Price-to-Earnings Ratio – P/E Ratio :

  • The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share.
  • A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.
  • Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.
  • Two kinds of P/E ratios – forward and trailing P/E – are used in practice.

Enterprise multiple :

  • Enterprise multiple, also known as the EV/EBITDA multiple, is a ratio used to determine the value of a company.
  • It is computed by dividing enterprise value by EBITDA.
  • Enterprise multiples can vary depending on the industry. It is reasonable to expect higher enterprise multiples in high-growth industries and lower multiples in industries with slow growth.
  • EV = (market capitalization) + (value of debt) + (minority interest) + (preferred shares) – (cash and cash equivalents); and
  • EBITDA is earnings before interest, taxes, depreciation, and amortization.

Arbitrage :

Simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.

A Simple Arbitrage Example :

As a simple example of arbitrage, consider the following. The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE) while, at the same moment, it is trading for $20.05 on the London Stock Exchange (LSE). A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share. The trader could continue to exploit this arbitrage until the specialists on the NYSE run out of inventory of Company X’s stock, or until the specialists on the NYSE or LSE adjust their prices to wipe out the opportunity.

Earnings Per Share : EPS

  • Earnings per share is a company’s profit divided by the number of common stock shares it has outstanding.
  • EPS shows how much money a company makes for each share of its stock.
  • A higher EPS indicates more value because investors will pay more for a company with higher profits.
  • EPS can be calculated in various ways, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

Share repurchase :

  •  A share repurchase, or buyback, is a decision by a company to buy back its own shares from the marketplace.
  • A company might buy back its shares to boost the value of the stock and to improve the financial statements.
  • Companies tend to repurchase shares when they have cash on hand, and the stock market is on an upswing. There is a risk that the stock price could fall after a buyback.
  • Increase EPS, efficient way to give money to share holders, brings down PE, brings up Price

Tender Offer :

  • A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time.
  • The investor normally offers a higher price per share than the company’s stock price, providing shareholders a greater incentive to sell their shares.
  • In the case of a takeover attempt, the tender may be conditional on the prospective buyer being able to obtain a certain amount of shares, such as a sufficient number of shares to constitute a controlling interest in the company.

Example of a Tender Offer

For example, Company A has a current stock price of $10 per share. An investor, seeking to gain control of the corporation, submits a tender offer of $12 per share with the condition that he acquires at least 51% of the shares. In corporate finance, a tender offer is often called a takeover bid as the investor seeks to take over control of the corporation.

Business Process Management Software (BPMS) :

BPMS helps your organization improve your business processes with the help of analysis and automation. BPMS should be able to let you model, create, edit, and run all of the business processes in your organization and also collect data and analytics.

Business process management (BPM) is often defined as a technique, structured method, and discipline used to streamline operations and enhance efficiency. These techniques and methods are often used to identify, model, analyze, modify, improve, and standardize business processes with the help of automation.

Business Process Management Software has also taken a new and enhanced form–iBPMS (i stands for ‘intelligent’). An iBPMS uses actionable, real-time insights from operations intelligence to improve the orchestration of adaptive business processes.

Retrocession

  • Retrocession fees are kickbacks to wealth managers or other money acquirers that are provided by a third party.
  • Retrocession commission is controversial in the financial world because money is going back to marketers for advocating for specific products.
  • Retrocession fees are typically recurring, with one-time kickbacks usually called a finder’s fee, referral fee or acquisition commission.
  • Types of retrocession fees include custody banking, trading, and financial product purchase.

Hedge Fund

  • Hedge funds are alternative investment vehicles that employ a variety of strategies to generate alpha for their accredited investor clients.
  • They are more expensive as compared to conventional investment instruments because they have a Two And Twenty fee structure, meaning they charge two percent for asset management and take 20% of overall profits as fees.
  • They have had an exceptional growth curve in the last twenty years and have been associated with several controversies.

Key characteristics :

  • They’re only open to “accredited” or qualified investors: Hedge funds are only allowed to take money from “qualified” investors—individuals with an annual income that exceeds $200,000 for the past two years or a net worth exceeding $1 million, excluding their primary residence. As such, the Securities and Exchange Commission deems qualified investors suitable enough to handle the potential risks that come from a wider investment mandate. 
  • They offer wider investment latitude than other funds: A hedge fund’s investment universe is only limited by its mandate. A hedge fund can basically invest in anything—land, real estate, stocks, derivatives, and currencies. Mutual funds, by contrast, have to basically stick to stocks or bonds and are usually long-only.
  • They often employ leverage: Hedge funds will often use borrowed money to amplify their returns. As we saw during the financial crisis of 2008leverage can also wipe out hedge funds.
  • Fee structure: Instead of charging an expense ratio only, hedge funds charge both an expense ratio and a performance fee. This fee structure is known as “Two and Twenty”—a 2% asset management fee and then a 20% cut of any gains generated.

Shadow banking

  • The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
  • It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
  • The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight even since then.

Dark Pool

A dark pool is a private financial forum or exchange for trading securities. Dark pools allow investors to trade without exposure until after the trade has been executed. Dark pools are a type of alternative trading system that give investors the opportunity to place orders and make trades without publicly revealing their intentions during the search for a buyer or seller.

The primary advantage of dark pool trading is that institutional investors making large trades can do so without exposure while finding buyers and sellers. This prevents heavy price devaluation, which would otherwise occur. If it were public knowledge, for example, that an investment bank was trying to sell 500,000 shares of a security, the security would almost certainly have decreased in value by the time the bank found buyers for all of their shares. Devaluation has become an increasingly likely risk, and electronic trading platforms are causing prices to respond much more quickly to market pressures. If the new data is reported only after the trade has been executed, however, the news has much less of an impact on the market.

Internal rate of return IRR

The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.

It is important for a business to look at the IRR as the plan for future growth and expansion. The formula and calculation used to determine this figure follows.

  • IRR is the rate of growth a project is expected to generate.
  • IRR is calculated by the condition that the discount rate is set such that the NPV = 0 for a project.
  • IRR is used in capital budgeting to decide which projects or investments to undertake and which to forgo.

One popular use of IRR is comparing the profitability of establishing new operations with that of expanding existing ones. For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one. While both projects are likely to add value to the company, it is likely that one will be the more logical decision as prescribed by IRR.

IRR is also useful for corporations in evaluating stock buyback programs. Clearly, if a company allocates a substantial amount to a stock buyback, the analysis must show that the company’s own stock is a better investment (has a higher IRR) than any other use of the funds for other capital projects, or higher than any acquisition candidate at current market prices.

LBO Leveraged buy out

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.

  • A leveraged buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. 
  • One of the largest LBOs on record was the acquisition of Hospital Corporation of America (HCA) by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch in 2006.
  • In a leveraged buyout (LBO), there is usually a ratio of 90% debt to 10% equity.

Long/Short Equity

  • Long/short equity is an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares.
  • Long/short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both under-valued and over-valued.
  • Long/short equity is commonly used by hedge funds, which often take a relative long bias—for instance, a 130/30 strategy where long exposure is 130% of AUM and 30% is short exposure.

Holistic

Relating to the whole of something or to the total system instead of just to its parts

Share reconciliation

Share reconciliation is one of the most important steps in your day-to-day operation of the interface. The share reconciliation process verifies that the data you have just posted into the database is correct and complete. Share reconciliation compares cash and share quantities in PortfolioCenter with the quantities on record at the custodian.

Deterministic

Deterministic means that any participant who applies the operations to the initial state in the same order will arrive at exactly the same result.