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how an earnings call works | the term earnings call is a combination of a company s report of earnings such as its net income or earnings per share and the conference call to discuss results earnings calls often begin with the moderator issuing a safe harbor statement which advises that the call may include forward looking statements 1the vast majority of listed companies host earnings calls to discuss their financial results although small companies with minimal investor interest may be the exception to the rule many companies provide a phone recording or presentation of the earnings call on their corporate websites for a number of weeks after the actual call making it possible for investors who could not log in to the call to access this information earnings call and sec forms 10q and 10kduring an earnings call company management discusses the details of its sec form 10 q quarterly report or 10 k annual report federal securities laws mandate that publicly traded companies provide certain information in these forms including detailed financial results along with a more qualitative discussion the md a section management discussion and analysis usually provides the most comprehensive discussion of financial results and other performance metrics it will generally dig into the reasons behind certain aspects of growth or decline on the company s income statement balance sheet and statement of cash flows the md a will discuss particular drivers of growth risks that investors face when purchasing shares or extending loans and even pending lawsuits management also often uses the md a section to announce the upcoming year by outlining future goals and approaches to new projects and initiatives along with any changes in the executive suite and or key hires earnings call and fundamental analysisanalysts use the information they learn from the earnings call in fundamental analysis of the company fundamental analysis begins with the company s financial statements analysts will comb through these statements in addition to listening in on verbal cues that company management gives during the earnings call analysts may ask questions during an earnings call related to main concepts or even details in the footnotes that focus on inventory and less accumulated depreciation lines advantages and disadvantages of earnings callsearnings calls can provide a wealth of information for investors analysts and members of the financial community what s released during the earnings call can help analysts in their fundamental analysis of the company if allowed some participants may present questions to be answered by the company s representative or executives during the call the questions may yield valuable information that can enhance the company s image however some questions may be about topics management does not want in the forefront thereby damaging the company with earnings calls investors quickly receive the information they want without having to scour through dozens of report pages to find it also they often schedule trades close to the earnings call and how they trade is dependent on the information released preparing for the earnings call can take time and command significant resources this commitment may come at the expense of normal business operations also once a company hosts an earnings call it must continue to keep the investment community engaged this means that it must continue these calls to prevent investors from thinking something is amiss helps with fundamental analysisguides investors decisions on tradingallows participants to ask questionsstrains normal business operationsq a could produce unfavorable resultsmust establish a regular cadence to prevent negative speculationexample of an earnings callon april 28 2021 apple aapl held its 2nd quarter 2021 earnings call with ceo tim cook cfo luca maestri other company executives and analysts from other large companies such as morgan stanley evercore ubs and bank of america 2tim cook and luca maestri discussed the company s outlook on future revenues income expenses and plans for its capital tim cook highlighted the prior quarter s performance noting a significant increase in revenues he also boasted about iphone and mac s performance as well as that of wearable products like the apple watch and services like apple tv shifting the focus from its offerings tim cook spoke about the company s commitment to the environment and its focus on the u s economy in a quest for a net zero carbon footprint by 2030 apple plans to introduce approximately eight gigawatts of clean energy and continue supporting environmental projects globally regarding the nation s economy it plans to invest more than 430 billion which will result in approximately 20 000 new jobs luca maestri expanded on cook s message by providing concrete figures he celebrated their record breaking performance of 89 6 billion in revenues recorded for q2 a 54 increase compared to the same quarter of the prior year in greater detail he dissected revenues by segment attributing 47 9 billion of the quarter s revenue to iphone sales and 16 9 billion to services such as app store purchases cloud services apple music and more citing a remarkable performance maestri shared how apple returned more than 23 billion including 3 4 billion in dividends and 19 billion as open market repurchases of apple stock to shareholders during the march quarter looking forward the company expects the june quarter to not mirror the spectacular march quarter performance due to delayed launches and supply constraints gross margins are expected to be slightly below 50 and operating expenses are to be approximately 11 billion analysts asked questions about reviving the existing customer base and attracting new customers pricing forward looking initiatives drivers for its high gross margin 42 and the unexpectedly high performance in its services division in addition to the company s performance and outlook on revenues and expenses they were asked how their plans for the u s economy would affect the company s expenses to which maestri reflected on the company s dedication to the goal how much more revenues increased over its operations expenses in the prior quarter and its plans to continue investing into the business earnings call faqsan earnings call allows a public company to discuss its past performance and future plans as well as answer questions from analysts investors and media personnel before listening to an earnings call it is helpful to prepare to get a better understanding of what to listen for and what s particularly important to investors and analysts 3 listen to the company s previous earnings call and read subsequent analysts reports to gain insight into the company s performance then review the earnings press release which is usually published before the call this can provide valuable information such as benchmarks and plans for dividends as you listen to the earnings call pay attention to the results benchmarks plans and risks afterward you can analyze the call management s tone the results and the answers to analysts questions there is no prescribed time length for earnings calls however most last less than an hour 4 earnings call recordings are typically published on the company s website for a specific time such as two weeks the transcripts are often available for a longer period however you can also find recordings and transcripts on investment websites if an earnings call is not available the next best alternative is to review the company s earnings report on its website or the securities and exchange commissions s sec website the bottom linean earnings call is a conference call between company executives and the financial community on this call management reviews the company s performance for a specific period as well as potential risks and future plans at the end of the call analysts and investors are generally welcome to ask questions which can help in their fundamental analysis of the company | |
what is the earnings credit rate ecr | the earnings credit rate ecr is a daily calculation of interest that a bank pays on customer deposits the earnings credit rate is often correlated with the u s treasury bill t bill rate ecrs are rates that banks impute to offset service charges because depositors leave balances in non interest bearing accounts the bank will apply an ecr on those balances and use that as a credit for services for example a corporate treasurer with a 250 000 collected balance receiving a 2 ecr would earn 5 000 to offset services ecr is often credited automatically understanding the earnings credit ratebanks may use ecrs to reduce fees customers pay for other banking services these might include checking and savings accounts debit and credit cards business loans additional merchant services such as credit card processing and check collection reconciliation and reporting and cash management services e g payroll ecrs are paid on idle funds which reduce bank service charges customers with larger deposits and balances tend to pay lower bank fees ecrs are visible on most u s commercial account analyses and billing statements banks may have great discretion in determining the earnings allowance while the earnings credit rate can offset fees depositors must note that they are only being charged for services they use not in combination with others history of the earnings credit ratethe notion of an earnings credit rate originated with regulation q reg q which prohibited banks from paying interest on deposits in checking accounts set up for transactional purposes 1 following the 1933 glass steagall act many hoped this practice would limit loan sharking and other predatory actions 2the act subsequently supported consumers in releasing funds from checking accounts and shifting them to money market funds following regulation q many banks decided to offer soft dollar credits on these non interest bearing accounts to offset banking services financial instruments with a higher yield than ecrs include money market funds or even relatively safe and liquid bond funds typically the ecr is applied against collected balances not ledger or floating balances lockbox accounts and other depository accounts have float since it takes time for the deposits to clear while these items are floating the funds are not available collected balances are what you have cleared and have available to transfer or invest special considerations | |
what is the difference between ecr and hard interest | hard interest rates are generally higher than ecrs one reason is that ecrs are not taxable whereas hard interest rates are | |
what is the difference between interest earned and interest rate | the interest rate is a percent of your total deposits paid to you as interest earned | |
what is ecr for banks | the earned credit rate is an interest rate many banks give their institutional customers on their balances the bottom linethe earnings credit rate ecr is a daily interest calculation a bank pays on institutional customer deposits it is usually calculated using the u s treasury bill t bill rate the rate acts as an incentive for customers to deposit funds in non interest bearing accounts | |
what is an earnings estimate | an earnings estimate is an analyst s estimate for a company s future quarterly or annual earnings per share eps future earnings estimates are arguably the most important input when attempting to value a firm by placing estimates on the earnings of a firm for certain periods quarterly annually etc analysts can then use cash flow analysis to approximate fair value for a company which in turn will give a target share price investors often rely on earnings estimates to analyze different stocks and decide whether to buy or sell them understanding an earnings estimateanalysts use forecasting models management guidance and fundamental information on the company to derive an eps estimate market participants rely heavily on earnings estimates to gauge a company s performance so whether a company meets beats or misses its earnings estimates can impact the price of the underlying stock particularly in the short term analysts earnings estimates are often aggregated to create consensus estimates these are used as a benchmark against which the company s performance is evaluated when you hear that a company has missed estimates or beaten estimates it s usually in reference to consensus estimates a few companies such as refinitiv and zacks investment research compile estimates and compute the average or consensus their forecasts can be found in stock quotations or financial publications such as the wall street journal consensus numbers can also be found at a number of financial websites such as yahoo finance bloomberg visible alpha morningstar com and google finance published consensus earnings estimates frequently are reflected in the stock price of a company but sometimes they have an adverse effect the shares of firms with high earnings estimates tend to falter as the companies performance doesn t live up to the market s expectations they can easily disappoint conversely firms with low earnings estimates tend to perform better than anticipated because of the low bar they ve nowhere to go but up 1example of an earnings estimateearnings estimates are found by looking up individual stocks take for example amazon amzn here is a roundup of its consensus earnings estimates as of jun 7 2021 special considerationsearnings surprises occur when a company misses the consensus estimate either by earning more than expected or less if the firm manages to beat the earnings estimate it is called a positive or upside surprise if the firm fails to reach the earnings estimate it is called a negative surprise here is how amazon s performance vis vis surprises has worked out over 2020 2021 ytd as with the earnings estimates themselves earnings surprises affect stock prices it s been found that the stocks of firms with substantial positive earnings surprises tend to perform above average and the stock prices with substantial negative earnings surprises perform below average 1as a result companies often manage their earnings carefully to ensure that consensus estimates are not missed companies that consistently beat earnings estimates outperform the market so some companies set expectations low by providing forward guidance that results in consensus estimates that are low relative to likely earnings this results in the company consistently beating consensus estimates and the earnings surprise becoming less and less surprising | |
what is earnings management | earnings management is the use of accounting techniques to produce financial statements that present an overly positive view of a company s business activities and financial position many accounting rules and principles require that a company s management make judgments in following these principles earnings management takes advantage of how accounting rules are applied and creates financial statements that inflate or smooth earnings investopedia paige mclaughlinunderstanding earnings managementearnings refers to a company s net income or profit for a certain specified period such as a fiscal quarter or year companies use earnings management to smooth out fluctuations in earnings and present more consistent profits each month quarter or year large fluctuations in income and expenses may be a normal part of a company s operations but the changes may alarm investors who prefer to see stability and growth a company s stock price often rises or falls after an earnings announcement depending on whether the earnings meet or fall short of analysts expectations management can feel pressure to manage earnings by manipulating the company s accounting practices to meet financial expectations and keep the company s stock price up many executives receive bonuses based on earnings performance and others may be eligible for stock options when the stock price increases many forms of earnings manipulation are eventually uncovered either by a certified public accountant cpa firm performing an audit or through required securities and exchange commission sec disclosures the securities and exchange commission sec requires that the financial statements of publicly traded companies be certified by the chief executive officer ceo and chief financial officer cfo and has pressed charges against managers who engaged in fraudulent earnings management 1examples of earnings managementone method of manipulation when managing earnings is to change to an accounting policy that generates higher earnings in the short term for example assume a furniture retailer uses the last in first out lifo method to account for the cost of inventory items sold under lifo the newest units purchased are considered to be sold first since inventory costs typically increase over time the newer units are more expensive and this creates a higher cost of sales and a lower profit 2if the retailer switches to the first in first out fifo method of recognizing inventory costs the company considers the older less expensive units to be sold first fifo creates a lower cost of goods sold expense and therefore higher profit so the company can post higher net income in the current period 2material changes to accounting policy must be disclosed in a company s financial statement 34another form of earnings management is to change company policy so more costs are capitalized rather than expensed immediately capitalizing costs as assets delays the recognition of expenses and increases profits in the short term assume for example company policy dictates that every item purchased under 5 000 is immediately expensed and costs over 5 000 may be capitalized as assets if the firm changes the policy and starts to capitalize all items over 1 000 expenses decrease in the short term and profits increase special considerationsa change in accounting policy must be explained to financial statement readers and that disclosure is usually stated in a footnote to the financial statements the disclosure is required because of the accounting principle of consistency 34financial statements are consistent if the company uses the same accounting policies each year this is important because it allows the financial statement user to easily identify variations when looking at the company s historical trends the fact that a change in policy must be explained and that all of a company s accounts are laid bare in its financial statement means that careful readers will likely discover the earnings management strategy the problem is that not everyone has the time to go over reports in full or the knowledge to understand everything that is written | |
is earnings management illegal | changing accounting techniques in itself is not illegal however if the sec deems that a company is being creative to mislead investors and intentionally misrepresent its results then it may take action and issue fines | |
why do companies engage in earnings management | there are many reasons corporate managers engage in earnings management these include higher bonuses avoidance of falling below closely followed analyst forecasts tax savings boosting the value of the company and creating a sense of stability | |
what are the types of earnings management | several techniques are used to manage earnings examples include lowering capitalization limits changing from the last in first out method of valuing inventory to the first in first out method cutting nonmandatory expenses for short periods or attributing regular business expenses to a one off nonrecurring event the bottom lineinvestors should always do their homework before investing in a stock that means analyzing the company s financial report to get a true picture of how it is doing don t just fixate on the headline numbers the company wants you to read or trust that analysts or somebody else will do the job on your behalf go through everything yourself and do it with a skeptical eye | |
