Monthly Archives: August 2012
One of the primary objectives of Effi Enterprises is to help a company realize value. There can be many means through which the valuation of a company is achieved. Efraim Landa is a venture capitalist who is intent on helping emerging companies and entrepreneurs learn how to successfully manage the finances of the business. This includes helping businessmenconsider all available options including venture capital, IPO’s or strategic alliances or joint ventures. One thing that is commonly discussed among businessmen and investors it the P/E ratio.
What is the P/E Ratio?
The P/E Ratio is a proportion that can be used to learn about a company’s earnings and its value. P stands for Price, and E represents earnings. The price is relatively easy to find as it can be found through any vendor. The trading price for stocks is easily accessible through online resources. As an example, if a company’s stock is trading at $42 per share and the earnings for the last year was $1.55 per share, then the P/E ratio is found by dividing $42 by $1.55. The P/E ratio for the company’s stock would be 27.10. The earnings per share (EPS) is generally obtained by looking at the last four quarters but some prefer to take it from the estimates of what is expected over the upcoming four quarters or the projected P/E. Other companies will use the sum of the previous two quarters and the estimate of the upcoming two quarters.
What does the P/E Mean?
Generally a higher P/E will indicate to investors that they should expect an increased growth in earning in the future if it is compared to companies which have a lower P/E. But you cannot look solely at the P/E ratio. Typically, the P/E ratio is compared among companies in the same industry. It may also be compared to the overall market value or to the company’s previous ratios. It would not make any sense to compare a utility companies P/E ratio to one of a technology development company. In comparison the technology company would far surpass the utility company if based on the P/E ratio alone.
What the P/E ratio is used for is for investors to decide how much they are willing to pay per dollar of earnings. To interpret this let’s say a company is currently trading a multiple P/E at 20 which means that the investor would be willing to pay $20 for each $1 of earnings. For example’s sake we can say that Google is trading currently at $400 a share and the EPS is $13.31. That means that an investor can expect to earn $13.31 for each share that is available. But if Google only has 315 million shares which are outstanding shouldn’t they be available for $13 a share? No, simply because an investor plans on holding on to stocks for an extended amount of time, and they expect for the company’s stocks to increase in value during that time. That means that they will willingly pay a premium now hoping that they will get a higher return later. With a P/E ratio of about 30, an investor will pay 30 times more per share in Google.
The important thing for investors to note is that the P/E ratio is not the only influencer for making decisions. The P/E ratio has a higher quality based on the quality of the underlying earnings value. This is only one of the factors used to decide where to invest monies. Remember that investments are typically long term and after the initial purchase it is a game of waiting to see how much the price will increase until a profit is made.
There are many different types of trading platforms used to process trades across many financial markets. High Frequency Trading is a specific platform that is capable of performing many trade orders, or transactions, in a very short amount of time. Computers which are used on this trading platform use complex algorithms which can analyze numerous markets and carry out orders based on the changing market conditions. Usually the traders who can trade the fastest will be the most profitable. However, there has been much debate about whether high frequency trading improves the market quality; or if it is a detriment to long term investors. Whether or not it is a beneficial sector of the market is important to those who are involved in providing financial opportunities for businesses like Efraim Landa. His company, Effi Enterprises offers counsel to businesses concerning financial matters. One of their primary concerns is helping entrepreneurs learn how to create value for their growing business and the market plays a major role in this effort.
High Frequency Trading, or HFT, is a specialized trading platform which uses computer technology to make a large number of transactions in a very short amount of time. HFT uses computerized complex algorithms which analyze many markets at the same time and executes orders based on the conditions of the market. Those traders who can execute orders at the fastest speeds usually come out more profitable than other traders who have execution speeds which are slower. Recent estimates declared that close to 50 percent of all exchange volume are from high frequency trading transactions.
HFT costs are lower, deeper and more liquid than other options. The price differences across other related markets are reduced and the prices reflect the values of stocks and commodities more accurately. The trouble is that the term “high frequency trading” has become more of a catch all phrase for many of the automated trading strategies. The term tends to lump all strategies which use computers to create, tender, monitor or revise purchases and sells of orders throughout a trading day. These types of strategies are programmed to make trading decisions based on how the decision rules developed by humans along with public information. HFT is a popular form of trading with varying types of professional traders. This includes investment banks, proprietary trading firms and investment funds. This rapid growth is due to the innovations that have occurred in trading technology along with the reforms that trading regulations have undergone which have made the markets more transparent, competitive and open.
