[ Music ] >> Heitor Almeida: So we've done a lot of work, right? We computed liquidity ratios. We computed leverage ratios. We computed profitability ratios. We looked at cash flow statements. And if you think about what we've done, you know, we really learned a lot about what's going on with Cablevision and DIRECTV -- this specific example we looked at, right? And, of course, you can use the, a similar calculation, similar techniques to think about any company that you're interested in, right? Here's the summary of what we discovered for Cablevision and DIRECTV, right? Cablevision has higher leverage and lower profitability than DIRECTV. DIRECTV seems to be a more profitability company, right? DIRECTV also has liquidity ratios that are a little bit higher, okay. And if you look at the cash flow statement, what you see is that both companies are investing in operations and are returning cash to invest, right. They have positive, they have negative, sorry, negative cash flow from investment and negative cash flow from finance, okay. So how have the companies performed in recent years? Let's look at what happened to stock prices, okay. As we discussed earlier in this module, the stock price really is the key summary of the value of, of shareholder value, right. And it should be somewhat related, right. If these ratios make sense, then the stock price would be somewhat related to what we discovered here. And if you look at the stock price performance or DIRECTVision and Cablevision in the recent time period -- we are looking here at the last five years, okay -- what you see is that DIRECTV, which is the red line, so this is DIRECTV here. Cablevision is the blue line, okay. DIRECTV has performed significantly better than Cablevision in the last five years, okay. So this stock price chart is consistent with the analysis we've done, right. We learned that DIRECTV is more profitable, it has lower leverage. As we learned, poor performance can result in higher leverage, right, so this, you know, just from this, doing this quick analysis, it does make sense that DIRECTV has performed better than Cablevision in the last five years, all right? Since we're talking about stock prices, this is a good time for us to think about valuation ratios, okay. This is the last set of financial ratios that we're going to discuss in this module, right. And these ratios are ratios that summarize the company's current market valuation. And there are going to be two versions that we're going to use, but both of them are going to use market values in the numerators. So the market value's going to be in the numerator, and then in the denominator of these ratios, we're going to have either book value or profits, current profits, okay. So let's go back here and think about what these ratios mean. So we have market divided by current profits, for example. Market value divided by current profits, okay. And we've learned already, right, that the market value of a company is a measure of everything, right -- current, but also future cash flows. The market value should reflect all the cash flows, right, so really what you're doing is dividing the future, okay, by today, right. This is how we should interpret the valuation ratios. It's the measure of future relative to what you have today. It's also true when you look at book values, right. As we already learned, the book value of assets essentially reflects what happened to the company up to this point. It does not capture the future. So if you compute a valuation ratio, this really is what you're doing, okay. So remember this idea. It's a very important idea I think in finance. So the market to book ratio, let's talk about that one first. It's the ratio that uses book values in the denominator, okay. This ratio can be based either on assets or equity. What do you, what do I mean? So there are two versions. We can use the market values of assets and the book value of assets or you can use the market value of equity and the book value of equity, okay. And we already learned in this module that book equity can be a problematic measure. For example, for Cablevision and DIRECTV, you would not be able to compute the market to book ratio because they have negative equity, okay. Because of that reason, I think it's better, I prefer when I'm computing these ratios, I prefer to use assets to compute market to book ratios. So instead of using equity, I prefer to use assets, okay. I'm going to show you an example in a second. In terms of value over profits, again, we can do this either based off assets or based off equity, okay. So as we learned already, right, OPAT is a measure of profits for the company as a whole, right. Operating profit after taxes measures profits for the company as a whole. Net income measures profits for shareholders, okay. So ratio number one divides the market value of assets, the entire company, by profits, current profits for the company as a whole, whereas ratio number two, which is the well-known price to earnings ratio, looks at equity only. So it's the market value of equity divided by net income. These ratios capture very similar information, right, because you're dividing market values by current profits, right. But you might guess that at this point, I think you probably, can probably guess the ratio that I prefer, okay. I, you know, I really prefer to look at ratio number one, right. Why? Because it's based off asset values and profits to the entire company, so we are looking at the entire company instead of looking just at equity, okay. And because we are, we avoid using net income, right. Remember, the key difference between OPAT and net income is that OPAT is at the top of the income statement and net income is at the bottom, so net income is a number that is easier to manipulate, okay. So I, my recommendation is that we focus mostly on assets over OPAT instead of the price to earnings ratio when we're analyzing companies for corporate finance purposes, okay. Cablevision. So it should be very simple to compute these ratios. All of these numbers were computed in previous slides, okay, so it should be really straightforward for you to do these calculations. For example, the market to book ratio should be just the market value of assets divided by the book value of assets, right. So you can see that this ratio is going to be a little bit below three for Cablevision and you can do the calculation for DIRECTV as well, and which, you know, the data is here. To make it easy for you, you can compute the other ratio for our Cablevision, and that is the answer you would get, okay. So Cablevision has market to book ratio of 2.7. The DIRECTV has a market to book ratio of 3.1. Cablevision has a higher value to OPAT ratio, okay, which seems to be an interesting observation, right. So it appears that Cablevision is valued more, right. If you think about valuation ratios that way, right, it might seem that Cablevision is valued more by the market than DIRECTV, okay. So let's think about that for a while. Is this finding, right, does the, is this consistent what we've done so far, right? We learned that DIRECTV has performed better, right. It is more profitable and all that, so, you know, what about this ratio that we found now? How can this be consistent with what we've done? That's the question for you to think about for a while. And the answer is yes, okay. It has to be, right. This is the real data. It has to be consistent, okay. Why, remember, valuation ratio, what it's measuring is future over present or even future over past, right. The book value of assets reflect what happened in the past as well, right. DIRECTV is more profitable, currently is more profitable and has performed better in recent years, okay, so it's not surprising that a greater, really what you're finding is that a greater portion of Cablevision's value is lying in future, depends on future profits, okay. The value of Cablevision depends more on what's going to happen in the future whereas DIRECTV is more profitable today, okay. That's how you would conciliate this higher value OPAT ratio with the analysis we've done so far, okay. And just a final observation here. Sometimes future values can come not from organic growth, but they can come from mergers, which is going to be one of the topics that we will discuss in a future module, right. There is a rumor going on that Cablevision might be acquired by another company, right. And, of course, an acquisition can definitely change the future prospects of a company. Perhaps that is the reason why investors are boosting the valuation of Cablevision in the expectation that this merger is going to improve the financial situation of the company.