what is the earnings multiplier | the earnings multiplier is a financial metric that frames a company s current stock price in terms of the company s earnings per share eps of stock that s simply computed as price per share earnings per share also known as the price to earnings p e ratio the earnings multiplier can be used as a simplified valuation tool with which to compare the relative costliness of the stocks of similar companies it can likewise help investors judge current stock prices against their historical prices on an earnings relative basis understanding earnings multiplierthe earnings multiplier can be a useful tool for determining how expensive the current price of a stock is relative to the company s earnings per share of that stock this is an important relationship because the price of a stock is theoretically supposed to be a function of the anticipated future value of the issuing company and future cash flows resulting from ownership of that stock if the price of a stock is historically expensive relative to the company s earnings it may indicate that it s not an optimal time to purchase this equity because it s overly expensive furthermore comparing earnings multipliers across similar companies can help illustrate how expensive various companies stock prices are relative to one other example of the earnings multiplieras an example of a practical application of the earnings multiplier consider fictitious company abc let s assume this corporation has a current stock price of 50 per share and earnings per share eps of 5 under this set of circumstances the earnings multiplier would be 50 dollars 5 dollars per year 10 years this means it would take 10 years to make back the stock price of 50 given the current eps the multiplier can also be verbally expressed by saying company abc is trading at 10 times earnings because the current price of 50 is 10x the 5 eps if 10 years ago company abc had a market price of 50 and eps of 7 the multiplier would have been 7 14 years the earnings multiplier should only be used to value investments on a relative basis and shouldn t be used to gauge an absolute valuation of a stock the current price would be more expensive relative to current earnings than the price 10 years ago because at that time the stock was only trading at 7 14 times earnings instead of 10 times earnings it trades at currently comparing company abc s earnings multiplier to other similar companies can also provide a simple gauge for judging how expensive a stock is relative to its earnings if company xyz also has an eps of 5 but its current stock price is 65 it has an earnings multiplier of 13 years consequently this stock may be deemed to be relatively more expensive than the stock of company abc which has a multiplier of only 10 years | |
what is earnings per share eps | earnings per share eps is a measure of a company s profitability that indicates how much profit each outstanding share of common stock has earned it s calculated by dividing the company s net income by the total number of outstanding shares the higher a company s eps the more profitable it is considered to be investopedia alex dos diazearnings per share equationearnings per share value is calculated as net income also known as profits or earnings divided by available shares a more refined calculation adjusts the numerator and denominator for shares that could be created through options convertible debt or warrants the numerator of the equation is also more relevant if it is adjusted for continuing operations to calculate a company s eps the balance sheet and income statement are used to find the period end number of common shares dividends paid on preferred stock if any and the net income or earnings it is more accurate to use a weighted average number of common shares over the reporting term because the number of shares can change over time understanding how to find eps is crucial for evaluating a company s profitability any stock dividends or splits that occur must be reflected in the calculation of the weighted average number of shares outstanding some data sources simplify the calculation by using the number of shares outstanding at the end of a period example of epssay that the calculation of eps for three companies at the end of the fiscal year was as follows | |
how is eps used | earnings per share is one of the most important metrics employed when determining a firm s profitability on an absolute basis it is also a major component of calculating the price to earnings p e ratio where the e in p e refers to eps by dividing a company s share price by its earnings per share an investor can see the value of a stock in terms of how much the market is willing to pay for each dollar of earnings eps is one of the many indicators you could use to pick stocks if you have an interest in stock trading or investing your next step is to choose a broker that works for your investment style comparing eps in absolute terms may not have much meaning to investors because ordinary shareholders do not have direct access to the earnings instead investors will compare eps with the share price of the stock to determine the value of earnings and how investors feel about future growth basic eps vs diluted epsthe formula in the table above calculates the basic eps of each of these select companies basic eps does not factor in the dilutive effect of shares that could be issued by the company when the capital structure of a company includes items such as stock options warrants or restricted stock units rsu these investments if exercised could increase the total number of shares outstanding in the market to better illustrate the effects of additional securities on per share earnings companies also report the diluted eps which assumes that all shares that could be outstanding have been issued for example say the total number of shares that could be created and issued from company c s convertible instruments at fiscal year end was 23 million if this number is added to its total shares outstanding its diluted weighted average shares outstanding will be 541 million 23 million 564 million shares the company s diluted eps is therefore 1 67 billion 564 million 2 96 sometimes an adjustment to the numerator is required when calculating a fully diluted eps for example sometimes a lender will provide a loan that allows them to convert the debt into shares under certain conditions the shares that would be created by the convertible debt should be included in the denominator of the diluted eps calculation but if that happened then the company wouldn t have paid interest on the debt in this case the company or analyst will add the interest paid on convertible debt back into the numerator of the eps calculation so the result isn t distorted eps excluding extraordinary itemsearnings per share can be distorted both intentionally and unintentionally by several factors analysts use variations of the basic eps formula to avoid the most common ways that eps may be inflated imagine a company that owns two factories that make cell phone screens the land on which one of the factories sits has become very valuable as new developments have surrounded it over the past few years the company s management team decides to sell the factory and build another one on less valuable land this transaction creates a windfall profit for the firm though this land sale has created real profits for the company and its shareholders it is considered an extraordinary item because there is no reason to believe the company can repeat that transaction in the future shareholders might be misled if the windfall is included in the numerator of the eps equation so it is excluded a similar argument could be made if a company had an unusual loss maybe the factory burned down which would have temporarily decreased eps and should be excluded for the same reason eps from continuing operationsa company started the year with 500 stores and had an eps of 5 00 however assume that this company closed 100 stores over that period and ended the year with 400 stores an analyst will want to know what the eps was for just the 400 stores the company plans to continue with into the next period in this example that could increase the eps because the 100 closed stores were perhaps operating at a loss by evaluating eps from continuing operations an analyst is better able to compare prior performance to current performance eps and capitalan important aspect of eps that is often ignored is the capital that is required to generate the earnings net income in the calculation two companies could generate the same eps but one could do so with fewer net assets that company would be more efficient at using its capital to generate income and all other things being equal would be a better company in terms of efficiency a metric that can be used to identify more efficient companies is the return on equity roe eps and dividendsalthough eps is widely used as a way to track a company s performance shareholders do not have direct access to those profits a portion of the earnings may be distributed as a dividend but all or a portion of the eps can be retained by the company shareholders through their representatives on the board of directors would have to change the portion of eps that is distributed through dividends to access more of those profits eps and price to earnings p e making a comparison of the p e ratio within an industry group can be helpful though in unexpected ways although it seems like a stock that costs more relative to its eps when compared to peers might be overvalued the opposite tends to be the rule regardless of its historical eps investors are willing to pay more for a stock if it is expected to grow or outperform its peers in a bull market it is normal for the stocks with the highest p e ratios in a stock index to outperform the average of the other stocks in the index | |
what counts as a good eps will depend on factors such as the recent performance of the company the performance of its competitors and the expectations of the analysts who follow the stock sometimes a company might report growing eps but the stock might decline in price if analysts were expecting an even higher number | likewise a shrinking eps figure might nonetheless lead to a price increase if analysts were expecting an even worse result it is important to always judge eps in relation to the company s share price such as by looking at the company s p e or earnings yield | |
what is the difference between basic eps and diluted eps | analysts will sometimes distinguish between basic and diluted eps basic eps consists of the company s net income divided by its outstanding shares it is the figure most commonly reported in the financial media and is also the simplest definition of eps diluted eps on the other hand will always be equal to or lower than basic eps because it includes a more expansive definition of the company s shares outstanding specifically it incorporates shares that are not currently outstanding but could become outstanding if stock options and other convertible securities were to be exercised | |
what is the difference between eps and adjusted eps | adjusted eps is a type of eps calculation in which the analyst makes adjustments to the numerator typically this consists of adding or removing components of net income that are deemed to be non recurring for instance if the company s net income was increased based on a one time sale of a building the analyst might deduct the proceeds from that sale thereby reducing net income in that scenario adjusted eps would be lower than basic eps | |
when looking at eps to make an investment or trading decision be aware of some possible drawbacks for instance a company can game its eps by buying back stock reducing the number of shares outstanding and inflating the eps number given the same level of earnings | changes to accounting policy for reporting earnings can also change eps eps also does not take into account the price of the share so it has little to say about whether a company s stock is over or undervalued | |
how do you calculate eps using excel | after collecting the necessary data input the net income into excel preferred dividends and number of common shares outstanding into three adjacent cells say b3 through b5 in cell b6 input the formula b3 b4 to subtract preferred dividends from net income in cell b7 input the formula b6 b5 to render the eps ratio the bottom lineearnings per share eps is an important profitability measure used in relating a stock s price to a company s actual earnings in general higher eps is better but one has to consider the number of shares outstanding the potential for share dilution and earnings trends over time if a company misses or beats analysts consensus expectations for eps its shares can either crash or rally respectively | |
what is earnings power value epv | earnings power value epv is a technique for valuing stocks by making assumptions about the sustainability of current earnings and the cost of capital but not future growth earnings power value epv is derived by dividing a company s adjusted earnings by its weighted average cost of capital wacc while the formula is simple there are a number of steps that need to be taken to calculate adjusted earnings and wacc the final result is epv equity which can be compared to market capitalization formula and calculation for earnings power value epv epv adjusted earnings wacc where e p v earnings power value w a c c weighted average cost of capital begin aligned text epv frac text adjusted earnings text wacc textbf where epv text earnings power value wacc text weighted average cost of capital end aligned epv waccadjusted earnings where epv earnings power valuewacc weighted average cost of capital epv starts with operating earnings or ebit earnings before interest and tax not adjusted at this point for one time charges average ebit margins over a business cycle of at least five years are multiplied by sustainable revenues to yield normalized ebit normalized ebit is then multiplied by 1 average tax rate the next step is to add back excess depreciation after tax basis at one half average tax rate at this point the analyst has a firm s normalized earnings figure adjustments now take place to account for unconsolidated subsidiaries current restructuring charges pricing power and other material items this adjusted earnings figure is then divided by the firm s weighted average cost of capital wacc to derive epv business operations the final step to calculate the equity value of the firm is to add excess net assets mainly cash plus the market value of real estate minus legacy costs to epv business operations and subtract the value of the firm s debt epv equity can then be compared to the current market capitalization of the company to determine whether the stock is fairly valued overvalued or undervalued epv is meant to be a representation of the current free cash flow capacity of the firm discounted at its cost of capital | |
what does earnings power value tell you | earnings power value is an analytical metric used to determine if a company s shares are over or under valued the epv formula is used to calculate the level of distributable cash flows that a company could reasonably sustain current earnings are used rather than forecasts or discounted future earnings since current earnings are reliable and knowable it is because many other valuation metrics rely on assumptions or subjective evaluations that they are less reliable than evp epv was developed by columbia university professor bruce greenwald a renowned financial economist and value investor who through this valuation technique tries to overcome the main challenge in discounted cash flow dcf analysis related to making assumptions about future growth cost of capital profit margins and required investments 1limitations of earnings power valueearnings power value is based on the idea the conditions surrounding business operations remain constant and in an ideal state it does not account for any fluctuations either internally or externally that may affect the rate of production in any way these risks can stem from changes within the particular market in which the company operates changes in associated regulatory requirements or other unforeseen events that affect the flow of business in either a positive or negative way | |
what is a quarterly earnings report | a quarterly earnings report is a filing made by public companies every three months to report on their recent financial performance quarterly earnings reports include items such as net income earnings per share earnings from continuing operations and net sales stock analysts and investors use quarterly earnings reports as one way to gauge the financial health of the company and its prospects for the future understanding the quarterly earnings reportquarterly earnings reports provide an update of three financial statements the income statement the balance sheet and the cash flow statement that information includes an overview of sales expenses and net income for the most recent quarter the report may also provide a comparison to the previous year and possibly to the previous quarter some quarterly earnings reports include a brief summary and analysis from the ceo or other company spokesperson the quarterly earnings report is generally backed up by the company s form 10 q which companies must file with the securities and exchange commission each quarter for the first three quarters of the year at the end of the fourth quarter companies file a 10 k form reporting annual performance 1 the 10 q is more comprehensive in nature than the quarterly earnings report and provides additional details it is usually published a few weeks after the quarterly earnings report fundamental analysts pay particular attention to the trend in ratios gleaned from quarterly earnings reports over time rather than to individual data points from the latest report one of the most important numbers for these analysts is earnings per share some companies post quarterly earnings reports going back several years on their websites the impact of quarterly earnings reportsthe announcement of quarterly earnings for a stock particularly for widely followed large capitalization stocks can move the overall market an individual stock s price can also fluctuate wildly on days when the company s quarterly earnings report is released for better or worse a company s ability to beat earnings estimates projected by analysts or by the firm itself can be more important than its ability to grow earnings over the prior year if it fails to meet or exceed the estimates published before the release that may result in a sell off of the stock in capital markets it is all about market expectations since many believe expectations are already reflected in stock prices following the efficient markets theory | |
how do you know when a company will release its quarterly earnings report | you should be able to obtain the exact date and time for a quarterly earnings report announcement from the company s investor relations department you can also track it on an earnings calendar through nasdaq or your broker | |
what is fundamental analysis | fundamental analysis attempts to determine the intrinsic value of a particular stock by studying both its unique financial data and trends in the larger economy in that way fundamental analysts hope to identify stocks that are trading at lower or higher prices than their actual worth | |
what is the efficient markets theory | the efficient markets theory also known as the efficient markets hypothesis maintains that all the information that is known about a particular stock at a given time is already reflected in its share price or will be in short order for that reason adherents of the theory say it is all but impossible for any investor to consistently outperform the market efficient markets theory is often cited as a major argument for investing through index funds as princeton economist burton c malkiel author of the influential book a random walk down wall street wrote in a 2003 paper many of us economists who believe in efficiency do so because we view markets as amazingly successful devices for reflecting new information rapidly and for the most part accurately 2the bottom linequarterly earnings reports are filings made by public companies every three months to provide data on their latest performance earnings reports are important to stock analysts investors and others as a way of assessing a company s current financial health and its performance over time a disappointing earnings report can have serious consequences for the company s share price and sometimes for the entire market | |
what is earnings yield | the earnings yield refers to the earnings per share for the most recent 12 month period divided by the current market price per share the earnings yield the inverse of the p e ratio shows the percentage of a company s earnings per share earnings yield is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem underpriced or overpriced investopedia nono flores | |