There is a large school of thought that believes that HFT improves the overall quality of the markets. As trading has emerged to become more automated it has also become more competitive. One way that HFT improves the market is by making the market more efficient for traders who are bridging the gap between natural traders who are not all working the market all at one time. The high speed of entries helps decrease the risks of the market and becomes a beneficial tool for risk management which allows traders to revise their orders quickly by responding to changing market conditions in a real time environment. This brings more liquidity to the market since traders can offer more narrow spreads, as well as larger sized quotes which ultimately reduce costs for end users. High frequency trading is a broader type of risk management tool just like the ones marketers have used for years; but just in a faster mode due to the availability of the most accurate, up to date information available.
HFT techniques have been mostly used by professional traders such as Efraim Landa. However, even average investors can benefit from this type of trading. A long term investor who traditionally buys a mutual fund and holds it can use HFT to his benefit by using them to reduce transaction costs which are typical of the mutual fund. This allows the investor to be out less money up front and in turn end up with a greater investment return. Many mutual fund companies advise regulators that HFT can result in significant savings for mutual fund investors.
An entrepreneur usually starts a business because they feel there is a market for their product or service. The unspoken goal is that the company will grow to the point that they need investors; and hopefully at some point there will be able to go public. Emerging companies will usually look to a private equity firm such as Effi Enterprises, which was founded by an expert in entrepreneurship, Efraim Landa.
An investment is typically made by a venture capital firm, an angel investor or a private equity firm. They all have different types of investment strategies but they provide companies working capital so that they can expand, develop new products or restructure the company on a management level. There are several private equity firms in the United States and a few of them have experienced much success in private equity to foster growth in emerging companies. Here are some brief overviews of some of the top private equity firms in the United States.
TPG Capital, L.P.
TPG Capital is not only one of the largest in the US, but in the world. The company was founded in 1992 by founding partners David Bonderman and James Coulter. They have headquarters in Fort Worth, Texas and San Francisco, California. It has stakes in a wide variety of industries including retail, health care, media and technology. The firm specializes in recapitalizations and leveraged buyouts but the company participates in many other investment strategies. They typically hold on to their investments for 5 to 7 years on average and are active in their holdings when needed. TPG has approximately $48 billion in assets. They have stakes in companies such as Neiman Marcus, SunGard Data Systems, Univision, Freescale Semiconductor and Avaya. The company’s affiliate, TPG Growth concentrates on growth equity and middle-market investments.
The Carlyle Group, L.P.
The Carlyle Group is another worldwide private investment firm. The company was founded in 1987 and went public in 2012. They have over 30 offices located around the world; headquarters are in Washington, D.C. They have made nearly 1000 investments since they were established. They participate in venture capital, leveraged finance opportunities, minority equity investments, real estate and management-led buyouts and specialize in industries such as consumer and retail, technology and business, and energy and power. They have also branched out into various other sectors such as health care, aerospace and defense, infrastructure and financial services.
Kohlberg Kravis Roberts & Co.(KKR)
This is possibly one of the most recognized names in finance and private equity. Their fame came from a scandal surrounding one of the most controversial buyouts ever. They participated in a $31 billion buyout/takeover of RJR Nabisco. The story was immortalized in a bestselling book and later a made for TV movie both entitled Barbarians at the Gate. Although KKR is competitive they are slightly behind many as far as size. They were established in 1976 and have participated in nearly 200 transactions which had a total value of nearly $424 billion.
The Blackstone Group L.P.
If you are talking about alternative asset management and private equity firms, it is certain that The Blackstone Group will be one of the primary topics. Their corporate office is located in New York, NY. Blackstone manages several investment strategies which include real estate funds, private equity funds and hedge funds. But the company also provides other types of financial counsel to their corporate clients as well as restructuring and mergers and acquisitions. Among their clientele are pensions both public and corporate, individuals and financial institutions. Co-founder Stephen Schwarzman also serves as Chairman, Alternative Asset Management, President and CEO of the private equity company.
