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The Tragedy of Leverage Driven Growth for 2U
Part 1: Author’s Bias All valuations are biased. I must start with a simple yet profound confession. I love education. And, I love EdTech more. So, why does that matter? Well you see, when going into any analyses, it is important to consider that the analyzer, the person conducting the analysis, may have some preconceived…
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Investment Bank Email Formats
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Maximizing Future Cash Flows not GAAP
This past week, I was invited to speak at Rochester and Huron High school about business and investing. One student asked a simple but genuine question that highlighted some of the key challenges we face when deciding to start a business. “How financially rewarding is it?” While the answer can vary greatly, I would say…
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ARR Multiples Revert to Mean
Valuations for cloud-based SaaS companies have traded down to 6x ARR. What is ARR? Annual Recurring Revenue (ARR) is a metric used by companies that operate subscription-based business models. It represents the amount of predictable and recurring revenue a company expects to receive on an annual basis from its subscription customers. For instance, Peloton (PTON)…
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Why are negative multiples not meaningful?
A valuation multiple is a ratio that measures price paid per unit. The numerator is often a total value metric such as enterprise value or equity value. The denominator is some financial metric. The benefit of valuation multiples, as with any ratio, is that it expresses price in relative terms, allowing us to compare companies…
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Be a Missionary Not a Mercenary.
This past week I was invited to speak to high school students at Lakeland High School and Skyline High School where I spoke about building a business, qualities of success, and college admissions. It was a great experience that brought me back to my roots, where I spent thousands of hours coaching high school students…
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Get Comfortable doing the Uncomfortable
#1 PageRank on Google! This past Friday, my website ranked first on Google search results. While routinely logging in to edit the backend of my website, I accidentally hit the name rather than the URL on Google. To my surprise, the website I tirelessly built from the ground up each day over this past year…
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Negative Earnings Per Share
Why can negative earnings per share (EPS) be misleading? Recently, I was discussing anti-dilutive effects on a student’s financial model. This problem arises for companies that have negative EPS. EPS is defined as Net Income to Common/Shares Outstanding. Because companies cannot have a negative amount of shares outstanding, the only way to have negative EPS…
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Weighted Average Shares Outstanding
Why do companies use weighted average count as opposed to the ending diluted share count? Remember that the income statement reflects a period of time. Over the period of time the number of shares outstanding can fluctuate for a variety of reasons related to share buybacks, share issuances, and dilution. In these cases, simply using…
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Levers Behind Margin Expansion
A continued focus on efficient, sustainable business profitability. As earnings season progresses, I was looking at some of the top movers, including Bel Fuse, an electrical components manufacturer. Shares are trading up 23% post-earnings release, reflecting the increased profitability stemming from gross margin expansion. Bel Fuse is a multifaceted company specializing in three core product…
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Q3 M&A Activity Update
A quick note on Q3 M&A activity: In Q3 2023, the global M&A market experienced a significant decline, with only 8,775 deals announced worldwide. This represents a 28.3% decrease compared to the same period in the previous year. Notably, it marked the first time since the pandemic that the number of global M&A announcements fell…
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Don’t Forget the Non-quantifiable
“We can’t measure the impact. That’s exactly why it’s our values. Our values are that we do something that nobody notices and we can’t measure. We do it because that’s what we believe.” In a recent interview with one of my favorite CEOs, Airbnb’s Brian Chesky, I recollected an experience I had two summers ago…
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Treasury Bond Drawdowns
Threw together a drawdown chart, look at recent drawdown levels on long-dated treasury bonds. What is a drawdown chart? Effectively, the chart shows the peak-to-trough decline in the value of an investment or trading account over a specific period. It is used in finance to analyze the performance and risk associated with investments. Through the…
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There’s no Hard Rules
While we like hard rules, there are often no hard rules in finance. Everything must be viewed on a case-by-case basis. Especially when it comes to working capital, as I have been discussing. This weekend, I was running quant screens to identify potential value names, more to come, and when I pre-maturely screened for names,…
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Negative Working Capital in the S&P 500
https://youtu.be/CrTsCstZ7MI?feature=shared How many companies in the S&P 500 have negative working capital? 151 companies have negative working capital, defined as current liabilities exceeding current assets. Does this mean that they are inherently more risky businesses? Not exactly. In my last post, I uncovered how many large companies have negative working capital. This is because one…
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Negative Working Capital
Is negative working capital bad? No, not necessarily. Working capital = Current Assets – Current Liabilities This past week, I was discussing the concept of working capital. At a surface level, most students realized the benefits of having positive working capital: liquidity. Current assets are defined as any asset that can be converted to cash…
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Calendarization
The Basics In order to understand calendarization, we must know two basic terms: calendar year and fiscal year. Calendar Year (CY): The standard twelve-month period that begins on January 1st and ends on December 31st of the same year. Fiscal Year (FY): A twelve-month accounting period that a business or organization chooses for financial reporting purposes. It…