how earnings yield works | money managers often compare the earnings yield of a broad market index such as the s p 500 to prevailing interest rates such as the current 10 year treasury yield if the earnings yield is less than the rate of the 10 year treasury yield stocks may be considered overvalued if the earnings yield is higher stocks may be considered undervalued relative to bonds economic theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk free rates such as rates on treasury bills in their earnings yield to compensate them for the higher risk of owning stocks over bonds earnings yield as an investment valuation metric is not as widely used as the p e ratio earnings yield can be helpful when there is concern about the rate of return on investment however for equity investors earning periodic investment income may be secondary to growing their investment values over time this is why investors may refer to value based investment metrics such as the p e ratio more often than earnings yield when making stock investments that said the metrics provide the same information just in a different way for investors looking to invest in stocks with stable dividend income earnings yield can offer a direct look into the level of return dividend stocks may generate in this case earnings yield is more of a return metric revealing how much an investment may earn for investors rather than a valuation metric showing how investors value the investment however a valuation metric like the p e ratio can affect a return metric like earnings yield an overvalued investment can lower earnings yield while an undervalued investment can raise earnings yield this is because the higher the stock price goes without a comparable rise in earnings the lower the earnings yield will drop if the stock price falls but earnings stay the same or rise the earnings yield will increase value investors seek the latter scenario the inverse relationship between earnings yield and the p e ratio indicates that the more valuable an investment the lower the earnings yield and the less valuable an investment the higher the earnings yield however investments with strong valuations and high p e ratios might generate lower earnings over time and eventually boost their earnings yield and this is what growth investors look for on the other hand investments with weak valuations and low p e ratios may generate lower earnings over time and in the end drag down their earnings yield example of earnings yieldearnings yield can help investors assess whether or not they want to buy or sell a stock in april of 2019 meta meta formerly facebook was trading near 175 with 12 month earnings of 7 57 which produced an earnings yield of 4 3 this was historically high as the yield had been 2 5 or lower before 2018 between 2016 and 2017 the stock increased by more than 70 while the earnings yield increased from approximately 1 to 2 5 12the stock fell more than 40 off its 2018 high while the earnings yield was near its highest historical level about 3 after the decline the earnings yield continued to creep higher as the price fell reaching over 5 in early 2019 when the stock started to bounce back higher 12the increased earnings yield may have played a role in driving the stock higher mainly because investors expected earnings to improve going forward a high earnings yield relative to prior readings didn t prevent the stock from seeing a significant decline in 2018 12earnings yield may also be helpful in a stock that is older and has more consistent earnings if growth is expected to be low for the foreseeable future the earnings yield can be used to determine when it is a good time to buy the stock in its cycle a higher than typical earnings yield can indicate the stock may be oversold and could be due for a bounce higher assuming no negative news has occurred within the company | |
what is an earnout | an earnout is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals which are usually stated as a percentage of gross sales or earnings if an entrepreneur seeking to sell a business is asking for a price more than a buyer is willing to pay an earnout provision can be utilized in a simplified example there could be a purchase price of 1 million plus 5 of gross sales over the next three years understanding an earnoutearnouts do not come with hard and fast rules instead the payout level is dependent on a number of factors including the size of the business this can be used to bridge the gap between differing expectations from the buyers and sellers an earnout helps eliminate uncertainty for the buyer as it is tied to future financial performance the buyer pays a portion of the cost of the business upfront and the remainder of the cost is dependent upon if future performance targets are met the seller also receives the benefits of future growth for a period of time different financial targets such as net income or revenue may help determine earnouts structuring an earnoutthere are a number of key considerations aside from the cash compensation when structuring an earnout this includes determining the crucial members of the organization and whether an earnout is extended to them the length of the contract and the executive s role with the company post acquisition are two issues that also have to be negotiated this is so because the performance of the company is tied to management as well as other key employees if these employees leave then the company may not hit its financial targets the agreement should also specify the accounting assumptions that will be used going forward although a company can adhere to generally accepted accounting principles gaap there are still judgments managers have to make that can affect results for instance assuming a higher level for returns and allowances will lower earnings a change in strategy such as a decision to exit a business or invest in growth initiatives may depress current results the seller should be aware of this in order to come up with an equitable solution the financial metrics used to determine the earnout must also be decided upon some metrics benefit the buyer while some benefit the seller it is a good idea to use a combination of metrics such as revenues and profit metrics there are legal and financial advisors that can assist with the entire process the fee for advisors typically grows with the complexity of the transaction advantages and disadvantages of an earnoutthere are both advantages and disadvantages for the buyer and seller in an earnout for the buyer an advantage is having a longer period of time to pay for the business rather than all upfront in addition if earnings are not as high as expected the buyer does not have to pay as much for the seller the advantage is the ability to spread out taxes over a few years helping to reduce the tax impact of the sale a disadvantage to the buyer is that the seller may be involved in the business for a longer period of time wanting to provide assistance to boost earnings or use their previous experience to run the business how they see fit the disadvantage to the seller is that the future earnings are not high enough therefore they do not make as much from the sale of the business example of an earnoutabc company has 50 million in sales and 5 million in earnings a potential buyer is willing to pay 250 million but the current owner believes this undervalues the future growth prospects and asks for 500 million to bridge the gap the two parties can use an earnout a compromise might be for an upfront cash payment of 250 million and an earnout of 250 million if sales and earnings reach 100 million within a three year window or 100 million if sales only reach 70 million | |
what is an easement in gross | an easement is a concept in real estate in which one party either an individual or organization gains the right to use another party s property in a defined way in some cases the holder of the easement pays the owner of the property for the right of usage in others it is created by state or local law and attached to the property such an easement may exist in perpetuity and be transferred when the property is sold encumbering the new owner 1an easement in gross also known as a personal easement attaches the right of use to a single individual or entity rather than to the property itself it is a personal interest in another person s land usually limited in scope and duration its terms including payment are negotiated between the property owner and the easement holder an easement in gross is often considered irrevocable for the life of the holder but it is usually rendered void if the owner sells the property upon which the easement request was based 2 | |
what is an eavesdropping attack | an eavesdropping attack also known as a sniffing or snooping attack is a theft of information as it is transmitted over a network by a computer smartphone or another connected device the attack takes advantage of unsecured network communications to access data as it is being sent or received by its user eavesdropping is a deceptively mild term the attackers are usually after sensitive financial and business information that can be sold for criminal purposes there also is a booming trade in so called spouseware which allows people to eavesdrop on their loved ones by tracking their smartphone use 1understanding the eavesdropping attackan eavesdropping attack can be difficult to detect because the network transmissions will appear to be operating normally to be successful an eavesdropping attack requires a weakened connection between a client and a server that the attacker can exploit to reroute network traffic the attacker installs network monitoring software the sniffer on a computer or a server to intercept data as it is transmitted 2amazon alexa and google home are vulnerable to eavesdropping as are any internet connected devices 3any device in the network between the transmitting device and the receiving device is a point of weakness as are the initial and terminal devices themselves eavesdropping attacks can be prevented by using a personal firewall keeping antivirus software updated and using a virtual private network vpn using a strong password and changing it frequently helps too and don t use the same password for every site you log onto public wi fi networks such as those that are available free in coffee shops and airports should be avoided especially for sensitive transactions they are easy targets for eavesdropping attacks the passwords for these public networks are readily available so an eavesdropper can simply log on and using free software monitor network activity and steal login credentials along with any data that other users transmit over the network 4if your facebook or email account has been hacked lately this is probably how it happened virtual assistants such as amazon s alexa and google home also are vulnerable to eavesdropping and their always on mode makes them difficult to monitor for security some reported incidents that the companies did the snooping themselves appear to have been accidents caused by mistakes in speech recognition another way to limit your vulnerability to an attack is to make sure your phone is running the most recent version available of its operating system however its availability is up to the phone vendor who may or may not be efficient about offering the update even if you do all of the above you have to be careful from day to day avoid clicking on dodgy links the sites they link to may install malware on your device download apps only from the official android or apple stores | |
what is the ebit ev multiple | the ebit ev multiple shorthand for earnings before interest and taxes ebit divided by enterprise value ev is a financial ratio used to measure a company s earnings yield the concept of the ebit ev multiple as a proxy for earnings yield and value was introduced by joel greenblatt a noteworthy value investor and professor at columbia business school understanding the ebit ev multipleenterprise value ev is a measure used to value a company investors often use ev when comparing companies against one another for possible investment because ev provides a clearer picture of the real value of a company as opposed to simply considering market capitalization ev is an important component of several ratios investors can use to compare companies such as the ebit ev multiple and ev sales the ev of a business can be calculated using the following formula the ev result shows how much money would be needed to buy the whole company some ev calculations include the addition of minority interest and preferred stock however for the vast majority of companies minority interest and preferred stock in the capital structure is uncommon thus ev is generally calculated without them ebit ev is supposed to be an earnings yield so the higher the multiple the better for an investor there is an implicit bias toward companies with lower levels of debt and higher amounts of cash a company with a leveraged balance sheet all else being equal is riskier than a company with less leverage the company with modest amounts of debt and or greater cash holdings will have a smaller ev which would produce a higher earnings yield benefits of the ebit ev multiplethe ebit ev ratio can provide a better comparison than more conventional profitability ratios such as return on equity roe or return on invested capital roic while the ebit ev ratio is not commonly used it does have a couple of key advantages in comparing companies first employing ebit as a measure of profitability as opposed to net income ni eliminates the potentially distorting effects of differences in tax rates second using ebit ev normalizes for effects of different capital structures greenblatt states that ebit allows us to put companies with different levels of debt and different tax rates on an equal footing when comparing earnings yields in his eyes ev is more appropriate as the denominator because it takes into account the value of debt as well as the market capitalization a downside to the ebit ev ratio is that it does not normalize for depreciation and amortization costs thus there are still potential distorting effects when companies use different methods of accounting for fixed assets example of the ebit ev multiplesay company x has company z has ebit ev for company x would be approximately 7 7 while the earnings yield for company z would be approximately 4 4 company x s earnings yield is superior not only because it has greater ebit but also because it has lower leverage | |
what is ebita | earnings before interest taxes and amortization ebita is a measure of company profitability used by investors it is helpful for comparing one company to another in the same line of business in some cases it can also provide a more accurate view of a business s value another similar measure adds depreciation to this list of factors this is earnings before interest taxes depreciation and amortization ebitda some analysts use ebita and ebitda as ways to gauge a company s value earning power and efficiency investopedia julie bangunderstanding ebitaebita is a metric taken from the financial data collected and reported by a company for a reporting period some analysts and investors consider a company s ebita to be a more accurate representation of its actual earnings this is because it removes the taxes owed the interest on company debt and the effects of amortization the accounting practice of writing off the cost of an intangible asset over a period of years from the equation it also is viewed by some as an indicator of the efficiency of a company s operations ebita vs ebitdaebita is not used as commonly as ebitda which adds depreciation to the calculation depreciation in company accounting is the recording of the reduced value of the company s tangible assets over time it s a way of accounting for the wear and tear on assets such as equipment and facilities some companies such as those in the utilities manufacturing and telecommunications industries require significant expenditures on equipment and infrastructure which are reflected in their books both ebita and ebitda are used by some analysts for gauging a company s operating profitability profitability is earnings generated throughout the ordinary course of doing business the company s profitability may be more apparent if capital expenditures and financing costs are subtracted from the official earnings total some analysts consider both ebita and ebitda to be reliable indicators of a company s cash flow however you should consider these metrics carefully because they tend to overstate a business s cash flow however some industries require significant investments in fixed assets therefore using ebitda to evaluate companies in asset heavy industries may provide a clearer view of operating profitability by excluding the impact of depreciation whereas ebita which includes depreciation or amortization might distort a company s profitability metrics in other words the ebita measurement may be used instead of ebitda for companies that do not have substantial capital expenditures that may skew the numbers ebita vs gaap earningsgenerally accepted accounting principles gaap earnings are as their name suggests a common set of standards accepted and used by companies and their accounting departments the use of gaap earnings standardizes the financial reporting of publicly traded companies in the united states many companies report gaap earnings as well as non gaap earnings which exclude one time transactions the rationale for reporting non gaap earnings is that substantial one off costs such as organizational restructuring can distort the true picture of a company s financial performance therefore some do not consider them normal operational costs earnings before interest and taxes ebit ebita and ebitda are examples of commonly used non gaap financial measures be careful with ebita and ebitda when making investment decisions because non gaap metrics are not standardized and can sometimes be misleading 1calculating ebitato calculate a company s ebita you must first determine the company s earnings before tax ebt this figure appears in the company s income statements and other investor relations materials and you add any interest and amortization costs so the formula is | |
what is the difference between ebita and ebitda | each of these is a measure of profitability used by analysts earnings before interest taxes and amortization ebita and earnings before interest taxes depreciation and amortization ebitda both are used to gauge a company s profitability efficiency or value ebitda is the more commonly used measure because it adds depreciation the accounting practice of recording the reduced value of a company s tangible assets over time to the list of factors | |
where can you find a company s ebita | if a company doesn t provide this metric there s no legal requirement to do so you find it by looking at the firm s financial statements look for the earnings tax and interest figures on the income statement the amortization is usually found in the notes to operating profit or on the cash flow statement a shortcut to calculating ebita is to start with operating profit also called earnings before interest and taxes ebit then add back amortization | |
how is ebita useful | ebita is considered by some to be a reliable indicator of how efficient a company s operations are some analysts use it to gauge profitability although doing so can be misleading because of the excluded expenses the bottom lineearnings before interest taxes and amortization ebita is one way analysts measure a company s efficiency profitability and value while it can be a useful tool it isn t always an accurate reflection of a business s financial situation most companies use earnings before interest taxes depreciation and amortization ebitda which is a more accurate financial picture but it also has the same limitations in that it hides true profitability by excluding these expenses | |
what is ebitda margin | the acronym ebitda stands for earnings before interest taxes depreciation and amortization the ebitda margin is a measure of a company s operating profit as a percentage of its revenue knowing the ebitda margin allows for a comparison of one company s real performance with the performance of others in the same industry sydney saporito investopediaunderstanding ebitda margina company s interest taxes depreciation and amortization all have important implications for a business s finances however ebitda strips all of those numbers out in order to focus on the essentials operating profitability and cash flow this makes it easy to compare the relative profitability of two or more companies of different sizes in the same industry otherwise the numbers could be skewed by short term issues or disguised by accounting maneuvers calculating a company s ebitda margin is helpful when gauging the effectiveness of a company s cost cutting efforts the higher a company s ebitda margin is the lower its operating expenses are in relation to total revenue so a firm with revenue totaling 125 000 and ebitda of 15 000 would have an ebitda margin of alternatives to ebitda marginthere are a couple of alternatives to ebitda that are used by investors and analysts seeking to understand a company s profitability in any case the formula for determining operating profitability is a simple one ebitda or ebita or ebit divided by total revenue equals operating profitability any of these numbers ebitda ebita or ebit can be used to analyze a company s profitability however when comparing profitability between two or more companies it s important to always use the same calculation to get the most accurate results special considerationsebitda is known as a non gaap financial figure meaning it does not follow generally accepted accounting principles gaap the gaap standards are critical in ensuring the overall accuracy of financial reporting but they can be superfluous to financial analysts and investors that is interest taxes depreciation and amortization are not part of a company s operating costs and are therefore not associated with the day to day operation of a business or its relative success however ebitda is calculated using gaap results from a business s financial statements 1advantages and disadvantages of ebitda marginthe ebitda margin tells an investor or analyst how much operating cash is generated for each dollar of revenue earned the benefit of this calculation is that it can be used as a comparative benchmark to compare businesses within the same industry for example a small company might earn 125 000 in annual revenue and have an ebitda margin of 12 while a larger company might earn 1 250 000 in annual revenue but have an ebitda margin of 5 this indicates that the smaller company operates more efficiently and maximizes its profitability the larger company on the other hand probably focused on volume growth to increase its bottom line a good ebitda margin is relative however a higher number in comparison with its peers in the same industry or sector indicates a greater level of profitability the exclusion of debt has its drawbacks when measuring the performance of a company some companies highlight their ebitda margins as a way to draw attention away from their debt and enhance the perception of their financial performance companies with high debt levels should not be measured using the ebitda margin large interest payments should be included in the financial analysis of such companies in addition the ebitda margin is usually higher than the profit margin companies with low profitability will emphasize ebitda margin as their measurement for success finally companies using the ebitda figure are allowed more discretion in calculating it because ebitda isn t regulated by gaap in other words a firm can skew the figure in its favor | |
