use that to estimate a current price.
That takes a bit more work and I was just going for something quick and dirty.
Yes, just use whatever you can find for your country. Ideally you would use the average PE of the companies in it's peer group but thats a bit of a hassle, especially in a smaller country. You could try to find an index that corresponds to the sizes of NZ companies. If this is a NZ mid-cap, see if you can find a mid cap NZ index.
Regardless you're going to be doing a comparison, which is a big approximation anyway. So just try to consider the differences between your company and the index when looking at the result.
thanks a lot senpai, youre the real MVP.
Do you recommend anywhere to learn stock analysis type of things such as what you described briefly? I try to learn some finance in my spare time while I focus on my major in university (cs 2nd year) because I believe business sense is an important fundamental for any field of work.
I have currently read "The intelligent investor" and currently hold "Security analysis 6th ed" however I havent read Security analysis yet since uni is starting again soon
I can't really point you to a quick start guide or anything. It takes time to learn. You could start with some beginning finance textbooks, maybe just read what the finance guys are reading at your school.
The CFA exams are highly regarded, you could glance at the level 1 curriculum. It covers about the first 1.5 years of undergrad finance, including pre reqs like econ and basic accounting. Its 6 textbooks (although 1 is ethics which you can skip,) but there's abbreviated books from Kaplan which are a bit shorter. Also, Kaplan has video lectures which could make it easy to learn. All this stuff can be pirated BTW.
Honestly though, just focus on school for now, get good grades, and learn stocks after you graduate.
CS and finance are an excellent combination in my opinion. The finance industry includes a ton of analytics and those guys get paid bank. So many finance guys are trying to learn programming to model and back test different strategies. It's something to keep in mind when you pick out classes for CS; analytics, big data that kind of stuff.
Will do senpai, I suppose its just lucky that I happened to take an interest in CS and finance, although I don't actually know how seriously to take school, I mean, I enjoy the stuff I learn but its not like I spend every night and day studying and furthering myself to try revolutionize the field so, in a sense im not 'too concerned' with gpa, I just take it easy get a combination of A-'s and B+'s, but the stuff I do really take interest in I research to the end of the world
Any suggestions on the philosophy I should take towards school?
>Any suggestions on the philosophy I should take towards school?
My guess is that in the CS field GPA doesn't matter that much. I think a lot of people are successful even without formalized education. Consider what is GPA going to do for you? For people trying to get into law school or an MBA program it can be extremely important so current classes are the only priority. I don't think CS guys go that route very often though. Their industry seems a lot more concerned with your capabilities than certifications and grad school.
Learning on your own will probably be your next step after graduation anyway, employing what you've learned in real examples that you can show to potential employers. So getting a head start researching the stuff you take interest in now could be really valuable in differentiating yourself.
Internships are good too.
Sounds reasonable, but yeah thats pretty much what i've been going on
Not an american, whats a 3.5 roughly? A range? B range?
Also when people say socialize/network, how do you actually do this? I dont have friends and im rather introverted, do I just randomly schedule an appointment to talk to a professor or something? Im rather confused in this area
Just stopping by to say that this thread embodies what I hoped /biz/ could be all the time. Thanks for contributing.
I'm in the mining industry (which is extremely networking-oriented), so my experience may be able to help you.
First, get involved with any local CS institutes in the area. In my case I have the CIM, the Canadian Institue of Mining. They hold regular dinner events, have a keynote speaker, and their primary purpose is to get mining engineers in a room together to talk about the industry. Any galas or other similar events are also worth attending. I interviewed with the VPs of two large mining companies after meeting them at a gala, shooting the shit about what's going on in the province, and having a drink. Worth the effort in my case.
Second - volunteer your time to help with CS-related causes. Hackathon going on? Go to it, meet other students, place if you're good. Career fair/info session/CS fair going on? Help them set up, work a booth, meet the people working at the other booths in the area. These are people that are passionate about your industry. You're volunteering, so you must be passionate about it too. That's a foot in the door. I got a job offer from a situation like this.
