started dcf

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 - [[./../mba-main.org][TOC | Business]]
 - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4317198#overview][S12:L65 course video]]
 
+
 * notes
+** take the average of three valuations
+- price / earnings
+- price / sales
+- [[#dcf][Discounted Cash Flow (DCF)]]
+  - because cash flow is similar to net income for tech stocks it makes things easier [[#cashflow-diff][link 1]] [[#cashflow-diff-real][link 2]]
+
+  - DCF is the value of all future cash flows discounted today
+
+* definitions
+** Discounted Cash Flow (DCF)
+:PROPERTIES:
+:CUSTOM_ID: dcf
+:END:
+
+*** What is DCF?
+Discounted Cash Flow (DCF) is a financial valuation method used to estimate the *present value* of an investment or business based on its *expected future cash flows*.
+
+The core idea: *money today is worth more than money tomorrow*, due to the time value of money. DCF discounts future expected cash flows back to their present value using a discount rate (usually the cost of capital).
+
+*** Formula
+#+BEGIN_SRC latex
+\text{DCF} = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t}
+#+END_SRC
+
+- \( CF_t \): Cash flow at time \( t \)
+- \( r \): Discount rate (e.g., 10%)
+- \( n \): Number of years or periods
+
+*** Example
+You're evaluating a business expected to generate the following cash flows:
+
+- Year 1: $100,000
+- Year 2: $110,000
+- Year 3: $120,000
+- Discount rate: 10%
+
+#+BEGIN_SRC latex
+\text{DCF} = \frac{100{,}000}{(1.10)^1} + \frac{110{,}000}{(1.10)^2} + \frac{120{,}000}{(1.10)^3}
+= 90{,}909 + 90{,}909 + 90{,}163 ≈ \$272{,}000
+#+END_SRC
+
+*** When to Use DCF
+- When valuing businesses with predictable cash flows
+- To assess investment or project viability
+- To compare multiple investment opportunities
+
+*** Notes
+- DCF can include a *terminal value* if the business continues beyond the forecast period
+- Highly sensitive to discount rate and cash flow assumptions
+
+** Difference Between Cash Flow and Net Income
+:PROPERTIES:
+:CUSTOM_ID: cashflow-diff
+:END:
+
+The difference between cash flow and net income lies in *timing* and *accounting method* — they measure different things.
+
+*** ✅ Net Income
+The company’s *profit* after all revenues and expenses are accounted for, based on accrual accounting.
+
+- Appears on the income statement
+- Includes non-cash items like depreciation and amortization
+- Includes revenues earned and expenses incurred, even if no cash has changed hands yet
+- Formula:
+
+#+BEGIN_SRC text
+Net Income = Revenue - Expenses (including non-cash and interest/taxes)
+#+END_SRC
+
+*** ✅ Cash Flow
+The *actual cash* moving into and out of the business during a period.
+
+- Appears on the cash flow statement
+- Based on cash accounting
+- Only counts real money in/out, regardless of when it was earned or incurred
+- Includes operations, investing, and financing activities
+- Formula (Operating Cash Flow):
+
+#+BEGIN_SRC text
+Cash Flow from Ops = Net Income
+                   + Non-cash expenses (e.g. depreciation)
+                   - Changes in working capital
+#+END_SRC
+
+*** 🧠 Key Differences
+
+| Feature                         | Net Income               | Cash Flow                       |
+|---------------------------------+---------------------------+----------------------------------|
+| Basis                           | Accrual accounting        | Cash accounting                 |
+| Includes non-cash?              | Yes (depreciation, etc.)  | No                              |
+| Timing of transactions          | Matches earnings period   | Based on actual cash movement   |
+| Found on                        | Income statement          | Cash flow statement             |
+| Reflects profitability?         | Yes                       | No, it reflects liquidity       |
+| Negative while other is positive?| Yes                      | Yes — e.g., due to non-cash charges |
+
+*** 🔍 Example
+- A company sells $10,000 of goods but hasn’t been paid yet.
+  - Net Income: Shows the $10,000 as revenue.
+
+** Is net income more similar to cash flow in terms of a tech stock?
+:PROPERTIES:
+:CUSTOM_ID: cashflow-diff-real
+:END:
+
+That is, do we effectively consider it the same when doing evaluations for tech stocks as opposed to other industries?
+
+Great question — and the answer is *no*, net income is not considered equivalent to cash flow, even for tech stocks — though the relationship can be closer or more misleading depending on the business model.
+
+*** ✅ Tech Stocks Often Emphasize Free Cash Flow (FCF) More Than Net Income
+
+Why?
+
+- Tech companies (especially SaaS) tend to have:
+  - High non-cash expenses (like stock-based compensation and depreciation of capitalized R&D)
+  - Deferred revenue (prepaid subscriptions)
+  - Low capital expenditure needs
+
+These factors can cause net income to look worse than actual cash performance.