why is ebitda margin useful | ebitda focuses on operating profitability and cash flow this makes it easy to compare the relative profitability of two or more companies of different sizes in the same industry calculating a company s ebitda margin is helpful when gauging the effectiveness of a company s cost cutting efforts if a company has a higher ebitda margin this means that its operating expenses are lower in relation to total revenue | |
is ebitda margin the same as operating margin | the ebitda margin and operating profit margin are two different metrics that measure a company s profitability operating margin measures a company s profit after paying variable costs but before paying interest or tax ebitda on the other hand measures a company s overall profitability but it may not take into account the cost of capital investments such as property and equipment | |
what are the advantages of ebitda margin | the ebitda margin measures a company s operating profit as a percentage of its revenue revealing how much operating cash is generated for each dollar of revenue earned therefore a good ebitda margin is a relatively high number compared with its peers the simplicity of using one metric as a comparative benchmark can be helpful to investors | |
what are the disadvantages of ebitda margin | the ebitda margin excludes debt in its calculation of a company s performance some companies highlight their ebitda margins as a way to draw attention away from their debt and enhance the perception of their financial performance the ebitda margin is usually higher than profit margin which encourages companies with low profitability to feature it when emphasizing their success also ebitda isn t regulated by gaap the bottom lineebitda stands for earnings before interest taxes depreciation and amortization the ebitda margin is a measure of a company s operating profit as a percentage of its revenue ebitda margin is calculated by dividing ebitda by total revenue ebitda margin lets investors and financial analysts easily compare the profitability of multiple companies in the same sector or industry however it isn t the best measurement for all businesses ebitda doesn t take debt into account which can give a misleading picture of the financial position of high debt companies it can also be used to disguise a low profit margin because of these limitations ebitda should be just one of several metrics that investors use to analyze the performance of a business | |
what is ebitda ev multiple | the ebitda ev multiple is a financial valuation ratio that measures a company s return on investment roi the ebitda ev ratio may be preferred over other measures of return because it is normalized for differences between companies using ebitda normalizes for differences in capital structure taxation and fixed asset accounting the enterprise value ev also normalizes for differences in a company s capital structure understanding ebitda ev multipleebitda ev is a comparables analysis method that seeks to value similar companies using the same financial metrics while computing the ebitda ev ratio is more complicated than other return measures it is sometimes preferred because it provides a normalized ratio for comparing the operations of different companies if a more conventional ratio such as net income to equity were used comparisons would be skewed by each company s accounting policies an analyst using ebitda ev assumes that a particular ratio is applicable and can be applied to various companies operating within the same line of business or industry in other words the theory is that when firms are comparable this multiples approach can be used to determine the value of one firm based on the value of another thus ebitda ev is commonly used to compare companies within an industry this is a modification of the ratio of operating and non operating profits compared to the market value of a company s equity plus its debt since ebitda is often considered a proxy for cash income the metric is used as a measure of a company s cash return on investment ebitda and ev ebitda is an acronym that stands for earnings before interest taxes depreciation and amortization however the measure is not based on the u s generally accepted accounting principles gaap in april 2016 the securities and exchange commission sec stated non gaap measures such as ebitda would be a focal point for the agency to ensure that companies are not presenting results in a misleading manner if ebitda is shown the sec advises that the company should reconcile the metric to net income this should assist investors by providing information on how the figure is calculated enterprise value ev is a measure of the economic value of a company it is frequently used to determine the value of the business if it is acquired it is considered to be a better valuation measure than market capitalization since the latter factors in only a business equity without regard to the debt ev is calculated as the market capitalization plus debt preferred stock and minority interest minus cash an entity purchasing a company would have to pay the value of the equity and assume the debt but the money would reduce the price paid example of ebitda evthe ebitda ev uses the cash flows of a business to evaluate the value of a company when the ebitda is compared to enterprise revenue an investor can tell if a business has cash flow issues a business with a healthy cash flow will have a high value banks also look at ebitda since it is an indicator of the capacity of the enterprise to pay the debt service and repay the principal of any new debt incurred for example wal mart inc s ebitda for the fiscal year 2020 was 31 55 billion its enterprise value was 445 77 billion during this period this works out to an ebitda ev multiple of 0 07077 or 7 08 the reciprocate multiple ev ebitda is used to measure the value of a company | |
what is the ebitda to interest coverage ratio | the ebitda to interest coverage ratio is a financial ratio that is used to assess a company s financial durability by examining whether it is at least profitable enough to pay off its interest expenses using its pre tax income specifically it looks to see what proportion of earnings before interest taxes depreciation and amortization ebitda can be used for this purpose the ebitda to interest coverage ratio is also known simply as as ebitda coverage the main difference between ebitda coverage and the interest coverage ratio is that the latter uses earnings before interest and taxes ebit rather than the more encompassing ebitda the formula for the ebitda to interest coverage ratio is understanding the ebitda to interest coverage ratiothe ebitda to interest coverage ratio was first widely used by leveraged buyout bankers who would use it as a first screen to determine whether a newly restructured company would be able to service its short term debt obligations a ratio greater than 1 indicates that the company has more than enough interest coverage to pay off its interest expenses while the ratio is a very easy way to assess whether a company can cover its interest related expenses the applications of this ratio are also limited by the relevance of using ebitda earnings before interest tax depreciation and amortization as a proxy for various financial figures for example suppose that a company has an ebitda to interest coverage ratio of 1 25 this may not mean that it would be able to cover its interest payments since the company might need to spend a large portion of its profits on replacing old equipment because ebitda does not account for depreciation related expenses a ratio of 1 25 might not be a definitive indicator of financial durability ebitda to interest coverage ratio calculation and examplethere are two formulas used for the ebitda to interest coverage ratio that differ slightly analysts may differ in opinion on which one is more applicable to use depending on the company being analyzed they are as follows andas an example consider the following a company reports sales revenue of 1 000 000 salary expenses are reported as 250 000 while utilities are reported as 20 000 lease payments are 100 000 the company also reports depreciation of 50 000 and interest expenses of 120 000 to calculate the ebitda to interest coverage ratio first an analyst needs to calculate the ebitda ebitda is calculated by taking the company s ebit earnings before interest and tax and adding back the depreciation and amortization amounts in the above example the company s ebit and ebitda are calculated as next using the formula for ebitda to interest coverage that includes the lease payments term the company s ebitda to interest coverage ratio is | |
what is the ebitda to sales ratio | the ebitda to sales ratio also known as ebitda margin is a financial metric used to assess a company s profitability by comparing its gross revenue with its earnings more specifically since ebitda itself is derived in part from revenue this metric indicates the percentage of a company s earnings remaining after operating expenses a higher value indicates the company is able to produce earnings more efficiently by keeping costs low the formula for the ebitda to sales ratio e b i t d a margin e b i t d a net sales ebitda text margin frac ebitda text net sales ebitdamargin net salesebitda | |
how to calculate the ebitda to sales ratio | ebitda is an abbreviation for earnings before interest taxes depreciation and amortization thus it is calculated adding back these line items to net income and so does include operating expenses such as the cost of goods sold cogs and selling general and administrative sg a expenses the ebitda sales ratio is therefore able to focus on the impact of direct operating costs while excluding the effects of the company s capital structure tax exposure and accounting quirks | |
what does the ebitda to sales ratio tell you | the purpose of ebitda is to report earnings while exlcluding certain expenses that are considered uncontrollable ebitda provides deeper insight into the operational efficiency of an organization based on only those costs management can control the ebitda to sales ratio divides the ebitda by a company s net sales a ratio equal to 1 implies that a company has no interest taxes depreciation or amortization it is thus virtually guaranteed that the calculation of a company s ebitda to sales ratio will be less than 1 because of the deduction of those expenses in the numerator as a result the ebitda to sales ratio should not return a value greater than 1 a value greater than 1 is an indicator of a miscalculation still a good ebitda to sales ratio is a number higher in comparison with its peers ebitda to sales can be construed as a liquidity measurement because a comparison is being made between the total revenue earned and the residual net income before certain expenses showing the total amount a company can expect to receive after operating costs have been paid although this is not a true sense of the concept of liquidity the calculation still reveals how easy it is for a business to cover and pay for certain costs limitations of the ebitda to sales ratiothe ebitda to sales ratio for a given company is most useful when comparing to similar sized companies within the same industry to one another because different companies have different cost structures across industries the ebitda to sales ratio calculations won t tell much during comparison if used to compare against industries with different cost structures for example certain industries may experience more favorable taxation due to tax credits and deductions these industries incur lower income tax figures and higher ebitda to sales ratio calculations another aspect related to the usefulness of the ebitda to sales ratio concerns the use of depreciation and amortization methods because companies can select different depreciation methods ebitda to sales ratio calculations eliminate the depreciation expense from consideration to improve consistency between companies finally the exclusion of debt interest has its drawbacks when measuring the performance of a company companies with high debt levels should not be measured using the ebitda to sale ratio since large and regular interest payments should be included in the financial analysis of such companies | |
what is the ebitda to sales ratio | the ebitda to sales ratio also known as ebitda margin is a financial metric used to assess a company s profitability by comparing its gross revenue with its earnings more specifically since ebitda itself is derived in part from revenue this metric indicates the percentage of a company s earnings remaining after operating expenses a higher value indicates the company is able to produce earnings more efficiently by keeping costs low the formula for the ebitda to sales ratio e b i t d a margin e b i t d a net sales ebitda text margin frac ebitda text net sales ebitdamargin net salesebitda | |
how to calculate the ebitda to sales ratio | ebitda is an abbreviation for earnings before interest taxes depreciation and amortization thus it is calculated adding back these line items to net income and so does include operating expenses such as the cost of goods sold cogs and selling general and administrative sg a expenses the ebitda sales ratio is therefore able to focus on the impact of direct operating costs while excluding the effects of the company s capital structure tax exposure and accounting quirks | |
what does the ebitda to sales ratio tell you | the purpose of ebitda is to report earnings while exlcluding certain expenses that are considered uncontrollable ebitda provides deeper insight into the operational efficiency of an organization based on only those costs management can control the ebitda to sales ratio divides the ebitda by a company s net sales a ratio equal to 1 implies that a company has no interest taxes depreciation or amortization it is thus virtually guaranteed that the calculation of a company s ebitda to sales ratio will be less than 1 because of the deduction of those expenses in the numerator as a result the ebitda to sales ratio should not return a value greater than 1 a value greater than 1 is an indicator of a miscalculation still a good ebitda to sales ratio is a number higher in comparison with its peers ebitda to sales can be construed as a liquidity measurement because a comparison is being made between the total revenue earned and the residual net income before certain expenses showing the total amount a company can expect to receive after operating costs have been paid although this is not a true sense of the concept of liquidity the calculation still reveals how easy it is for a business to cover and pay for certain costs limitations of the ebitda to sales ratiothe ebitda to sales ratio for a given company is most useful when comparing to similar sized companies within the same industry to one another because different companies have different cost structures across industries the ebitda to sales ratio calculations won t tell much during comparison if used to compare against industries with different cost structures for example certain industries may experience more favorable taxation due to tax credits and deductions these industries incur lower income tax figures and higher ebitda to sales ratio calculations another aspect related to the usefulness of the ebitda to sales ratio concerns the use of depreciation and amortization methods because companies can select different depreciation methods ebitda to sales ratio calculations eliminate the depreciation expense from consideration to improve consistency between companies finally the exclusion of debt interest has its drawbacks when measuring the performance of a company companies with high debt levels should not be measured using the ebitda to sale ratio since large and regular interest payments should be included in the financial analysis of such companies | |
what was ecash | ecash was a digital based system that facilitated the transfer of funds anonymously a pioneer in cryptocurrency its goal was to secure the privacy of individuals that use the internet for micropayments ecash was created in 1990 by dr david chaum under his company digicash founded the previous year though there was interest in the platform from large banks ecash never took off and digicash filed for bankruptcy in 1998 digicash along with its ecash patents was eventually sold off in 2018 chaum launched a new startup focused on cryptography understanding ecashthe idea for ecash came from dr david chaum in the early 1980s he was ahead of his time in thinking about privacy concerns in the age of the internet and not only did he advocate for privacy but he took it a few steps further in creating an anonymous based payment system for the digital age this was even before the internet was available for public use in 1989 chaum created the company digicash to realize his idea for ecash the following year the core concept behind ecash was blind signatures a blind signature is a type of digital signature in which the message s content is invisible prior to signing in this manner no user is able to create a link between withdrawal and spend transactions the money used in the system was called cyberbucks ecash s rise and falldigicash gained a lot of traction in the mid 1990s when internet companies were taking off the company signed deals with many banks that intended to use the platform these banks included deutsche bank db credit suisse cs and other banks across the globe microsoft was also interested in ecash for windows 95 but the two companies couldn t agree to a deal the banks that decided to implement ecash started testing the platform but never sold it as a viable product to its customers the only bank that actually used the platform was mark twain bank in st louis missouri the service was free to buyers but sellers had to pay a transaction fee mark twain bank had signed approximately 5 000 customers including just more than 300 merchants but the platform never gained traction according to chaum as the web grew the average level of sophistication of users dropped it was hard to explain the importance of privacy to them digicash eventually filed for bankruptcy in 1998 it was sold off to ecash technologies along with its patents for ecash the trademark for the name is now with due inc due was founded in 2015 and is ranked one of the top 10 e wallets in the world ecash and online security todaydespite the failure of digicash and with it ecash online security is an ongoing issue in the digital realm to this day financial information stored on a computer or electronic device or the internet more generally e g the cloud is vulnerable to hackers cryptocurrencies are extremely popular today and owe their foundations to ecash the most popular cryptocurrency is bitcoin which was created in 2009 by an anonymous creator and had a better luck gaining traction quickly overall many consider dr chaum to be the father of digital currency in 2018 chaum launched elixxir its purpose is to create a cryptography network focused on communication anonymity that is controlled by users to protect their information as opposed to the current setup where companies have detailed access to consumer information and use it for targeting ads to generate revenue was ecash the first cryptocurrency yes it was created by david chaum s company digicash in 1990 | |
