The Analyst Agenda

Private Equity (PE) firms buy and manage companies before selling them. Value is created through financial engineering (leverage), operational improvements, and strategic repositioning. The goal is to exit at a higher valuation, a process known as multiple expansion, delivering returns to investors.

Capital structure is how a firm finances its assets through a mix of debt and equity. It’s a constant trade-off. Debt is cheaper and provides a tax shield on interest payments, but increases financial risk. Equity is more expensive and dilutes ownership, but is less risky for the company.

The Weighted Average Cost of Capital (WACC) represents a firm's blended cost of capital across all sources, including equity and debt. It sets the minimum return a company must earn on new projects to satisfy its creditors, owners, and other providers of capital, making it a critical hurdle rate for investment decisions.

Options are contracts giving the right, but not the obligation, to buy (call) or sell (put) an asset at a set price. Calls are bullish bets that a stock will rise. Puts are bearish bets it will fall. They can be used for speculation (high-risk, high-reward) or hedging (reducing risk in a portfolio).

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets. It states that an asset's expected return equals the risk-free rate plus a premium based on its "beta"—a measure of its volatility relative to the overall market. It's simple, but relies on many assumptions.

Net Income is an accounting profit metric including non-cash expenses like depreciation. Free Cash Flow (FCF) is the actual cash a company generates after capital expenditures. FCF is often considered a truer measure of financial performance and is the cornerstone of DCF valuation, as it represents cash available to all investors.

A stock represents a share of ownership in a corporation. As an owner (shareholder), you have a claim on a portion of the company's assets and earnings. Returns come from two sources: dividends (a share of profits) and capital gains (increase in stock price). Stock ownership can be diluted by new share issuances.

A bond is a loan made by an investor to a borrower (typically a corporation or government). The borrower pays periodic interest (coupons) and repays the principal at maturity. Bond prices are sensitive to interest rate changes (duration) and the borrower's ability to repay (credit risk).

The Balance Sheet is a snapshot of a company's financial health at a single point in time. It follows the fundamental accounting equation: Assets = Liabilities + Equity. It reveals what a company owns (assets) and what it owes (liabilities), providing insights into its liquidity, solvency, and overall capital structure.

The Income Statement, also called the P&L (Profit & Loss), shows a company's financial performance over a period. It starts with revenue, subtracts costs and expenses, and arrives at Net Income. It reveals key profitability metrics like gross, operating, and net margins, and shows the impact of operating leverage.

The Cash Flow Statement bridges the gap between accrual accounting and cash reality. It tracks the movement of cash from Operating (CFO), Investing (CFI), and Financing (CFF) activities. It is crucial for understanding how a company is generating and using cash, and reconciles Net Income back to the change in the cash balance.

A Discounted Cash Flow (DCF) analysis is a valuation method used to estimate the value of an investment based on its expected future cash flows. It involves forecasting a company's free cash flow, discounting it back to the present using WACC, and adding a terminal value. Its accuracy is highly sensitive to assumptions.

Comparable Company Analysis ("Comps") is a relative valuation method. It values a company by comparing it to similar publicly traded companies, using metrics like P/E, EV/EBITDA, or P/B ratios. The challenge lies in selecting truly comparable peers and making adjustments (normalizing) for differences in accounting or growth.

The Price-to-Earnings (P/E) ratio is a simple valuation multiple that compares a company's stock price to its earnings per share. A high P/E can suggest the market expects high future growth, but it can also indicate overvaluation. It must be viewed in the context of the industry, growth rates, and overall market conditions.

The Price-to-Book (P/B) or Market-to-Book ratio compares a company's market value to its book value (from the balance sheet). A ratio > 1 implies the market values the company for more than its accounting net assets, often due to intangible assets like brand or IP. It is most useful for asset-heavy industries like banking.

Trailing P/E uses past (last 12 months) earnings, making it a concrete, historical measure. Forward P/E uses analysts' future earnings estimates, making it a predictive, expectations-based measure. Trailing P/E can be misleading if past performance is not indicative of the future, while Forward P/E is only as good as the forecasts.

Intangible assets are non-physical assets like brand recognition, intellectual property (patents, trademarks), and human capital. Traditional accounting often struggles to capture their true economic value, leading to discrepancies between a company's book value and its market value, especially for technology and consumer firms.

Dollar-Cost Averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market fluctuations. This approach reduces the risk of making a large investment at a market peak. It enforces discipline and smooths out the average purchase price over time, dampening volatility.

Hedge funds are private investment partnerships that use a wide range of complex strategies (e.g., long/short equity, global macro) to seek "alpha," or returns uncorrelated with the broader market. They cater to accredited investors and are known for their "2 and 20" fee structure (2% management fee, 20% of profits).

Liquidity ratios measure a company's ability to meet its short-term obligations. The Current Ratio (Current Assets / Current Liabilities) is a broad measure. The Quick Ratio (or Acid-Test) is stricter, excluding less-liquid inventory. The Cash Ratio is the most conservative, considering only cash and equivalents. They are vital signs of operational health.