+
+So analysts often disregard net income in favor of:
+
+- Operating cash flow
+- Free cash flow (FCF):
+
+#+BEGIN_SRC latex
+\text{FCF} = \text{Operating Cash Flow} - \text{CapEx}
+#+END_SRC
+
+*** 📊 Example: Tech Company X
+
+| Metric                    | Value         |
+|---------------------------+---------------|
+| Net income                | $5 million    |
+| Stock-based compensation  | $10 million   |
+| Depreciation              | $3 million    |
+| CapEx [[#capex][(link)]] | $2 million    |
+| Operating cash flow       | $18 million   |
+| Free cash flow            | $16 million   |
+
+➡️ The net income looks modest, but the free cash flow is much stronger — this is what investors in tech tend to value more.
+
+*** 🔁 Compare with Other Industries
+
+| Industry     | Preferred Metric           | Why                                    |
+|--------------+----------------------------+----------------------------------------|
+| Tech (SaaS)  | Free Cash Flow             | Low cape, high non-cash costs          |
+| Utilities    | Net Income + Dividends     | Stable earnings, regulated cash flow   |
+| Oil & Gas    | EBITDA / FCF               | High depreciation, volatile capex      |
+| Banks        | Net Income (GAAP adjusted) | Highly regulated balance sheets        |
+
+*** 🧠 Conclusion
+
+- No, net income ≠ cash flow for tech stocks
+- In fact, net income may understate performance due to:
+  - High non-cash expenses (e.g., stock comp)
+  - Accounting rules around R&D and subscriptions
+- DCF models for tech should focus on FCF or adjusted EBITDA, not just net income - Cash Flow: $0 until cash is actually received.
+
+** CapEx – Capital Expenditures
+:PROPERTIES:
+:CUSTOM_ID: capex
+:END:
+
+*** What is CapEx?
+CapEx stands for *Capital Expenditures* — it refers to money a company spends to acquire, upgrade, or maintain physical assets such as:
+
+- Equipment
+- Buildings
+- Vehicles
+- Technology infrastructure
+- Property
+
+*** In Plain Terms
+CapEx is money spent on things that last more than one year — unlike operating expenses (OpEx), which are day-to-day costs like rent, salaries, or utilities.
+
+*** Accounting Treatment
+- CapEx is not expensed all at once on the income statement.
+- It’s capitalized — added to the balance sheet as an asset — and then depreciated over time.
+
+*** Examples
+
+| Action                | CapEx?         |
+|-----------------------+----------------|
+| Buying servers        | ✅ Yes          |
+| Repainting the office | ❌ No (OpEx)    |
+| Building a data center| ✅ Yes          |
+| Paying engineers      | ❌ No (OpEx)    |
+
+*** CapEx in Valuation
+- Important in Free Cash Flow (FCF) calculations:
+
+#+BEGIN_SRC latex
+\text{FCF} = \text{Operating Cash Flow} - \text{CapEx}
+#+END_SRC
+
+- High-growth tech companies often have low CapEx, which boosts FCF and valuation.
+- Asset-heavy companies (like telecom, energy, or manufacturing) have high CapEx, reducing FCF.
+
+** EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization
+
+*** What is EBITDA?
+EBITDA is a measure of a company’s core operational profitability. It strips out the effects of financing decisions, tax environments, and non-cash accounting items like depreciation and amortization.
+
+*** Purpose
+EBITDA is commonly used to:
+- Assess a company’s operating performance
+- Compare companies across industries
+- Approximate cash flow (roughly)
+
+*** Formula
+
+From Net Income:
+#+BEGIN_SRC text
+EBITDA = Net Income
+       + Interest
+       + Taxes
+       + Depreciation
+       + Amortization
+#+END_SRC
+
+From Operating Income (EBIT):
+#+BEGIN_SRC text
+EBITDA = Operating Income
+       + Depreciation
+       + Amortization
+#+END_SRC
+
+*** Why Use EBITDA?
+
+| Benefit                  | Explanation                                        |
+|--------------------------+----------------------------------------------------|
+| Strip out accounting noise | Removes non-cash charges like depreciation       |
+| Cross-industry comparison | Ignores capital structure and tax regime effects |
+| Cash flow proxy           | Gives a rough estimate of operating cash flow    |
+
+*** Cautions
+- EBITDA is *not* actual cash flow.
+- It ignores capital expenditures and changes in working capital.
+- It can be used to obscure poor net income performance.
+- Not suitable for asset-heavy businesses as it omits large CapEx burdens.
+
+*** Example
+Suppose a company reports:
+
+- Net Income: $1,000,000
+- Interest: $500,000
+- Taxes: $400,000
+- Depreciation: $300,000
+- Amortization: $200,000
+
+#+BEGIN_SRC text
+EBITDA = 1,000,000 + 500,000 + 400,000 + 300,000 + 200,000 = $2,400,000
+#+END_SRC