Security Valuation and Risk Analysis: Assessing Value in Investment Decision-Making - Hardcover

Hackel, Kenneth S.

Hardcover

ISBN 10: 0071744355 ISBN 13: 9780071744355

Verlag: McGraw-Hill Education Ltd, 2010

Inhaltsangabe

A superior new replacement to traditional discounted cash flow valuation models

Executives and corporate finance practitioners now have a more reliable discount rate to value companies and make important business and investment decisions. In today's market, it’s free cash flow, cost of capital and return on invested capital that really matters, and now there's a superior tool to help analyze these metrics—Security Valuation and Risk Analysis.

In this pioneering book, valuation authority Kenneth Hackel presents his next-generation methodology for placing a confident value on an enterprise and identifying discrepancies in value—a system that will provide even themost well-informed investor with an important competitive advantage.

At the core of Security Valuation and Risk Analysis is Hackel's successful credit model fordetermining an accurate fair value and reliable discount rate for a company. Using free cash flow as the basis for evaluating return on invested capital is the most effective method for determining value. Hackel takes you step by step through years of compelling evidence thatshows how his method has earned outsized returns and helped turn around companies that were heading toward failure.

Whether used for corporate portfolio strategy,acquisitions, or performance management, the tools presented in Security Valuation and Risk Analysis are unmatched in their accuracy and reliability. Reading through this informative book, you'll discover how to:

• Take advantage of early warning signs related to cash flow and credit metrics
• Estimate the cost of equity capital from which free cash flows are discounted
• Identify where management can free up resources by using a better definition of free cash flow

Security Valuation and Risk Analysis provides acomplete education on cash flow and credit, from how traditional analysts value a company and spot market mispricing (and why many of those traditional methods are obsolete) to working with the most recent financial innovations, including derivatives, special purposeentities, pensions, and more.

Security Valuation and Risk Analysis is youranswer to a credit market gone bad, from an expert who knows bad credit from good.

Über diesen Titel

Über die Autorin bzw. den Autor

Kenneth S. Hackel is president of CT Capital LLC, an investment advisory firm, and founder and past president of Systematic Financial Management, Inc. An internationally recognized expert in security analysis, he has managed the nation's leading mutual fund, a very successful investment advisory firm, and has consulted and written on mergers and acquisitions and fairness opinions. Hackel lives in Alpine, NJ.

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SECURITY VALUATION AND RISK ANALYSIS

Assessing Value In Investment Decision Making

By KENNETH S. HACKEL

The McGraw-Hill Companies, Inc.

Copyright © 2011 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-174435-5

Contents

PREFACE
ACKNOWLEDGMENTS
Chapter 1 Overview
Chapter 2 Management
Chapter 3 Statement of Cash Flows
Chapter 4 Free Cash Flow
Chapter 5 Return on Invested Capital
Chapter 6 Financial Structure
Chapter 7 Cost of Equity Capital
Chapter 8 Cost-of-Equity-Capital Credit Model
Chapter 9 Portfolio Selection
Index

Excerpt

CHAPTER 1

Overview

Security Valuation and Risk Analysis is a book written to help investorsappraise the expected return from an investment in an equity security. Inundertaking this endeavor, half this book is allocated to risk, as measured bycost of capital, and half is allocated to to return, as measured by theinvestment's expected cash flows.

Many new lessons were taught and many old lessons were learned as a result ofthe financial system meltdown of 2008–2009, but none more important thanpossessing the deep skill set to practice the rigorous application of cash flowsand credit analysis. The investors having such a deep-seated knowledge were, inmany instances, able to earn outsized returns while avoiding the concerns thatwere forced into bankruptcy or forced to accept government aid. Many otherentities were severely weakened, with massive loss of market share. And when theeconomy stabilized, the firms that had strong cash flows and low cost of capitalquickly rebounded to their former levels, and over the course of a businesscycle, such enterprises normally outperform the general equity market by aconsiderable margin.

Investors who understand cash flow and credit have an important competitiveadvantage. They can place a confident value on the enterprise and spotdiscrepancies in value. To the extent that economic uncertainty is prevalent,investment opportunities are especially widespread. Those who succeed in thisenvironment are those who are best equipped with the new analytic skills to doso. Successful investors understand cash-flow adequacy is the most importantbenchmark in both security valuation and credit decisions; they also understandthere are risks associated with expected cash flows.

