Essay on Investment and Company

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smOperating Margin
Operating Margin a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt
Operating Margin = Operating Income/net sales

For example, if a company has an operating margin of 12%, this means that it makes $0.12 for every dollar of sales.
Book Value
The book value is another way to determine whether a stock is over- or underpriced. Basically, book value represents what a company would be worth if it stopped doing business tomorrow and were liquidated. The price-to-book ratio is calculated by dividing the current price of the stock by the latest quarter's book value per share. If a stock is selling far below its book value per share, it might be undervalued. Conversely, a stock priced above its book value could be overpriced.

For example, if HIG has book value of $20.93 and is trading at $10, the stock could be undervalued. However, if QRS has a book value of $30.95 and the stock is trading at $64, this may signal that the stock is overvalued. As with any fundamental indicator, book value must be considered in conjunction with other indicators. It is also more meaningful when used to analyze stocks in certain industries compared to others. For example, the stock of a rapidly growing company could trade well above book value and still represent a good buy in some industries.

Beta
Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.
Beta is a key component for the capital asset pricing model (CAPM), which is used to calculate cost of equity. Recall that the cost of capital represents the discount rate used to arrive at the present value of a company's future cash flows. All things being equal, the higher a company's beta is, the higher its cost of capital discount rate. The higher the discount rate, the lower the present value placed on the company's future cash flows. In short, beta can impact a company's share valuation

Advantages of Beta
To followers of CAPM, beta is a useful measure. A stock's price variability is important to consider when assessing risk. Indeed, if you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk.

Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a safe-haven utility industry stock with a low beta.

Besides, beta offers a clear, quantifiable measure, which makes it easy to work with. Sure, there are variations on beta depending on things such as the market index used and the time period measured, but broadly speaking, the notion of beta is fairly straightforward to understand. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method that discounts cash flows.

Disadvantages of Beta
However, if you are investing in a stock's fundamentals, beta has plenty of shortcomings.

For starters, beta doesn't incorporate new information. Consider a utility company, let's call it Company X. Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed high debt levels, X's historic beta no longer captured the substantial risks the company took on. At the same time, many technology stocks are relatively new to the market
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