Money Advice Guide

Price-Earnings-Ratio (PER) is a simple and familiar method of valuing a stock among investors. However, there are many other ways to value a stock that can be quite complicated and require a technical expertise. It’s impossible to say that any one method is better than others. Therefore, it’s common for analysts to use several valuation methods and come up with different fair values.

Recently, the Economic Valued Added method has gained attention worldwide. This method is intuitively appealing and measures profitability in the way shareholders define it.

Economic Value Added calculates the actual dollar amount of a business’s wealth created or destroyed in each reporting period. It takes into account the opportunity cost (the minimum acceptable compensation for investing in a risky asset as opposed to a less risky market instrument like government bonds) of the company’s capital investment and measures the excess returns over this charge.

A positive Economic Value Added indicates that value is being created; so adding to the intrinsic value of the company by that amount. A negative Economic Value Added, on the other hand, indicates that value is eroded and the company is now worth less than the initial capital employed.

There are eight steps involve in applying Economic Value Added to value a company:

Step 1: Determining a period of financial projection. To calculate returns on capital employed, we first need to estimate the company’s earnings; for instance, in the next five years to 2011. The earnings projection is based on a set of assumptions for future volume sales growth, finished product prices, government duties and inflation.

Step 2: Net operating profit after tax (Nopat) Net operating profit after tax is equivalent to the after tax earnings generated by the company (excluding interest expense). The financing of asset (interest expense) is assumed to be independent of operating results and is instead reflected in the company’s cost of capital.

Step 3: Initial capital employed The total capital employed at the beginning of each year is the assets base from which earnings for the year are generated.

Capital employed = Net fixed assets + Working capital

Step 4: Return on capital employed (ROCE) The yearly returns on capital employed are determined by dividing Nopat by capital employed at the beginning of each year.

ROCE = Nopat

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Commercial Equity Line of Credit, abbreviated as CELOC, is best suited to meet the industry’s changing financial needs. It is mainly used by small businesses, especially start-ups. A Commercial Equity Line of Credit requires a zero balance for a specific time annually. CELOC provides easy access to money when the borrower needs it. Using checks provided, the money can be easily accessed.

A Commercial Equity Line of Credit allows the mortgager to borrow money on a regular basis to finance transactions and for business purposes. The amount borrowed depends on the company’s collateral and cash flow needs. In this method of borrowing, the borrower mortgages company assets, rather than personal assets, as collateral. Even though it is harder to obtain, it provides greater borrowing power.

With the help of a Commercial Equity Line of Credit, the borrower can regulate cash flow by borrowing only what is needed. It reduces interest expenses often incurred by over borrowing. The interest rate equals or exceeds the prime rate.

A Commercial Equity Line of Credit provides almost all the benefits that are available with a Home Equity Line of Credit. The line of credit can be used to improve cash flow or expanding business. Also, it is used for other expenses such as purchasing equipment and increasing inventory. A major advantage of CELOC is that the borrower has to pay the interest only on the amount accessed.

Also known as Operating loans, a Commercial Equity Line of Credit plays a vital role in the business field. By providing quick access to cash with the option to pay overtime, CELOC ensures flexibility to the borrower.

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