Currency pairs are not the only tools you can trade on the over-the-counter Forex market. Many brokers have long included in their arsenal the securities of leading companies in different industries and different countries (CFD). And while currency traders are trying to get a quick profit with the return of the spread on the volatility of currency pairs, stock traders earn on long-term growth of securities. And to analyze the fair value of shares, you need to know what the multipliers of companies are.
Company Multipliers to Assess Financial Stability
- Market capitalization. In simple variation, the indicator is calculated as the multiplication of the current stock price by the number of shares in circulation. By itself, the capitalization figure does not say anything, but its assessment in dynamics shows how quickly stocks grew over a period of time, how deep was the drawdown at the time of force majeure, etc. The disadvantages of the multiplier:
- does not take into account the total debt of the company, which can reduce capitalization to zero;
- includes speculative capital, therefore it does not reflect the real price of shares;
- does not allow comparing the indicators of companies of even one industry. The growth rate of companies with small capitalization may be greater than the pace of a company with a capitalization of several trillion rubles.
Often forgotten to take into account in the calculation of the turnover of preferred shares.
- EBITDA. Reflects the performance of the company before debt and depreciation charges are made. With the same amount of profit, companies can make different depreciation deductions (that is, invest in the renewal of fixed assets). This multiplier of companies levels this assessment problem, and therefore is considered one of the most popular. Indicator Disadvantages:
- there are more than 5 calculation formulas: a coarse formula that does not include many reporting lines, an international version, calculation in accordance with IFRS and RAS, etc. Companies themselves calculate these figures, but by what formulas, it is often unknown;
- only companies from the same industry and one country can be compared;
- The ratio is not calculated for companies with a loss.
- P / E. At first glance, a simple multiplier of companies, which shows how much investment in securities will pay off. It is calculated by dividing net profit minus dividends by the number of ordinary shares. The indicator is compared with the industry average. The value is higher – the company is overvalued or, on the contrary, promising, given the increased demand of investors. The value below is the opposite.
- EV. Adapted capitalization rate, to which all debt is summed up and cash assets are deducted (currency, finished goods, liquid assets). It has more than 5 derivative multipliers for deep analysis.
- Net debt. Short-term and long-term debt, from which funds are deducted, which can be quickly spent on its repayment. For investors, its presence indicates the effectiveness of money, for lenders, its absence is important, although this is a sign that money “does not work”.
Conclusion. The multipliers of companies number in the tens and how effective they are – a rhetorical question. Due to the specifics of accounting standards, it is almost impossible to calculate ratios on the balance sheet of CIS companies. Whether to trust the data published on official sites is also a rhetorical question. Multipliers can be compared with each other, forming a picture of the industry, but no more. Do you trust the multipliers of the companies?