Third - networking itself. In my field, business cards are essential. That may not be the case for you. When you meet somebody just greet them, introduce yourself, ask them about their work, and (if possible) bring up your interest in that area. Try to be genuine. Your best network may come from the students you go to class with though, as after you graduate they'll be working at companies across the world and can be your "in" with those companies.
I was a really shy guy growing up, but I've been told that I'm quite social at this point. That didn't happen by mistake - it took a lot of hard work for me to really learn how to socialize. If you're interested I could tell you how I got over it, on the off chance it'll help you out.
Interesting read, the funny thing though, is im not sure if events and all that stuff really happens in small places like NewZealand, even if it did, I wouldn't even know how to receive news/information about it, it may just be the difference between big countries and small countries but I'll definitely keep an eye out for things like this
>Learning how to socialize
I don't believe im a shy person but the reason I don't socialize is due to a lack of interest in other people, I could expand on my philosophy with why I believe making friends or getting to know people (in a non economic benefitial way) is pointless but in the end its my own personal viewpoint.
As for your personal journey of socializing, if you'd like to share id like to read it out of curiosity
>if earnings growth rate is greater than investor's expectations, stock price should be negative
basically because there are things other people know that you don't.
Yes, you've identified one of the major limitations of this simple model. You get irrational results as g approaches r. Normally g is like 5% and r is like 10% so you get a rational result. That's kind of what I'm talking about in this example, this company has a g which is much closer to r than we normally see. That might explain why we're seeing a relatively high PE.
The market seems be assuming an 8% growth rate for this company which isn't all that crazy, so we aren't in irrational territory just yet.
Yes. I know the model looks stupid simple. It's derived from finding the present value of the future earning payment stream. You could find the present value of an annuity, by forecasting future earnings and discounting to find the present value of each payment. Which is used in finance all the time for everything from bonds and insurance products, to stock prices. But that long drawn out math problem simplifies into the very simple formula I showed.
Present value of a growing annuity:
PV = cf + (cf(1+g))/(1+r) + (cf(1+g)^2)/(1+r)^2 + (cf(1+g)^3)/(1+r)^3 + (cf(1+g)^4)/(1+r)^4 ...... to infinity
PV = cf / (r-g)
I want to reiterate, this is a simplified model I just used to explain why the company's earnings growth leads to high valuations.
A company's value can be derived from two aspects; future growth potential (qualitative aspects) and value of companies future cash flow/assets (quantitative methods). From this, we can see that the reason a company would ever trade at a high price to book multiple is if A) the company has high potential of generating high revenues in the future or B) the company is generating huge cash flows both today and in the future.
One thing to note from a philosophical prospective is that the company is valued at its POTENTIAL, that is to say, what people EXPECT the company to do. In the case of companies in the growth faze with no positive cash flows coming in, it becomes hard if not impossible to evaluate the company using financial analysis. The companies assets reveal mostly nothing for modern companies with a lot of "soft" assets such as software and IP. Likewise it is near impossible to get an accurate prediction on future cash flows on companies that haven't reached their maturity. Simply put, the future is chaotic; unpredictable and under the influence of so many variables which right now might seem irrelevant but will lead to a future completely from the one you can imagine. Thus all quantitative methods are out the window for growth companies; you're left with qualitative methods.
"What are the qualitative methods, then?" Simply put, it's seeing the people behind the smoke and mirrors. Companies have founders and employees which have a vested interest in seeing the company succeed. Yet we know that all people are not equal, some grew up and acquired 'talent' in respective fields. It is no different in business, there are those 'talented' at running and expanding a company and those that are not. So if you want to do any sort of qualitative analysis, you need to talk to the people in the company, figure out what they are doing and how they are expanding their companies, what their vision is and do they have the skill sets to execute on this vision.