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Thus, without a sense of what comprises a high or low profit margin for a firm, or what the cost of capital is for the typical company, it is easy to create "fairy tale" valuations and analyses. Data universe : In my sample, I include all publicly traded firms with marketcapitalizations that exceed zero, traded anywhere in the world.
In this section, I will lay out a mechanism for evaluating the effects of borrowing on the cost of funding a business, i.e., the cost of capital, and talk about why firms may under or overshoot this optimal. Debt to EBITDA, Interest Coverage Ratios If debt to capital is not a good measure for judging over or under leverage, what is?
The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.
Since I am lucky enough to have access to databases that carry data on all publicly traded stocks, I choose all publicly traded companies, with a market price that exceeds zero, as my universe, for computing all statistics. Beta & Risk 1. Equity RiskPremiums 2. Return on (invested) capital 2. Debt Details 1.
Thus, as you peruse my historical data on implied equity riskpremiums or PE ratios for the S&P 500 over time, you may be tempted to compute averages and use them in your investment strategies, or use my industry averages for debt ratios and pricing multiples as the target for every company in the peer group, but you should hold back.
It is for this reason that I chose to compute returns differently, using the following constructs: I included all publicly traded stocks in each market, or at least those with a marketcapitalization available for them. I converted all of the marketcapitalizations into US dollars , just to make them comparable.
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