what are other cryptoccurencies before bitcoin | ecash b money bit gold and hashcash are other early cryptocurrencies that were very influential in bitcoin s creation | |
what was the first blockchain | although david chaum first proposed a blockchain like protocol in his 1982 dissertation computer systems established maintained and trusted by mutually suspicious groups the first decentralized blockchain was conceptualized by satoshi nakamoto in 2008 the bottom lineecash was conceived by david chaum as an electronic cash system in 1982 in 1990 it was realized through his company digicash ecash was implemented as micropayment system at mark twain bank in saint louis missouri from 1995 to 1998 when the company filed fro bankruptcy the company along with its patents for ecash was sold off to ecash technologies | |
what is an eclectic paradigm | an eclectic paradigm also known as the ownership location internalization oli model or oli framework is a three tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment fdi this paradigm assumes that institutions will avoid transactions in the open market if the cost of completing the same actions internally or in house carries a lower price it is based on internalization theory and was first expounded upon in 1979 by the scholar john h dunning understanding eclectic paradigmsthe eclectic paradigm takes a holistic approach to examining entire relationships and interactions of the various components of a business the paradigm provides a strategy for operation expansion through fdi the goal is to determine if a particular approach provides greater overall value than other available national or international choices for the production of goods or services since businesses seek the most cost effective options while still maintaining quality they may use the eclectic paradigm to evaluate any scenario which exhibits potential three key factors of the eclectic paradigmfor fdi to be beneficial the following advantages must be evident the first consideration ownership advantages include proprietary information and various ownership rights of a company these may consist of branding copyright trademark or patent rights plus the use and management of internally available skills ownership advantages are typically considered to be intangible they include that which gives a competitive advantage such as a reputation for reliability location advantage is the second necessary good companies must assess whether there is a comparative advantage to performing specific functions within a particular nation often fixed in nature these considerations apply to the availability and costs of resources when functioning in one location compared to another location advantage can refer to natural or created resources but either way they are generally immobile requiring a partnership with a foreign investor in that location to be utilized to full advantage finally internalization advantages signal when it is better for an organization to produce a particular product in house versus contracting with a third party at times it may be more cost effective for an organization to operate from a different market location while they keep doing the work in house if the business decides to outsource the production it may require negotiating partnerships with local producers however taking an outsourcing route only makes financial sense if the contracting company can meet the organization s needs and quality standards at a lower cost perhaps the foreign company can also offer a greater degree of local market knowledge or even more skilled employees who can make a better product real world exampleaccording to research methodology an independent research and analyst firm the eclectic paradigm were applied by shanghai vision technology company in its decision to export its 3d printers and other innovative tech offerings while their choice strongly considered the disadvantage of higher tariffs and transportation costs their internationalization strategy ultimately allowed them to flourish in new markets | |
what is an ecn broker | an ecn broker is a financial intermediary that uses electronic communications networks ecns to give clients direct access to other participants in equity and currency markets because an ecn broker consolidates price quotations from several market participants it can generally offer its clients tighter bid ask spreads than would be otherwise available to them an ecn broker only matches trades between other market participants it cannot trade against the client ecn spreads are often narrower than those used by conventional brokers but ecn brokers still charge clients a fixed commission per transaction understanding ecn brokersthe use of an ecn allows investors a way to trade outside traditional trading hours providing a mechanism for those who either can t be actively involved during normal market times or who prefer the flexibility offered by wider availability it also avoids the wider spreads that are common when using a traditional broker and provides overall lower commissions and fees for those concerned about privacy the ecn can provide a level of anonymity to those who desire it this can be particularly attractive to investors interested in making larger transactions ecn brokers are non dealing desk brokers meaning that they do not pass on order flow to market makers instead they match participants in a trade electronically and pass the orders to liquidity providers an ecn broker facilitates trades for interested investors across the ecn working with brokers of this nature often results in lower fees as well as additional trading time availability because of how the ecn functions understanding the electronic communications networkthe ecn provides an electronic system for buyers and sellers to come together for the purpose of executing trades it does this by providing access to information regarding orders being entered and by facilitating the execution of these orders the network is designed to match buy and sell orders currently present in the exchange when specific order information is not available it provides prices reflecting the highest bid and lowest ask listed on the open market benefits of electronic communications networksprice feed transparency is also a byproduct that many consider a benefit because of how the information is transmitted all ecn brokers have access to the exact same feed and trade at the precise price that is provided a certain amount of price history is also readily available allowing for easier analysis of particular trends within the marketplace this helps limit price manipulation as current and past information are readily available to all making it more difficult to act unscrupulously additionally no trader has a particular built in advantage over the other as they all have equal access to the information disadvantages of electronic communications networksone of the biggest drawbacks to using an ecn is the price to pay for using it typically the fees and commissions for using an ecn are higher as compared to non ecn systems per trade based commissions can be costly and can affect a trader s bottom line and profitability investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is econometrics | econometrics is the use of statistical and mathematical models to develop theories or test existing hypotheses in economics and to forecast future trends from historical data it subjects real world data to statistical trials and then compares the results against the theory being tested depending on whether you are interested in testing an existing theory or in using existing data to develop a new hypothesis econometrics can be subdivided into two major categories theoretical and applied those who routinely engage in this practice are commonly known as econometricians investopedia michela buttignolunderstanding econometricseconometrics analyzes data using statistical methods in order to test or develop economic theory these methods rely on statistical inferences to quantify and analyze economic theories by leveraging tools such as frequency distributions probability and probability distributions statistical inference correlation analysis simple and multiple regression analysis simultaneous equations models and time series methods econometrics was pioneered by lawrence klein ragnar frisch and simon kuznets all three won the nobel prize in economics for their contributions 123 today it is used regularly among academics as well as practitioners such as wall street traders and analysts an example of the application of econometrics is to study the income effect using observable data an economist may hypothesize that as a person increases their income their spending will also increase if the data show that such an association is present a regression analysis can then be conducted to understand the strength of the relationship between income and consumption and whether or not that relationship is statistically significant that is it appears to be unlikely that it is due to chance alone methods of econometricsthe first step to econometric methodology is to obtain and analyze a set of data and define a specific hypothesis that explains the nature and shape of the set this data may be for example the historical prices for a stock index observations collected from a survey of consumer finances or unemployment and inflation rates in different countries if you are interested in the relationship between the annual price change of the s p 500 and the unemployment rate you d collect both sets of data then you might test the idea that higher unemployment leads to lower stock market prices in this example stock market price would be the dependent variable and the unemployment rate is the independent or explanatory variable the most common relationship is linear meaning that any change in the explanatory variable will have a positive correlation with the dependent variable this relationship could be explored with a simple regression model which amounts to generating a best fit line between the two sets of data and then testing to see how far each data point is on average from that line note that you can have several explanatory variables in your analysis for example changes to gdp and inflation in addition to unemployment in explaining stock market prices when more than one explanatory variable is used it is referred to as multiple linear regression this is the most commonly used tool in econometrics some economists including john maynard keynes have criticized econometricians for their over reliance on statistical correlations in lieu of economic thinking there are several different regression models that are optimized depending on the nature of the data being analyzed and the type of question being asked the most common example is the ordinary least squares ols regression which can be conducted on several types of cross sectional or time series data if you re interested in a binary yes no outcome for instance how likely you are to be fired from a job based on your productivity you might use a logistic regression or a probit model today econometricians have hundreds of models at their disposal econometrics is now conducted using statistical analysis software packages designed for these purposes such as stata spss or r these software packages can also easily test for statistical significance to determine the likelihood that correlations might arise by chance r squared t tests p values and null hypothesis testing are all methods used by econometricians to evaluate the validity of their model results limitations of econometricseconometrics is sometimes criticized for relying too heavily on the interpretation of raw data without linking it to established economic theory or looking for causal mechanisms it is crucial that the findings revealed in the data are able to be adequately explained by a theory even if that means developing your own theory of the underlying processes regression analysis also does not prove causation and just because two data sets show an association it may be spurious for example drowning deaths in swimming pools increase with gdp does a growing economy cause people to drown this is unlikely but perhaps more people buy pools when the economy is booming econometrics is largely concerned with correlation analysis and it is important to remember that correlation does not equal causation | |
what are estimators in econometrics | an estimator is a statistic that is used to estimate some fact or measurement about a larger population estimators are frequently used in situations where it is not practical to measure the entire population for example it is not possible to measure the exact employment rate at any specific time but it is possible to estimate unemployment based on a randomly chosen sample of the population | |
what is autocorrelation in econometrics | autocorrelation measures the relationships between a single variable at different time periods for this reason it is sometimes called lagged correlation or serial correlation since it is used to measure how the past value of a certain variable might predict future values of the same variable autocorrelation is a useful tool for traders especially in technical analysis | |
what is endogeneity in econometrics | an endogenous variable is a variable that is influenced by changes in another variable due to the complexity of economic systems it is difficult to determine all of the subtle relationships between different factors and some variables may be partially endogenous and partially exogenous in econometric studies the researchers must be careful to account for the possibility that the error term may be partially correlated with other variables the bottom lineeconometrics is a popular discipline that integrates statistical tools and modeling for economic data and it is frequently used by policymakers to forecast the result of policy changes like with other statistical tools there are many possibilities for error when econometric tools are used carelessly econometricians must be careful to justify their conclusions with sound reasoning as well as statistical inferences | |
what is the economic calendar | the economic calendar refers to the scheduled dates of significant releases or events that may affect the movement of individual security prices or markets as a whole investors and traders use the economic calendar to plan trades and portfolio reallocations and to be alert for chart patterns and indicators that may be caused or affected by these events the economic calendar for various countries is available for free on many financial and market websites understanding the economic calendareconomic calendars usually focus on a given country s scheduled releases of economic reports examples of events on an economic calendar include weekly jobless claims reports of new home starts scheduled changes in the interest rate or interest rate signaling regular reports from the federal reserve or other central banks and economic sentiment surveys from specific markets and many others traders and investors rely on the economic calendar to provide information and trading opportunities traders often move into or out of positions corresponding with an announcement of some event or with the heavy trading volume that often precedes a scheduled announcement the majority of the events listed fall into one of two categories projections of future financial or economic events or reports on recent financial or economic events following the economic calendar can be especially beneficial for a trader who wants to take a short position if the trader guesses correctly about the nature of the announcement they can open a position immediately before the scheduled announcement and then close it within hours navigating the economic calendareconomic calendars are available for free from financial and economic websites these calendars vary from site to site however although they are referred to as economic calendars the actual calendar listings depend on the website s focus and the events the users of the website are likely to be interested in for example the economic calendar on many websites lists only events in the united states as these events have a large market impact other sites allow users to build their own economic calendar by using filters to display or hide events you can create your own economic calendar by visiting the websites of the agencies that affect your investments the most and finding their regularly scheduled releases some examples are websites for the board of governors of the federal reserve the bureau of labor statistics and the bureau of economic analysis while these free calendars can be a helpful starting point most traders customize a calendar of their own based on the types of trades they prefer and the asset classes and regions they are comfortable with moreover a customized economic calendar doesn t need to be limited to government and central bank releases a trader may for example create an economic calendar around the major releases from oil producing regions while also incorporating the u s energy information administration s weekly petroleum status report and the quarterly filing dates of the oil sector companies they follow in this way an economic calendar becomes a customizable trading tool like an indicator alert | |
what is the economic calendar for forex | the economic calendar for forex generally follows the same events and releases as economic calendars for stocks with the addition of events and releases in the countries for the pairs being traded | |
how does the economics calendar work | an economics calendar shows scheduled events news releases and other regularly released data that tend to affect trading and investing | |
are economic indicators released quarterly | some economic indicators are released quarterly while others are monthly reports for example the bureau of labor statistics releases data on the employment situation monthly gross domestic product is released monthly with estimates for a one quarter period | |
what is economic capital | economic capital is a measure of risk in terms of capital more specifically it s the amount of capital that a company usually in financial services needs to ensure that it stays solvent given its risk profile economic capital is calculated internally by the company sometimes using proprietary models the resulting number is also the amount of capital that the firm should have to support any risks that it takes economic capital is different than regulatory capital also known as capital requirement investopedia jake shiunderstanding economic capitaleconomic capital is used for measuring and reporting market and operational risks across a financial organization economic capital measures risk using economic realities rather than accounting and regulatory rules which can sometimes be misleading as a result economic capital is thought to give a more realistic representation of a firm s solvency the measurement process for economic capital involves converting a given risk to the amount of capital that it s required to support it the calculations are based on the institution s financial strength or credit rating and expected losses financial strength is the probability of the firm not becoming insolvent over the measurement period and is otherwise known as the confidence level in the statistical calculation the firm s expected loss is the anticipated average loss over the measurement period expected losses represent the cost of doing business and are usually absorbed by operating profits the relationship between the frequency of loss amount of loss expected loss financial strength or confidence level and economic capital can be seen in the following graph calculations of economic capital and their use in risk reward ratios reveal which business lines a bank should pursue that make the best use of the risk reward trade off performance measures that use economic capital include return on risk adjusted capital rorac risk adjusted return on capital raroc and economic value added eva business units that perform better on measures like these can receive more of the firm s capital in order to optimize risk value at risk var and similar measures are also based on economic capital and are used by financial institutions for risk management example of economic capitala bank wants to evaluate the risk profile of its loan portfolio over the next year specifically the bank wants to determine the amount of economic capital needed to absorb a loss approaching the 0 04 mark in the loss distribution corresponding to a 99 96 confidence interval the bank finds that a 99 96 confidence interval yields 1 billion in economic capital in excess of the expected average loss if the bank had a shortfall in economic capital it could take measures such as raising capital or increasing the underwriting standards for its loan portfolio in order to maintain its desired credit rating the bank could further break down its loan portfolio in order to evaluate if the risk reward profile of its mortgage portfolio exceeded its personal loan portfolio | |