It is a common occurrence to hear of private equity buyouts these days. While some would like to place it entirely in a negative light, it can be beneficial for the business. Private Equity Firms such as Effi Enterprises may perform these types of financial activities to help recreate the business. There was a large number of leveraged buyouts (LBOs) that occurred in the 80s. It’s interesting to find out what triggered all of these buyouts and what the influencing factors were for their beginning and why they ended. It is also interesting to know the happenings after the companies were purchased. And what about the buyout firms; did firms like Effi Enterprises make any money?
At the very peak of the 1980s leveraged buyouts was Kohlberg Kravis Roberts’ purchase of RJR Nabisco. This buyout became the subject of a book written by two Wall Street Journal reporters, “Barbarians at the Gate.” It became a #1 bestseller in the New York Times. Later it was made into an HBO movie and was called by the same name.
The movie, Barbarians at the Gate retells the events that occurred during the largest leveraged buyout ever. James Garner plays RJR Nabisco’s Chief Executive Officer, F. Ross Johnson who is trying to buy out his own company. Much of the movie surrounds the power struggle between a Wall Street investment banker Henry Kravis and Johnson. Kravis wants to make Johnson take Nabisco over on his own.
It is a story of betrayal, high stakes and power struggles but told with great flair. It is well balanced with some lightheartedness and even playful tones at times. The movie gives us the chance to see a very different point of view of the behind the scenes goings on of leveraged buyouts. Rather than viewing these types of high profile financial transactions as an outsider with little understanding to what is actually going on in the company Barbarians at the Gate allows us to see it from the perspective of an insider. And in this case not just someone inside the company, but the man who sits at the top, the CEO.
It is sprinkled with dry humor, quite a bit of tension and subtlety. It’s a general look at a huge corporate game in which the losers all get $23 million – after taxes of course. The pace of the movie is great and this picks up nicely closer to the end of the movie as the story is building up to the climax. As the characters are all rushing around the audience is caught up in the energy of the moment, whether you already know how the story ends or not.
Screenwriter Larry Gelbart does an exceptional job of making F. Ross Johnson the protagonist. This is a difficult thing to do since he is a rich man who is deviously trying to get ahead of the game, this type of financial slight of hand that is despised by most. Mr. Gelbart is able to make Johnson into a rather likeable character in spite of his dealings. Of course he is made out to be someone who cares immensely for the company and the people and less for the money to be made. And Garner does a great job at playing a character which is mixed with humanity, greed, incompetence and good-naturedness. Kravis, played by Jonathan Pryce makes him out as more of a villain.
These were some very strong and captivating performances which opened up the world of F. Ross Johnson making it visible to the public eye. His morals are very much what is expected from the super wealthy are warped and the movie has several scenes which play this out nicely. The movie does a great job of presenting how he manages and even mismanages the buyout. It’s a high stakes game played between Kravis and Johnson and has all the drama that entails. And even though the vast majority despises such things as financial fakery that ends up with literally thousands of jobs lost, Barbarians at the Gate shares a perspective that is nothing less than thought provoking and entertaining.
Efraim Landa and investment firms like Effi Enterprises are well acquainted with the workings of the stock market. They work with emerging businesses and help them gain value. One of the greatest steps for a company or a business is when they have become profitable enough to go public and make an Initial Public Offering (IPO) of their stocks. Typically a business idea begins with an entrepreneur who gets started and then outgrows their sources. This is when they look for a venture capitalist such as Efraim Landato help get them with funding options with the hope that there will be a day where they can make an IPO. This is when stocks in the company are available to the public through the stock market.
The stock market can be very confusing and those who are unsure about how it works can stand to lose a lot of money when they first start out. However, it is not as complex as it appears to be. Basically, you have the option of purchasing stocks in a company. Companies make these shares available as a way of funding their business. When someone purchases a company’s stock they do not own part of the company but are providing funds by which the company can grow. The more the company is worth, the more value their stocks become. Stocks are frequently traded back and forth on the “stock market.” There can be a few things that affect the price of stocks.
