Friday, August 29, 2014

Financial Thought of the Day August 29, 2014: Share Buybacks

Share buybacks or share repurchases only provide a theoretical return on value. It's better for a company to return the cash to shareholders directly or reinvest back into the company. Even if the share price temporarily moves in your favor because of it, the stock market could reverse course and wipe out the gains.

Thursday, August 28, 2014

Financial Thought of the Day August 28, 2014: Dividend Payout Ratio

When you see a company with a frothy dividend yield of say 4% you may want to check out its dividend sustainability. The best way do that is to see how much of its free cash flow a company pays out in dividends in a given full year. That way it won't get distorted by seasonal fluctuations. I consider a dividend sustainable if it pays out less than 50% of its free cash flow a year.

Wednesday, August 27, 2014

Financial Thought of the Day August 27, 2014: Cash Is King

The rule of thumb in the past is to always have enough cash on hand to live on for six months. I would say in this day and age of economic volatility for your average Joe is to have enough cash on to live on for 1-2 years. Moreover, cash (over and beyond your emergency fund of course) allows you the opportunity to take advantage of lower stock prices when corrections.

Also when researching a publicly traded business its always preferable to find a company with a cash to stockholder's equity of at least 20%. Companies that store a lot of cash can get itself through a downturn.

Remember cash is king.

Tuesday, August 26, 2014

Financial Thought of the Day August 26, 2014: Pennies Adds Up to Dollars

When it comes to saving money pennies adds up to dollars.

For example let's say you can eat at home for half the price of eating out:

Price of a fast food meal: $7.50 x 0.5= $3.75

Over a year $3.75 adds up to $1368.75 per year assuming you eat out every day.

Invest that money in a index mutual and if you get 10% per annum over the course of 30 years that will equal $23,883.87 and that's if you do it for 1 year alone.

If you get 15% per annum for 30 years that amount becomes $90,627.36.

If you are the next Warren Buffett and get 22% compound annual growth rate for 30 years and that amount becomes $533,481.12.

What bad habit could you kick today?

Monday, August 25, 2014

Financial Thought of the Day August 25, 2014: Return On Equity

Return On Equity is defined by the following formula: Return On Equity = (Net Income/Stockholder's Equity) x 100. It is a measure of how much profit can come from a company's capital base. Generally most companies that make good investments possess return on equity of 12% or greater.

Friday, August 22, 2014

Financial Thought of the Day August 22, 2014: Think Long-Term

When investing in the stock market it always pays to think long-term. Stock prices move up and down every day. However, if you think like a business owner and invest in a company that sits behind high barriers to entry against competitors resulting in excellent free cash flow growth over the long-term then superior long-term stock price appreciation will follow suit.

Thursday, August 21, 2014

Financial Thought of the Day August 21, 2014: Always Pay Yourself First

When you receive a payday always set aside 10% for emergencies and/or other savings and investment. You can't invest in appreciable assets such as stocks if you don't save.

Wednesday, August 20, 2014

Financial Thought of the Day August 20, 2014: Free Cash Flow

Free Cash Flow is defined by the following formula: FCF = Operating Cash Flow - Capital Expenditures.

This represents a better measure of a company's profitability as it strips away accounting accruals leaving behind actual cash flow generated less the investments back into the business. A particular company may not represent a good investment if it utilizes all of its cash in capital maintenance.

Tuesday, August 19, 2014

Financial Thought of the Day August 19, 2014: The P/E Ratio

The price to earnings ratio, also known as the P/E ratio, represents the most commonly quoted valuation measure in the stock market. It's basically defined by the following formula: P/E= Market price per share/earnings per share. The quoted P/E ratio can vary slightly from one publication to another as some uses estimated earnings, trailing twelve month earnings, last year's earnings, etc, in the denominator. Some publications quote the P/E ratio of the S&P 500. If the P/E ratio of your company exceeds the P/E ratio of the S&P 500 then it may be considered overvalued by some.

Wednesday, August 13, 2014

Financial Thought of the Day August 13, 2014: Business Perspective Investing

When you buy a share of stock you become part owner of a business. Before doing that you need to assess its fundamentals such as what the company sells as well as its revenue, profitability, and cash flow growth rates. It's also important to assess how much of that revenue the company keeps (margins). Moreover, you should also determine whether the company retains some of that cash for reinvestment in the business. Growth in revenue and cash flow generating capability while utilizing as little external capital as possible is what determines superior long-term gains versus the overall market.

It also pays an investor if that company sits behind a huge barrier to entry against competitors. Competitors dilute the profitability of your company while lowering the potential for superior long-term gains.

Tuesday, August 12, 2014

Financial thought of the day August 12, 2014

Spend less than you earn and then invest and save the rest. It's as simple as that. Put part of it in a savings account for medical emergencies, job loss, and miscellaneous unexpected bills. Invest the rest in a financial instrument suited to your needs.