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|Stock Market Analysis: 02/20/18 by styleinspobcz: 7:27pm On Mar 02, 2021|
Last week, new CEO Pekka Lundmark communicated the company's updated strategy to improve competitiveness. Risk appetite pulled back slightly last week, but they have further room to run and portfolios are not fully invested. To illustrate the divide between risky assets and cash, assume that you are trying to value a software company, with a cash balance (which is invested in liquid, riskless or close-to-riskless investments) of $200 million. If you assume that cash is the only non-operating asset (i.e., that companies do not have cross holdings and other non-operating investments), the debt effect can be computed approximately. Unlike the cash effect, which I was able to measure with relative ease by netting cash out of the market capitalization and the income from cash from the net income, the debt effect is messier to isolate. Note that both the cash effect, which pushes up PE ratios, and the debt effect, which pushes down PE ratios, is visible in this table.
Whatever the reasons, these shifts can affect the PE ratios for the market, making it look expensive when cash balances are high and debt ratios are low. A low PE ratio can be indicative of cheapness, but it can also be the result of high debt ratios and low or no cash holdings. Interesting, a zero net debt ratio (which occurs across the diagonal of the table) does not have a neutral effect on PE, with PE rising when both debt and cash are at higher values; thus the PE when you have no cash and no debt is 11.81, but it is 12.66 when you have 40% debt and 40% cash. The first set of statistics that I will estimate relate to debt and cash. Conversely, a high PE ratio can point to over priced unique boutique s, but it can be caused by high cash balances and low debt ratios. Even if nothing else changes, the PE ratio for the company should decrease after the buyback, as (high PE) cash leaves the company.
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