In one way it is as simple as the law of supply and demand. Stocks are available in a limited number and when there are a lot of people who want to buy stocks in a particular company the price will increase on their stocks. But when there is a decline in the number of buyers who want them, or there are a large number of people who want to sell the ones they have then the price on the stocks decreases. Theoretically the demand for stocks for a particular company will depend on how profitable the company is. However, what the company is expected to do in the future will also factor in to the value of the company’s stocks.
When a company goes public with their stock it is generally a way of increasing revenue. This is generally to be used for some form of expansion. Perhaps the business needs to add a new product or offer more services to their clientele. An IPO can be a way of raising those funds. The public can then invest in the company by purchasing the stocks.
The main goal of an investor is to make money on the stocks that are purchased. They will need to buy stock at a lower price and then when the price on the stocks goes up they will sell it off before it takes a downward turn. This will mean that stock holders will need to pay particular attention to the company’s value and the projected value of the company later on. Many times stock prices will go up before an earnings announcement but then decline if these earnings were much higher than what was generally expected.
A lot of novice investors think that when they purchase stocks they are going to receive from the company’s profits but this is not so. Some very large companies may pay a dividend and this is done a per share basis. But most companies hold on to their profits in order to pay for future growth. There are two schools of thought on this, some investors are interested in the company growing so that the stocks are worth more and others are more interested in investing in companies who are profitable enough to pay dividends. The type of stocks purchased will depend largely on a person’s investment goals.
Money is not a natural construct, it is an invention, like fire a tool that we use to live in the modern world, money did not start with big corporations, and although we think of money as these “bills” that we carry around or as a numbers on a bank statement money has come in many different forms through the millennia, from cattle to seashells to coins gilded out of precious metal…. Money had rather humble beginnings. In one way you could look at the development of money as the ultimate in entrepreneurship.
From about 9000 to 6000 BC there wasn’t any money to exchange. That doesn’t mean that there was not some form of markets where people traded different assets; it’s just that assets looked a lot different back then. People bartered what items they possessed in order to obtain those which they did not. This is actually used today to some extent. Of course, we cannot take a couple of watermelons to the bank and ask them to send a fax for us in exchange; but if I grow watermelons and you grow chickens I can still trade you a couple of watermelons for a couple dozen eggs. (Believe it or not this happens all the time in some parts of the country!)
There are many other ways that we still use bartering. Inside prisons inmates will tell you that their currency is cigarettes. It is not a strange thing for individuals to trade skills. A hairdresser may offer to cut a man’s hair in exchange for an oil change on their vehicle. These types of trades occur all the time; all without money.
Money is the root of finance. But until 1200 BC nothing that even closely resembled money existed. And then it was only cowry shells. These shells became the first type of money or exchange in China. They served as money or currency for many years even up until the 1900s. The closest thing to metal currency occurred in China in about 1000 BC when they made a mock cowry shell. However, since knives, spades and other tools were made out of metal they were also used as money. These were the first models of the coins that we carry in our pockets today. The interesting thing about the Chinese metal coins is that they each had a hole so that they could all be put together to make a sort of chain.
The first silver coins were made in about 500 BC. They looked similar to what we use today and they bore images of their gods and emperors. These imprints let everyone know the value of each coin. Lydia was the first to use these coins but then other countries such as Romania, Persia, Greece and Macedonia all used them and began to improve them. These coins were very different than the Chinese coins in that they were not made from base metals, but of scarce ones like bronze, silver and gold which already had a lot of value.
Paper money also has its roots in China. They began the practice of using leather currency. They were primarily used as bank notes and exchanged for goods. They then moved on to paper money in China in the 9th to 15th centuries. But in 1455 using currency was completely gone from China because they had too much of the currency and it caused serious inflation.
In the 1500s the North American Indians used gifts for currency before switching to clam shells called Wampum. This was a string of beads that was made all from clam shells. They used this as a type of currency.
Finally in 1816 England put a value on gold. This is when currency began to be attributed to certain set amounts of gold. This helped protect the economy from inflation. The depression the in the 1930s started a worldwide effort to end the connection of currency to gold. Now most nations do not have any ties between gold and their currencies. There are other ways to try to avoid or control inflation.
Presently, nations exchange currencies think of the recent changes to the $100 bill and the $20 bill. Even coins have changed recently. The next big step in the world of finance is certainly digital cash, or electronic money. This is a form of money which is already begun to be exchanged via the Internet.