what is economic collapse | an economic collapse is a breakdown of a national regional or territorial economy that typically follows a time of crisis an economic collapse occurs at the onset of a severe version of an economic contraction depression or recession and can last any number of years depending on the severity of the circumstances an economic collapse can happen rapidly due to an unexpected event or it may be preceded by several events or signs pointing to fragility in the economy understanding economic collapsean economic collapse is an extraordinary event that is not necessarily a part of the standard economic cycle it can occur at any point in the cycle leading to contraction and recessionary phases economic theory outlines several phases that an economy can go through a full economic cycle includes movement from trough to expansion followed by a peak and then a contraction leading back towards the trough although an economic collapse should be more likely in an economy that is already contracting black swan events or trends in the global economy can override any point in the cycle to set off an economic collapse unlike contractions and recessions there is no agreed upon guideline for an economic collapse instead the term economic collapse is a label that may be applied by economists and government officials and it may be applied months or years after the actual event governments also tend to speak in terms of economic collapse when crafting large scale stimulus during market panics the threat of economic collapse is raised in order to make the case for intervention in the economy responding to economic collapsealthough economies can and still do experience economic collapse there is a strong incentive for national governments to attempt to stave off or lessen the severity of an economic collapse through fiscal and monetary policy an economic collapse is often combated with several waves of interventions and fiscal measures for example banks may close to curb withdrawals new capital controls may be enforced billions could be pumped into the economy through the banking system and entire currencies may be revalued or even replaced despite government efforts some economic collapses result in a complete overthrow of the government both responsible for and responding to the collapse following an economic collapse there are almost always a number of legislative changes aimed at avoiding a similar situation in the future these changes are usually informed by a post collapse analysis aimed at identifying the key factors leading to the collapse and integrating controls in new legislation to mitigate those risks in the future over time the appetite for these financial controls can weaken leading to the regulation of risky market behavior being relaxed as the memory of the economic collapse fades examples in historythere are many examples of national level economic collapse throughout history each economic collapse typically has its own special circumstances and factors although some share triggers as with the great depression oftentimes these factors are mixed with many of the macroeconomic factors that occur in contractions and recessions such as hyperinflation stagflation stock market crashes extended bear markets and unbalanced interest and inflation rates of course economic collapses can also occur from extraordinary factors like disastrous government policies a depressed global market or the old standbys of war famine plague and death in the united states the 1930s great depression remains the prime example of an economic collapse ranking as both the greatest in terms of damage as well as the longest from which to recover the 1929 stock market crash was a key catalyst for the collapse but the problems were compounded by policy responses and systematic weaknesses 1 the multi year economic collapse of the u s economy was followed was sweeping regulatory reforms affecting the investment and banking industries including the securities exchange act of 1934 2 many economists have blamed the economic collapse that began in the 1920s on a lack of government involvement in the economy and financial markets it took 25 years to fully recover from the great depression 3 in addition unemployment skyrocketed to an almost 200 increase between 1929 and 1930 4the 2008 financial crisis is not considered an economic collapse in terms of the american economy but a collapse was believed to be imminent at the time the freezing of the credit market may well have resulted in a more severe situation if not for the liquidity provided by the federal reserve the bankruptcy of lehman brothers was the tipping point for the 2008 financial crisis but it wasn t the only one overall the factors involved in the 2008 crisis included extremely loose lending and trading policies for institutions this lack of rigor led to large losses from defaults that were transmitted and amplified by the derivatives market similar to the 1920s collapse the 2008 financial crisis also resulted in legislative reform primarily in the dodd frank wall street reform and consumer protection act 5the 2007 2009 great recession lasted less than two years and the u s experienced six quarters of negative gdp growth with a 5 3 reduction in gdp growth from 2006 to 2009 6 the 2007 2009 recession also resulted in unemployment reaching a high level of 9 6 in 2010 7there are also many international economic collapses that have occurred throughout history the soviet union latin america greece and argentina have all made headlines in this regard in the cases of greece and argentina both economic collapses were brought about by severe issues with sovereign debt in both greece and argentina sovereign debt collapses led to consumer riots a drop in the currency international bailout support and an overhaul of the government the 2020 covid 19 pandemic which spread across the globe starting in china then europe then the americas is another example of an external shock leading to a global economic downturn | |
what are economic conditions | economic conditions refer to the present state of the economy in a country or region these conditions change over time along with the economic and business cycles as an economy goes through periods of expansion and contraction economic conditions are considered to be sound or positive when an economy is expanding and are seen as adverse or negative when an economy is contracting understanding economic conditionsa country s economic conditions are influenced by numerous macroeconomic and microeconomic factors including monetary and fiscal policy the state of the global economy unemployment levels productivity exchange rates inflation and many others economic data is released on a regular basis generally weekly or monthly and sometimes quarterly some economic indicators like the unemployment rate and gdp growth rate are monitored closely by market participants as they help to make an assessment of economic conditions and potential changes in them a plethora of economic indicators can be used to define the state of the economy or economic conditions including the unemployment rate levels of current account and budget surpluses or deficits gdp growth rates and inflation rates generally speaking economic indicators can be categorized as leading coincident or lagging that is they describe likely future economic conditions current economic conditions or conditions of the recent past economists are typically most interested in leading indicators as a way to understand what economic conditions will be like in the next three to six months for example indicators like new orders for manufactured goods and new housing permits indicate the pace of future economic activity as it relates to the rate of manufacturing output and housing construction other indicators that can forecast future economic conditions include the consumer confidence index new factory orders the new orders for goods by retail and other businesses and business inventories the inventories maintained by businesses to keep up with demand | |
why economic conditions matter for investors and businesses | indicators of economic conditions provide important insights to investors and businesses investors use indicators of economic conditions to adjust their views on economic growth and profitability an improvement in economic conditions would lead investors to be more optimistic about the future and potentially invest more as they expect positive returns the opposite could be true if economic conditions worsen similarly businesses monitor economic conditions to gain insight into their own sales growth and profitability a fairly typical way of forecasting growth would be to use the previous year s trend as a baseline and augment it with the latest economic data and projections that are most relevant to their products and services for example a construction company would look at economic conditions in the housing sector to understand whether momentum is improving or slowing and adjust its business strategy accordingly | |
what are the conditions of the economic cycle | the economic cycle also know as the business cycle refers to the way an economy might fluctuate over time the four stages of the economic cycle are expansion peak contraction and trough each stage is characterized by certain economic conditions related to growth interest rates and output | |
what are bad economic conditions | economic conditions include a wide range of potential characteristics each measured a different indicator as such there are many examples of poor economic conditions some of the most common illustrations include high inflation high unemployment and low wages | |
what is economic outlook | economic outlook is a concept closely related to economic conditions whereas the latter refers to present characteristics the former more often refers to projections about what future economic conditions will be economic outlook is a future oriented hypothesis about how the economy of tomorrow may shape up the bottom lineeconomic conditions are the characteristics of an economy at any given point in time they can be measured with a range of metrics and indicators such as unemployment rate inflation output and more economic conditions evolve in accordance with business cycles which involve both periods of expansion and contraction | |
what is the economic cycle | an economic cycle also known as a business cycle refers to economic fluctuations between periods of expansion and contraction factors such as gross domestic product gdp interest rates total employment and consumer spending can help determine the current economic cycle stage understanding the economic period can help investors and businesses determine when to make investments and when to pull their money out as each cycle impacts stocks and bonds as well as profits and corporate earnings investopedia mira norianstages of the economic cyclean economic cycle is the circular movement of an economy as it moves from expansion to contraction and back again economic expansion is characterized by growth and contraction including recession a decline in economic activity that can last several months four stages characterize the economic cycle or business cycle 1during expansion the economy experiences relatively rapid growth interest rates tend to be low and production increases the economic indicators associated with growth such as employment and wages corporate profits and output aggregate demand and the supply of goods and services tend to show sustained uptrends through the expansionary stage the flow of money through the economy remains healthy and the cost of money is cheap however the increase in the money supply may spur inflation during the economic growth phase the peak of a cycle is when growth hits its maximum rate prices and economic indicators may stabilize for a short period before reversing to the downside peak growth typically creates some imbalances in the economy that need to be corrected as a result businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak a correction occurs when growth slows employment falls and prices stagnate as demand decreases businesses may not immediately adjust production levels leading to oversaturated markets with surplus supply and a downward movement in prices if the contraction continues the recessionary environment may spiral into a depression the trough of the cycle is reached when the economy hits a low point with supply and demand hitting bottom before recovery the low point in the cycle represents a painful moment for the economy with a widespread negative impact from stagnating spending and income the low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery measuring economic cycleskey metrics determine where the economy is and where it s headed the national bureau of economic research nber is the definitive source for marking the official dates for u s economic cycles relying primarily on changes in gdp nber measures the length of economic cycles from trough to trough or peak to peak 2since the 1950s a u s economic cycle on average lasted about five and a half years however there is wide variation in the length of cycles ranging from just 18 months during the peak to peak cycle in 1981 to 1982 up to the expansion that began in 2009 according to the nber two peaks occurred between 2019 and 2020 the first was in the fourth quarter of 2019 a peak in quarterly economic activity the monthly peak happened in a different quarter which was noted as taking place in february 2020 34this wide variation in cycle length dispels the myth that economic cycles are a regular natural activity akin to physical waves or swings of a pendulum but there is debate as to what factors contribute to the length of an economic cycle and what causes them to exist in the first place businesses and investors need to manage their strategy over economic cycles not so much to control them but to survive them and perhaps profit from them managing economic cyclesgovernments financial institutions and investors manage the course and effects of economic cycles differently during a recession a government may use expansionary fiscal policy and rapid deficit spending it can also try contractionary fiscal policy by taxing and running a budget surplus to reduce aggregate spending to prevent the economy from overheating during expansion 5central banks may use monetary policy when the cycle hits a downturn a central bank can lower interest rates or implement expansionary monetary policy to boost spending and investment during expansion it can employ contractionary monetary policy by raising interest rates and slowing the flow of credit into the economy 6during expansion investors often find opportunities in the technology capital goods and energy sectors when the economy contracts investors may purchase companies that thrive during recessions such as utilities consumer staples and healthcare businesses that track the relationship between their performance and business cycles can plan strategically to protect themselves from approaching downturns and position themselves to take maximum advantage of economic expansions for example if your business follows the rest of the economy warning signs of an impending recession may suggest you shouldn t expand you may be better off building up your cash reserves economic theorymonetarism suggests that government can achieve economic stability through their money supply s growth rate it ties the economic cycle to the credit cycle where changes in interest rates reduce or induce economic activity by making borrowing by households businesses and the government more or less expensive the keynesian approach argues that changes in aggregate demand spurred by inherent instability and volatility in investment demand are responsible for generating cycles when business sentiment turns gloomy and investment slows a self fulfilling loop of economic malaise can result less spending means less demand which induces businesses to lay off workers according to keynesians unemployment means less consumer spending and the whole economy sours with no clear solution other than government intervention and economic stimulus 7 | |
what are the stages of an economic cycle | an economic cycle or business cycle has four stages expansion peak contraction and trough the average economic cycle in the u s has lasted roughly five and a half years since 1950 although these cycles can vary in length 4 factors to indicate the stages include gross domestic product consumer spending interest rates and inflation the national bureau of economic research nber is a leading source for indicating the length of a cycle | |
what happens in each phase of the economic cycle | in the expansionary phase the economy experiences growth over two or more consecutive quarters interest rates are typically lower employment rates rise and consumer confidence strengthens the peak phase occurs when the economy reaches its maximum productive output signaling the end of the expansion after that point employment numbers and housing starts to decline leading to a contractionary phase the lowest point in the business cycle is a trough which is characterized by higher unemployment lower availability of credit and falling prices | |
what causes an economic cycle | the causes of an economic cycle are widely debated among different economic schools of thought monetarists for example link the economic cycle to the credit cycle here interest rates which intimately affect the price of debt influence consumer spending and economic activity on the other hand a keynesian approach suggests that the economic cycle is caused by volatility or investment demand which in turn affects spending and employment the bottom linethe economic or business cycle refers to the cyclical pattern experienced by the economy the economy remains in an expansion phase until it reaches its peak reversing to the downside and entering a contraction before a trough and begins to expand once again gdp interest rates employment levels and consumer spending can help define the economic cycle although there are different economic theories to explain what drives the economic cycle the conditions associated with each stage can impact business and investment decisions | |
what is economic depreciation | economic depreciation is a measure of the decrease in the market value of an asset over time from influential economic factors this form of depreciation usually pertains to real estate which can lose value for several reasons such as the addition of unfavorable construction in close proximity to a property road closures a decline in the quality of a neighborhood or other negative influences economic depreciation is different than accounting depreciation in accounting depreciation an asset is expensed over a specific amount of time based on a set schedule | |
how economic depreciation works | depreciation in economics is a measure of the amount of value an asset loses from influential factors affecting its market value asset owners may more closely consider economic depreciation over accounting depreciation if they seek to sell an asset at its market value economic depreciation affects the selling value of an asset in the market it may be followed and tracked by asset owners in business accounting economic depreciation is not typically notated on financial statement reporting for large capital assets since accountants usually use book value as the primary reporting method there can be several scenarios where economic depreciation is considered in financial analysis real estate is one of the most common examples but analysts may also consider it in other situations as well economic depreciation can also be a factor in forecasts of future revenues for goods and services economic depreciation vs accounting depreciationcalculating economic depreciation is not always as simple as in accounting depreciation in accounting depreciation a tangible asset s value decreases over time based on a set depreciation schedule with economic depreciation an asset s decreases in value are not necessarily uniform or scheduled but rather based on influential economic factors economic depreciation can often occur with real estate in periods of economic downturn or a general housing market decline economic depreciation may lead to a decrease in market value the housing market environment can play a part in real estate valuations but individual valuations may also be affected by unfavorable neighborhood construction road closures a decline in the quality of a neighborhood or other negative influences any type of negative economic factors can lead to economic depreciation and therefore a lower appraisal value the difference in value from one appraisal to the next can show a property s economic depreciation appraisals can be key to understanding economic depreciation appraisals can occur on all types of assets and are often the biggest determinant of economic depreciation financial analysts may also consider economic depreciation when forecasting future projections and cash flows economic depreciation in these scenarios would be based on the decreases in the value of revenues expected from goods or services due to negative economic influences | |
