CFA Level 1 - Equity Investments
Price-to-Book Value (P/BV)
- Tends to be a stable valuations metric because balance sheets do not fluctuate much quarter-to-quarter.
- Can be used as a valuation metric even when firms report an EPS loss.
- Good metric to value firms in distress
- Sales tend to be a realistic number and are not influenced as heavily by accounting issues.
- Good metric to value firms in distress.
- Can be used as a valuation metric when firms report a loss.
- Cash flow is a truer metric of a company's results in comparison to earnings.
- It is more difficult for managements to manipulate cash flow - tends to be less volatile than earnings.
- Studies have indicated that it is a reliable metric over the longer-term.
- Cannot be used for firms when they report a loss in earnings.
- Earnings can be volatile given various inputs.
- Earnings are more easily manipulated by managements.
- Does not take into account the relative asset size when comparing firms.
- Accounting metrics can skew the results.
- Book value is not an accurate measure of actual market value.
- Sales do not always translate to profits which can leave out the cost component.
- Difficult to value companies with different cost structures.
- Accounting issues related to revenue recognition can still alter sales.
- Some items are not included, such as non-cash revenue.
Data for Newco and Oldco
Within this section we've discussed the top-down approach of security valuation, the Dividend Discount Model (DDM), the various methods of stock market, industry, and company analysis, and technical analysis.
In the Fixed Income section we will learn bond basics.