This book will provide you with the tools designed to give you a real edgerelative to other security analysts by demonstrating how you can

• Enhance your forecasting skills by showing how to spot and take advantage ofearly-warning signals provided by cash-flow and credit metrics

• Have a better understanding of how financial statements are prepared

• Take advantage of a better definition of cost of equity capital from which todiscount free cash flow

• Capitalize on a better definition of free cash flow by understanding howmanagement could free up cash resources

• Earn superior investment returns through practical use of an advanceddefinition of cash flow from operating activities that is superior to thatreported under generally accepted accounting principles (GAAP)

• Spot and quantify important balancesheet and off-balancesheet items that mostoften are neglected or lightly scrutinized by securities analysts and investors

• Think like a corporate "insider" by showing how corporate executives view thevarious risks that confront them

• Take advantage of the many failings of earnings before interest, taxes,depreciation, and amortization (EBITDA)

• Take advantage of how rating agencies assign credit grades

To say that much has developed in the world of finance since I cowrote CashFlow and Security Analysis (2nd ed., McGraw-Hill, 1995) with distinguishedProfessor at the Stern School of Business, Dr. Joshua Livnat, would be a verygross understatement. Who knows how close the United States, and, for thatmatter, the industrialized world, came to financial collapse during the fall of2008?

What can be stated with complete and utter confidence is the study of cash flowand credit has become more important than ever. It is with this perspective thatI produced this book.

Investments—and their study—are a living, changing experience. Whatwe take for granted one day may not be so certain the next. And thus we mustadapt, even when our central rule makers, the Securities and Exchange Commission(SEC) and the Financial Accounting Standards Board (FASB), are slow to do thesame. The U.S. Congress also operates with a lag, normally reacting to events byswinging too hard and too late.

At other times, as we have seen, accounting rule makers are forced to refineaccounting standards that have stood for many years, reacting to events of themoment, in order to satisfy investors in problem sectors. We have witnessed thepublic weigh in, voicing support for modification of existing accountingstandards, supported by a Congress feeling the heat of the voters.

Let me state with authority what this book is not. It is not atext written for or designed to appeal to academic statisticians who practicemoney management. This book is for practitioners of security analysis. Ihave seen more than a couple of Nobel Prize–winning scholars run gigantichedge funds into the ground with their theories. I have been through too manyonce-in-a-hundred-years events.

The great investors throughout time started, built, or acquired companies whoseproducts enjoyed consistent and growing free cash flow. By relying onfinancially prudent business practices, their companies enjoyed a low cost ofcapital. They created a competitive advantage and did not deviate. And if theydid deviate, more often than not, they ran into trouble. I never hear successfulbuilders of businesses mention beta or other academic statistical risk tools.They talk about products, customers, risk, and cash. They talk about growthrates in free cash flow, taxes, and stability. This is how the reader will betaught to measure return and risk in this book.

This book is not centered on financial companies, although I willprovide many detailed examples and explanations of financial instruments,including why it is important to monitor creditors with whom the industrialentity relies on for financial backing.

While I am painfully aware of how problems in the financial sector spilled overto the rest of the economy, banks and insurers have investment accounts equal tomany times their shareholders' equity, and it is too often those assets thatdrive valuations and stock prices. If their investments are overstated, theirreserves understated, or their commitments, contingencies, or hedges in trouble,their valuations will see sharp declines. It doesn't seem so long ago that manyof the largest U.S. banks, quite a while before television commentators weretalking about derivatives, were in danger of failing from loan overexposure tothe energy sector. Readers will understand how risk to cash flows can bemitigated through the judicious use of financial instruments, but also how riskcan be amplified when those instruments are used improperly.

This book is designed to assist you in analyzing operating concerns. Largechanges in market value resulting from...

Details zur Ausgabe

• Verlag: McGraw-Hill Education Ltd
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0071744355
• ISBN 13: 9780071744355
• Einband: Gebundene Ausgabe
• Auflage: 1
• Anzahl der Seiten: 614
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar