ROE is most commonly used in evaluating financial businesses. A bank, for instance, makes money by borrowing money in the form of deposits and then lending those deposits out. ROTC isn’t a good indicator of its performance because a bank’s debt to its depositors is part of its business, not part of its capital. ROE is a far better gauge of

“It’s called the balance sheet because it balances. Assets always equal liabilities plus owners’ equity.”

But the term “shareholder value” crops up in a number of different contexts and has a variety of meanings. Sometimes it just means market cap; sometimes it refers to the expected future cash flows of a company (which, after all, is what investors are buying when they purchase a share of stock); sometimes it refers to the increase in dividends,

In general, shareholder value depends on market perceptions, which in turn are driven by: • The company’s current financial performance • The company’s prospects for growth in the future • The company’s anticipated cash flows in the future • The predictability of its performance—that is, the degree of risk involved • Investors’ assessments of the

Reconciliation In a financial context, reconciliation means getting the cash line on a company’s balance sheet to match the actual cash the company has in the bank—sort of like balancing your checkbook, but on a larger scale.

Publicly traded companies, of course, are valued every day by the stock market. They are worth whatever their stock price is times the number of shares outstanding, a figure known as their market capitalization, or just market cap.

Companies treat expenditures like these differently from ordinary purchases of inventory, supplies, utilities, and so on, for at least three reasons. One is that the expenditures involve large (and sometimes indeterminate) amounts of cash. A second is that they are typically expected to provide returns for several years, so the time value of money

The Big Five are: • Revenue growth from one year to the next • Earnings per share (EPS) • Earnings before interest, taxes, depreciation, and amortization (EBITDA) • Free cash flow (FCF) • Return on total capital (ROTC) or return on equity (ROE). ROE is the right metric for financial businesses such as banks and insurance companies.

First, here’s another way of looking at IRR: it’s the hurdle rate that makes net present value equal to zero. Remember, we said that as discount rates increase, NPV decreases? If you did NPV calculations using a higher and higher interest rate, you’d find NPV getting smaller and smaller until it finally turned negative, meaning the project no