when people talk about depreciation it is often in reference to accounting depreciation accounting depreciation is the process of allocating the cost of an asset over the course of its useful life so as to align its expenses with revenue generation businesses also create accounting depreciation schedules with tax benefits in mind since depreciation on assets is deductible as a business expense in accordance with the internal revenue service s irs rules | most businesses depreciate an asset to 0 in book value because they believe the asset s value and expenses have been fully matched with the revenue it generates over its expected useful life companies may choose to hold some book value of a depreciated asset after it has been fully depreciated the book value of an asset and the market value of an asset are usually very different the economic value or market value of an asset may not be reported on financial statements but it is the value a company could potentially get if they chose to make an asset sale depreciation vs appreciationin general both economic depreciation and economic appreciation can affect the market value of an asset in some instances one appraisal to another may show an increase in value this would be the result of negative depreciation or positive appreciation during the credit crisis and housing market collapse of 2008 the combination of subprime loans requiring low or no down payments with the dramatic drop in housing values resulted in a significant amount of u s homeowners owing more money on their home than it was actually worth due to economic depreciation during the housing crisis of 2008 homeowners in the hardest hit areas such as las vegas saw the value of their homes depreciate by as much as 60 hypothetically economic influences can also lead to increases in value or economic appreciation following the height of the 2008 financial crisis regulators and the central bank took steps to improve economic conditions for the housing market that resulted in a housing market rebound and significant economic appreciation in real estate values from one appraisal to the next valuing assetsall types of assets are subject to the risks of economic depreciation and economic appreciation companies and investors may need to analyze and follow these effects differently a company may not always be concerned with how economic depreciation is affecting the market value of its tangible assets however companies and investors will be concerned with how market influences are affecting highly liquid assets like stocks bonds and money market accounts companies will follow more closely the depreciation and appreciation of assets that it marks to market on its books regularly since that has a greater impact on its overall performance investors certainly follow the economic depreciation and appreciation of assets in their portfolio regularly since it can have a big effect on their net worth from one day to the next for asset owners liquidity can also be a factor in analyzing economic depreciation and appreciation real estate assets may see a larger increase or decrease in value from year to year due to economic effects investors may view the economic depreciation or appreciation of their more liquid assets differently since economic factors can influence values from one day to the next | |
what is economic efficiency | economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized a system is considered economically efficient if the factors of production are used at a level at or near their capacity in contrast a system is considered economically inefficient if available factors are not used to their capacity wasted resources and deadweight losses may cause economic inefficiencies investopedia lara antalunderstanding economic efficiencyeconomic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency when an economy is economically efficient any changes made to assist one entity would harm another in terms of production goods are produced at their lowest possible cost as are the variable inputs of production some terms that encompass phases of economic efficiency include allocative efficiency productive efficiency distributive efficiency and pareto efficiency a state of economic efficiency is essentially theoretical a limit that can be approached but never reached instead economists look at the amount of loss referred to as waste between pure efficiency and reality to see how efficiently an economy functions economic efficiency and scarcitythe principles of economic efficiency are based on the concept that resources are scarce therefore there are not sufficient resources to ensure that all aspects of an economy function at their highest capacity at all times instead scarce resources must be distributed to meet the needs of the economy in an ideal way while also limiting the amount of waste produced the ideal state is related to the welfare of the population with peak efficiency also resulting in the highest level of welfare possible based on the resources available one way to measure economic efficiency is based on the unused productive capacity of an economy or system in the united states this is reported in the quarterly survey of plant capacity utilization issued by the census bureau every three months 1efficiency in production allocation and distributionproductive firms seek to maximize their profits by bringing in the most revenue while minimizing costs to do this they choose a combination of inputs that minimizes their costs while producing as much output as possible by doing so they operate efficiently when all firms in the economy do so it is known as productive efficiency consumers likewise seek to maximize their well being by consuming combinations of final consumer goods that produce the highest total satisfaction of their wants and needs at the lowest cost to them the resulting consumer demand guides productive through the laws of supply and demand firms to produce the right quantities of consumer goods in the economy that will provide the highest consumer satisfaction relative to the costs of inputs when economic resources are allocated across different firms and industries each following the principle of productive efficiency in a way that produces the right quantities of final consumer goods this is called allocative efficiency finally because each individual values goods differently and according to the law of diminishing marginal utility the distribution of final consumer goods in an economy is efficient or inefficient distributive efficiency is when the consumer goods in an economy are distributed so that each unit is consumed by the individual who values that unit most highly compared to all other individuals note that this type of efficiency assumes that the amount of value that individuals place on economic goods can be quantified and compared across individuals economic efficiency and welfaremeasuring economic efficiency is often subjective relying on assumptions about the social good or welfare created and how well that serves consumers in this regard welfare relates to the standard of living and relative comfort experienced by people within the economy at peak economic efficiency when the economy is at productive and allocative efficiency the welfare of one cannot be improved without subsequently lowering the welfare of another this point is called pareto efficiency even if pareto efficiency is reached the standard of living of all individuals within the economy may not be equal pareto efficiency does not include issues of fairness or equality among those within a particular economy instead the focus is purely on reaching a point of optimal operation regarding the use of limited or scarce resources it states that efficiency is obtained when a distribution exists where one party s situation cannot be improved without making another party s situation worse | |
how does privatization affect economic efficiency | many economists believe that privatization can make some government owned enterprises more efficient by placing them under budget pressure and market discipline this requires the administrators of those companies to reduce their inefficiencies by downsizing unproductive departments or reducing costs | |
what is the difference between technical efficiency and economic efficiency | technical efficiency refers to how effectively a company or system maximizes production based on a limited number of inputs a company is said to be technically efficient if it cannot produce more goods without increasing the number of inputs used in production such as labor or raw materials in contrast economic efficiency seeks to minimize the number of costs per unit this may be a similar goal to technical efficiency but they are not always the same | |
how do taxes affect economic efficiency | taxes often have the effect of reducing economic efficiency by introducing deadweight losses for example a sales tax on a certain product increases the price thereby reducing sales these lost sales are considered a deadweight loss because they represent potential economic activity that was not realized because of the sales tax | |
how does advertising affect economic efficiency | advertising can increase economic efficiency by supporting competition between different companies in the same market as businesses compete for consumers they may rely on advertisements to inform buyers of the best bargains and products if a business successfully attracts more customers through advertising it may be able to reduce its costs due to economies of scale however advertising can also have negative effects such as persuading consumers to buy overpriced products the bottom lineeconomic efficiency refers to the effective utilization of productive resources such as agricultural land manufacturing capacity raw materials or labor economists have several ways of measuring economic efficiency understanding and improving efficiency is one of the main objectives of economics | |
what is economic equilibrium | economic equilibrium is a condition or state in which economic forces are balanced in effect economic variables remain unchanged from their equilibrium values in the absence of external influences economic equilibrium is also referred to as market equilibrium economic equilibrium is the combination of economic variables usually price and quantity toward which normal economic processes such as supply and demand drive the economy the term economic equilibrium can also be applied to any number of variables such as interest rates or aggregate consumption spending the point of equilibrium represents a theoretical state of rest where all economic transactions that should occur given the initial state of all relevant economic variables have taken place investopedia sydney saporitounderstanding economic equilibriumequilibrium is a concept borrowed from the physical sciences by economists who conceive of economic processes as analogous to physical phenomena such as velocity friction heat or fluid pressure when physical forces are balanced in a system no further change occurs for example consider a balloon to inflate a balloon you blow air into it increasing the air pressure in the balloon by forcing air in the air pressure in the balloon rises above the air pressure outside the balloon the pressures are not balanced as a result the balloon expands lowering the internal pressure until it equals the air pressure outside once the balloon expands enough so that the air pressure inside and out are in balance it stops expanding it has reached equilibrium in economics we can think about something similar with regard to market prices supply and demand if the price in a given market is too low then the quantity that buyers demand will be more than the quantity that sellers are willing to offer like the air pressures in and around the balloon supply and demand will not be in balance consequently a condition of oversupply in the market a state of market disequilibrium so something has to give buyers will have to offer higher prices to induce sellers to part with their goods as they do the market price will rise toward the level where the quantity demanded equals the quantity supplied just as a balloon will expand until the pressures equalize eventually it may reach a balance where quantity demanded just equals quantity supplied and we can call this the market equilibrium types of economic equilibriumin microeconomics economic equilibrium may also be defined as the price at which supply equals demand for a product in other words where the hypothetical supply and demand curves intersect if this refers to a market for a single good service or factor of production it can also be referred to as partial equilibrium as opposed to general equilibrium which refers to a state where all final good service and factor markets are in equilibrium themselves and with each other simultaneously equilibrium can also refer to a similar state in macroeconomics where aggregate supply and aggregate demand are in balance economic equilibrium in the real worldequilibrium is a fundamentally theoretical construct that may never actually occur in an economy because the conditions underlying supply and demand are often dynamic and uncertain the state of all relevant economic variables changes constantly actually reaching economic equilibrium is something like a monkey hitting a dartboard by throwing a dart of random and unpredictably changing size and shape at a dartboard with both the dartboard and the thrower careening around independently on a roller rink the economy chases after equilibrium with out every actually reaching it with enough practice the monkey can get pretty close though entrepreneurs compete throughout the economy using their judgment to make educated guesses as to the best combinations of goods prices and quantities to buy and sell because a market economy rewards those who guess better through the mechanism of profits entrepreneurs are in effect rewarded for moving the economy toward equilibrium the business and financial media price circulars and advertising consumer and market researchers and the advancement of information technology all make information about the relevant economic conditions of supply and demand more available to entrepreneurs over time this combination of market incentives that select for better guesses about economic conditions and the increasing availability of better economic information to educate those guesses accelerates the economy toward the correct equilibrium values of prices and quantities for all the various goods and services that are produced bought and sold | |
what does equilibrium price mean in economics | economic equilibrium as it relates to price is used in microeconomics it is the price at which the supply of a product is aligned with the demand so that the supply and demand curves intersect | |
does economic equilibrium exist | economic equilibrium is seen as a concept or theoretical construct rather than a realistic goal due to the unlikelihood of economic conditions lining up in such a way as to create a perfectly balanced environment for price and demand | |
what are the two kinds of economic equilibrium | in microeconomics the term refers to the balancing of supply and demand in macroeconomics it refers to a state in which the aggregate supply and demand are in balance | |
what is economic exposure | economic exposure is a type of foreign exchange exposure caused by the effect of unexpected currency fluctuations on a company s future cash flows foreign investments and earnings economic exposure also known as operating exposure can have a substantial impact on a company s market value since it has far reaching effects and is long term in nature companies can hedge against unexpected currency fluctuations by investing in foreign exchange fx trading understanding economic exposurethe degree of economic exposure is directly proportional to currency volatility economic exposure increases as foreign exchange volatility increases and decreases as it falls 1economic exposure is obviously greater for multinational companies that have numerous subsidiaries overseas and a huge number of transactions involving foreign currencies however increasing globalization has made economic exposure a source of greater risk for all companies and consumers economic exposure can arise for any company regardless of its size and even if it only operates in domestic markets mitigating economic exposureeconomic exposure can be mitigated either through operational strategies or currency risk mitigation strategies operational strategies involve diversification of production facilities end product markets and financing sources since currency effects may offset each other to some extent if a number of different currencies are involved currency risk mitigation strategies involve matching currency flows risk sharing agreements and currency swaps matching currency flow means matching cash outflows and inflows with the same currency such as doing as much business as possible in one currency including borrowings currency swaps allow two companies to effectively borrow each other s currencies for a period of time example of economic exposureassume that a large u s company that earns approximately 50 of its revenue from overseas markets has factored in a gradual decline of the u s dollar against major global currencies say 2 per annum into its operating forecasts for the next few years if the dollar appreciates instead of weakening gradually in the years ahead this would represent economic exposure for the company the dollar s strength means that the 50 of revenues and cash flows the company receives from overseas will be lower when converted back into dollars which will have a negative effect on its profitability and valuation the company would have to employ currency risk mitigation strategies to hedge against any adverse moves from an incorrect calculation it might employ a small fx trading desk within the firm to help reduce exposure to adverse currency fluctuations | |
how do you manage economic exposure | economic exposure is managed through two overarching strategies operational strategies and currency risk mitigation strategies operational strategies include diversification in production facilities and the markets the products are sold flexibility in sourcing raw materials and diversifying financing sources currency risk mitigation strategies include matching currency flows currency swaps risk sharing agreements and back to back loans | |
what is currency exposure | currency exposure is the change in an asset s return due to fluctuations in a foreign currency when the asset s return is measured in the domestic currency in general currency exposure is the increase or decrease in an asset s value in the domestic currency due to changes in the value of a foreign currency this is often measured in relation to a company s profits that are earned overseas and have to be converted back into its domestic currency 2 | |
what is the main purpose of economic exposure management | the main purpose of economic exposure management is to reduce the impact that changes in exchange rates have on the cash flows of a company economic exposure management seeks to help companies preserve as much foreign profit as they can when profits in foreign currencies are converted to the domestic currency | |
what is economic forecasting | economic forecasting is the process of attempting to predict future conditions of the economy using a combination of indicators forecasting involves the building of statistical models with inputs of several key variables typically in an attempt to come up with a future gross domestic product gdp growth rate primary economic indicators include inflation interest rates industrial production consumer confidence worker productivity retail sales and unemployment rates | |
how economic forecasting works | economic forecasting has been around for centuries however it was the great depression of the 1930s that gave birth to the levels of analysis we see today after that disaster a greater onus was placed on understanding how the economy works and where it is heading this led to the development of a richer array of statistics and analytical techniques economic forecasts are geared toward predicting quarterly or annual gdp growth rates the top level macro number upon which many businesses and governments base their decisions with respect to investments hiring spending and other important policies that impact aggregate economic activity business managers rely on economic forecasts using them as a guide to plan future operating activities private sector companies may have in house economists to focus on forecasts most pertinent to their specific businesses for example a shipping company that wants to know how much of gdp growth is driven by trade alternatively they might rely on wall street or academic economists those attached to think tanks or boutique consultants understanding what the future holds is also important for government officials helping them to determine which fiscal and monetary policies to implement economists employed by federal state or local governments play a key role in helping policymakers set spending and tax parameters since politics is highly partisan many rational people regard economic forecasts produced by governments with healthy doses of skepticism a prime example is the long term gdp growth forecast assumption in the u s tax cuts and jobs act of 2017 that projected a much smaller fiscal deficit with drastic implications to the economy than independent economists estimated limitations of economic forecastingeconomic forecasting is often described as a flawed science many suspect that economists who work for the white house for instance are encouraged to produce unrealistic projections in an attempt to justify legislation the challenges of economic forecasting are not limited to the government private sector economists academics and even the federal reserve board fsb have issued economic forecasts that were wildly off the mark in particular economic forecasters have a history of neglecting to foresee crises according to prakash loungani assistant director and senior personnel and budget manager at the international monetary fund imf economists failed to predict 148 of the past 150 recessions loungani said this inability to spot imminent downturns is reflective of the pressures on forecasters to play it safe many he added prefer not to stray away from the consensus mindful that bold projections could damage their reputations special considerationsinvestors should also not overlook the subjective nature of economic forecasting predictions are heavily influenced by what type of economic theory the forecaster buys into projections can differ considerably between for example one economist who believes business activity is determined by the supply of money and another who maintains that hefty government spending is bad for the economy a forecaster s personal theory on how the economy works dictates the type of indicators to which they will pay more attention potentially leading to subjective or biased projections many conclusions do not come from objective economic analysis instead they are regularly shaped by personal beliefs on how the economy and its participants work that inevitably means that the impact of certain policies will be judged differently | |
what is the economic forecast for 2024 | there are a wide range of economic forecasts for 2024 given the divergent views that different experts have on the economy one organization that makes noteworthy economic forecasts is the organisation for economic co operation and development oecd an intergovernmental forum of 38 high income countries including the united states the united kingdom and australia among others per oecd global gdp is projected to grow at a rate of 3 1 in 2024 and 3 2 in 20251 | |
how do you make an economic forecast | economic forecasts are grounded in a range of important indicators including both macroeconomic and microeconomic data this can include everything from inflation interest unemployment and productions as well as prices for goods and services | |
how can economic growth be measured | the most popular metric used to track economic growth is the gross domestic product gdp the rate at which gdp grows on a year to year basis is a common indicator used to measure economic growth over time the bottom lineeconomic forecasting is a process by which policymakers businesses and individuals can predict future characteristics of the economy forecasting is based on an analysis of key metrics and indicators such as unemployment inflation sales consumer confidence and more forecasting is vulnerable to bias and subjectivity therefore economic forecasting can occasionally fail to properly judge potential economic headwinds or to accurately predict the onset of financial crises | |
what is economic growth | economic growth is an increase in the production of economic goods and services in one period of time compared with a previous period it can be measured in nominal or real terms traditionally aggregate economic growth is measured in terms of gross national product gnp or gross domestic product gdp although alternative metrics are sometimes used investopedia jiaqi zhouunderstanding economic growthin simplest terms economic growth refers to an increase in aggregate production in an economy which generally manifests as a rise in national income often but not necessarily aggregate gains in production correlate with increased average marginal productivity that leads to an increase in incomes inspiring consumers to open up their wallets and buy more and driving a higher material quality of life and standard of living in economics growth is commonly modeled as a function of physical capital human capital labor force and technology increasing the quantity or quality of the working age population the tools that they have to work with and the recipes that they have available to combine labor capital and raw materials will lead to increased economic output image by sabrina jiang investopedia 2020phases of economic growththe economy moves through different periods of activity this movement is called the business cycle it consists of four phases a single business cycle is dated from peak to peak or trough to trough such cycles generally are not regular in length and there can be a period of contraction during an expansion and vice versa since world war ii the u s economy has experienced more expansions than contractions between 1945 and 2019 the average expansion lasted about 65 months while the average contraction was only 11 months however the great recession from december 2007 to june 2009 lasted for 18 months this was followed by the longest expansion on record 128 months lasting until 2020 with the advent of the covid 19 pandemic 1governments often try to stimulate economic growth by lowering interest rates which makes money cheaper to borrow however that can only last for so long eventually as happened in 2022 and 2023 rates need to be hiked to combat price inflation and keep the economy from boiling over 2 | |
how to measure economic growth | the most common measure of economic growth is real gdp this is the total value of all goods and services produced in an economy with that value adjusted to remove the effects of inflation there are three different methods for looking at real gdp gdp the most popular way to measure economic growth is calculated by adding up all of the money spent by consumers businesses and the government in a given period the formula is gdp consumer spending business investment government spending net exports of course measuring the value of a commodity is tricky some goods and services are considered to be worth more than others for example a smartphone is more valuable than a pair of socks growth has to be measured in the value of goods and services not just the quantity another problem is that not all individuals place the same value on the same goods and services a heater is more valuable to a resident of alaska while an air conditioner is more valuable to a resident of florida some people value steak more than fish and vice versa a common approximation is the current market value in the united states this is measured in terms of u s dollars and added together to produce aggregate measures of output including gdp there are alternatives to gdp for example the world bank uses gross national income per capita which includes income sent back by citizens working overseas to measure economic growth classify countries for analytical purposes and determine borrowing eligibility 3 | |
how to generate economic growth | economic growth is dependent on the following four contributory areas the first is an increase in the amount of physical capital goods in the economy adding capital to the economy tends to increase the productivity of labor newer better and more tools mean that workers can produce more output per time period for a simple example a fisherman with a net will catch more fish per hour than a fisherman with a rod however two things are critical to this process someone in the economy must first engage in some form of saving in order to free up the resources to create the new capital in addition the new capital must be of the right type in the right place and activated at the right time for workers to actually use it productively a second method of producing economic growth is through technological improvements an example of this is the invention of gasoline fuel prior to the discovery of its energy generating power the economic value of petroleum was relatively low this changed when the use of gasoline proved a more productive method of transporting goods improved technology allows workers to produce more output with the same stock of capital goods by combining them in novel ways that are more productive like capital growth the rate of technical growth is highly dependent on the rate of savings and investment as they are necessary to engage in research and development the four factors of production are land and natural resources labor capital equipment and entrepreneurship another way to generate economic growth is to grow the labor force all else being equal more workers generate more economic goods and services during the 19th century a portion of the robust u s economic growth was due to a high influx of cheap productive immigrant labor however as with capital driven growth there are some key conditions to this process 4increasing the labor force necessarily increases the amount of output that must be consumed in order to provide for the basic subsistence of the new workers so the new workers need to be at least productive enough to offset this and not be net consumers also just like additions to capital it is important for the right type of workers to flow to the right jobs in the right places in combination with the right types of complementary capital goods in order to realize their productive potential the last method is to increase human capital this means laborers become more accomplished at their crafts raising their productivity through skills training trial and error or simply more practice savings investment and specialization are the most consistent and easily controlled methods human capital in this context can also refer to social and institutional capital behavioral tendencies toward higher social trust and reciprocity along with political or economic innovations such as improved protections for property rights are types of human capital that can increase the productivity of the economy | |
why does economic growth matter | in the simplest terms economic growth means that more will be available to more people which is why governments try to generate it however it s not just about money goods and services politics also enter into the equation how economic growth is used to fuel social progress matters according to research conducted by the united nations university world institute for development economics research most countries that have shown success in reducing poverty and increasing access to public goods have based that progress on strong economic growth however the institute noted that if the benefits flow only to an elite group the growth will not be sustained 5 | |
how do taxes affect economic growth | taxes affect economic growth at least in the short term through their impact on demand a tax cut increases demand by raising personal disposable income and encouraging businesses to hire and invest however the size of the effect is dependent on the strength of the economy if it is operating close to capacity the effect is likely to be small if it is operating significantly below its potential the impact will be more pronounced the congressional budget office cbo estimates that the effect is three times larger in the latter case than in the former 6the cbo also found that tax cuts are generally not as effective in stimulating economic growth as government spending increases that is because most of the spending boosts demand while tax cuts boost savings as well as demand one way to mitigate this effect is to target tax cuts to lower and middle income households which are less likely to put the money into savings 6 | |
what is another word or term for economic growth | other words and terms for economic growth include boom prosperity economic development economic upswing economic upsurge industrial development and buoyancy of the economy the bottom lineeconomic growth occurs when there is a rise in the production of goods and services for a certain period as compared with a previous one it is generally measured in terms of gdp and is an indicator of the economic health of a country however how widely the fruits of the growth are shared is an important factor in its sustenance not to mention societal health and progress | |
what is an economic growth rate | an economic growth rate is the percentage change in the value of all of the goods and services produced in a nation during a specific period of time as compared to an earlier period the economic growth rate is used to measure the comparative health of an economy over time the numbers are usually compiled and reported quarterly and annually understanding economic growth ratean economic growth rate is a measure of how well an economy is performing in terms of its overall size and productivity over a specific period often a year or a quarter it indicates the percentage change in the total economic output of a country during that time frame this measurement reflects the economy s ability to produce goods and services create jobs and generate income for its citizens a positive economic growth rate signifies that the economy has expanded during the measured period this often means the country had increased economic activity and output this growth often leads to higher employment rates improved living standards and greater opportunities for businesses and individuals conversely a negative economic growth rate suggests economic contraction which can lead to job losses reduced income and overall economic hardship economic growth is a fundamental goal for most countries as it allows them to improve the well being of their citizens and invest in various areas such as education healthcare and infrastructure it is also closely monitored by policymakers businesses and investors to make informed decisions measuring economic growth ratethere s three popular ways of measure economic growth first gross domestic product gdp is the most common and widely used measure of economic growth it represents the total value of all goods and services produced within a country s borders over a specific period typically a year or a quarter second gross national product gnp measures the total economic output produced by a country s residents both within the country and abroad it includes income earned by a country s citizens and businesses from foreign investments and activities gnp provides a broader perspective on an economy s performance taking into account its international interactions last net domestic product ndp adjusts gdp for depreciation reflecting the wear and tear on a country s capital assets for example consider how a country s infrastructure or major machinery wear down over time this adjustment provides a more accurate picture of sustainable economic growth because it accounts for the need to replace or repair these assets it s also worth pointing out that the measurements above can also be adjusted for inflation real economic measurements are exclusive of inflated prices over time while nominal terms are based on current inflated prices calculating economic growth ratethis formula shows how an economic growth rate is calculated note that for this example we ll look at gdp though the formula can be used for other types of measurements mentioned above economic growth gdp 2 gdp 1 gdp 1 where gdp gross domestic product of nation begin aligned text economic growth frac text gdp 2 text gdp 1 text gdp 1 textbf where text gdp text gross domestic product of nation end aligned economic growth gdp1 gdp2 gdp1 where gdp gross domestic product of nation in the formula above the numerator calculated the difference in gdp between two periods most often this will be the changed in gdp in a given month quarter or year then this difference is divided by the newest gdp calculation note that it is entirely possible to calculate negative economic growth this will occur should a nation s gdp decreases from one period to the next in q2 2023 the united states reported an economic growth rate of 2 1 this not only signaled economic growth it also represented an increased growth rate from q1 2023 of 2 0 1factors that contribute to economic growththere are a considerable number of factors that determine the economic growth of a nation below are some of the most important factors though the list is not meant to be exhaustive investment is a cornerstone of economic growth it includes both physical capital investment such as machinery factories and infrastructure and human capital investment through education and training physical capital investment enhances productivity while human capital investment equips the workforce with skillseconomies with higher levels of investment typically experience higher growth rates due to increased capacity and efficiency this is due to the expansion of activity within a country and limits of the knowledge obtained by its citizens technological advancements are a powerful driver of economic growth innovation and technological progress lead to improved production processes the development of new products and services and increased overall productivity innovations like the internet automation and breakthroughs in healthcare have all had profound impacts on economic growth by enhancing efficiency and creating new industries and job opportunities as touched on under investment a skilled and growing labor force is essential for economic growth a larger workforce can contribute to increased production capacity while a skilled workforce enhances productivity and innovation investments in education and vocational training play a critical role in developing a capable labor force that can adapt to evolving industries and technologies as discussed under the innovation section effective economic policies are crucial for maintaining economic stability and stimulating growth this includes fiscal policies that ensure responsible management of government finances monetary policies that maintain low and stable inflation and regulatory efficiency that reduces barriers to business activity stable and predictable policy environments instill confidence in investors and businesses encouraging long term investments and economic expansion in q2 2009 the united state s gdp was 14 381 billion the u s then experienced a positive economic growth rate in gdp until the covid 19 pandemic 2examples of economic growth ratesin july 2019 the u s marked an economic milestone its economy had been experiencing growth continuously since june 2009 making it the longest economic expansion in the nation s history 3 the u s gdp continued to grow until q4 2019 2then as a result of the covid 19 pandemic the u s gdp dropped the u s experienced a negative growth rate of 0 7 in q1 2020 and 8 8 in q2 2020 between then and q2 2023 the u s once again experienced positive economic growth rate 2in statistics growth rates can be relative and may not fully tell the entire story in 2018 the u s economy grew by 2 9 some economists believe that this number represented a high point for some time to come they were forecasting an expansion of 2 2 in 2019 and a further slowing in 2020 4 in this context not only did the economic growth rate signal actual growth it indicates the extent in which it grew compared to analyst expectation by contrast the economic growth rate of india fell to 5 8 in the first quarter of 2019 the lowest growth rate in five years given the nation s rapid growth in recent years there was much hand wringing over a severe slump in industrial output and a fall off in car sales both factors in the lower rate 5 | |
what is the difference between real and nominal economic growth | real economic growth adjusts gdp for inflation providing a more accurate picture of an economy s actual expansion or contraction nominal growth does not consider inflation making it less precise |
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