From 432c56d06bc880afddab727bbc931616302dacca Mon Sep 17 00:00:00 2001 From: ronny abraham Date: Thu, 27 Feb 2025 18:43:15 +0200 Subject: [PATCH] explained methodology 1, addded definitions --- mba-main.org | 4 +++ mba/ch59.org | 76 +++++++++++++++++++++++++++++++++++++++---- mba/finance_terms.org | 39 ++++++++++++++++++++++ 3 files changed, 113 insertions(+), 6 deletions(-) create mode 100644 mba/finance_terms.org diff --git a/mba-main.org b/mba-main.org index 5ac6d7e..45d6566 100644 --- a/mba-main.org +++ b/mba-main.org @@ -8,6 +8,10 @@ - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4589926#overview][Udemy MBA course]] * Table of Contents +** financial terms, errata, etc +#+attr_html: :class contents-overview +- [[./mba/finance_terms.org][Financial Terms]] + ** Section 1 - Launching a new company #+attr_html: :class contents-overview - [[./mba/ch05.org][Chapter 05. How to Legally Protect Your Company]] diff --git a/mba/ch59.org b/mba/ch59.org index b1bd94b..744910f 100644 --- a/mba/ch59.org +++ b/mba/ch59.org @@ -47,9 +47,73 @@ - do all of them and take an average - keep it simple -**** methodology 1: price / earnings ratio -- target price should be based on estimates 5 years from now - - more or less relevant - - don't be a victim of group think -- estimate what is the percentage of growth in 5 years -- multiply the EPS (Earnings per share) by that number +**** methodology 1: price vs earnings per share + +***** NOTE: we are calculating STOCK PRICE based on EARNINGS PER SHARE multiplied by YOY GROWTH RATE + +***** Understanding "Valuation" - Price/Earnings (P/E) Ratio Methodology + +This section of your financial course explains how to estimate the target price of a stock five years into the future using the Price-to-Earnings (P/E) ratio. + +***** 1. The Price-to-Earnings (P/E) Ratio +- The **P/E ratio** is a way to value a stock based on its **earnings per share (EPS)**. +- It is defined as: + + #+BEGIN_SRC + P/E = Stock Price / Earnings Per Share (EPS) + #+END_SRC + +- Stocks typically trade at a P/E ratio that is close to their **earnings growth rate**: + - If a company's **earnings grow at 20% per year**, it will likely have a **P/E ratio of ~20x**. + - If earnings **grow at 8% per year**, the stock might trade at **8x EPS**. + +***** 2. Forecasting the Target Price (5-Year Estimate) +- The **target price** in **5 years** is based on the company’s **forecasted EPS** multiplied by a reasonable P/E ratio. +- In this example: + - **MSFT’s EPS is growing at 12% per year**. + - The stock should trade at a **P/E of 12x** in 5 years. + +***** 3. Using the Provided Table (EPS Forecasts) + +| Metric | FY19e | FY20e | +|---------------------------------|--------|--------| +| Diluted Earnings Per Share (EPS) | $3.93 | $4.90 | +| Year-over-Year EPS Growth | 12% | - | + +- **FY19e EPS = $3.93** +- **FY20e EPS = $4.90** +- **EPS is growing at 12% per year**. + +***** 4. Calculating the Target Price +- Since the company is growing at **12% per year**, we assume it will trade at **12x earnings** in 5 years. +- Using the **FY20e EPS of $4.90**: + + #+BEGIN_SRC + Target Price = 12 × 4.90 = 59 + #+END_SRC + +***** 5. Comparing Today’s Price to the Target Price +- **Assume MSFT is trading at $47 today** (when the course was written). +- **Expected appreciation in 5 years**: + + #+BEGIN_SRC + (59 - 47) / 47 = 25% increase + #+END_SRC + +- Since **MSFT is a mature company**, a **25% increase in 5 years seems reasonable**. + +***** Final Takeaways +✔ The P/E ratio method values stocks based on **earnings growth**. +✔ Stocks usually trade at a **P/E close to their earnings growth rate**. +✔ Target price is found by **multiplying the estimated EPS by the assumed P/E ratio**. +✔ **MSFT, trading at $47 today, could reach $59 in 5 years with 12% EPS growth.** + +🚀 Now you understand how the course uses P/E ratios for stock valuation! + + + +**** methodology 2: price vs revenue/sales +- assume the avg software company trades at 5x revenue in 5 years +- MSFT, being a big company that grows slowly, grows at 70% of avg + - so instead of trading 5x in 5 years, it will trade at 3x in 5 years +- therefore the [[file:finance_terms.org::*Market Capitalization (Market Cap)][market cap]] should be $504bn in 5 years diff --git a/mba/finance_terms.org b/mba/finance_terms.org new file mode 100644 index 0000000..d76f28c --- /dev/null +++ b/mba/finance_terms.org @@ -0,0 +1,39 @@ +#+title: Definitions + +#+HTML_HEAD: +#+OPTIONS: H:6 + +* Links +- [[./../mba-main.org][TOC | Business]] + +* Notes + +** Market Capitalization (Market Cap) + +Market capitalization (market cap) refers to the total value of a company's outstanding shares of stock. It is used as a measure of a company’s size and worth in the stock market. + +*** Formula: +#+BEGIN_SRC +Market Cap = Stock Price × Total Outstanding Shares +#+END_SRC + +*** Example: +If a company has 10 million shares and each share is worth $50, the market cap would be: + +#+BEGIN_SRC +10,000,000 × 50 = 500,000,000 +#+END_SRC + +So, the company's market cap is **$500 million**. + +*** Market Cap Categories: +- *Small-cap:* Less than **$2 billion** (e.g., early-stage or high-growth companies) +- *Mid-cap:* Between **$2 billion - $10 billion** (e.g., growing businesses) +- *Large-cap:* Over **$10 billion** (e.g., well-established companies like Apple, Microsoft) + +*** Why is Market Cap Important? +- **Indicates company size** – Larger companies tend to be more stable, while smaller ones might have higher growth potential. +- **Affects investment decisions** – Large-cap stocks are often safer but may grow slower, while small-cap stocks can be more volatile but have higher growth potential. +- **Used in stock indices** – Major indices like the **S&P 500** are weighted by market cap. + +This structured format is now **ready for Org-mode** and easy to read or export! 🚀