This site uses cookies to improve your experience. To help us insure we adhere to various privacy regulations, please select your country/region of residence. If you do not select a country, we will assume you are from the United States. Select your Cookie Settings or view our Privacy Policy and Terms of Use.
Cookie Settings
Cookies and similar technologies are used on this website for proper function of the website, for tracking performance analytics and for marketing purposes. We and some of our third-party providers may use cookie data for various purposes. Please review the cookie settings below and choose your preference.
Used for the proper function of the website
Used for monitoring website traffic and interactions
Cookie Settings
Cookies and similar technologies are used on this website for proper function of the website, for tracking performance analytics and for marketing purposes. We and some of our third-party providers may use cookie data for various purposes. Please review the cookie settings below and choose your preference.
Strictly Necessary: Used for the proper function of the website
Performance/Analytics: Used for monitoring website traffic and interactions
A key tool in both endeavors is a hurdlerate a rate of return that you determine as your required return for business and investment decisions. It deepens the acquaintance because you encounter hurdlerates in almost every aspect of finance, and it ruins it, by making these hurdlerates all about equations and models.
What is a hurdlerate for a business? In this post, I will start by looking at the role that hurdlerates play in running a business, with the consequences of setting them too high or too low, and then look at the fundamentals that should cause hurdlerates to vary across companies. What is a hurdlerate?
Risk and HurdleRates In investing and corporate finance, we have no choice but to come up with measures of risk, flawed though they might be, that can be converted into numbers that drive decisions. In corporate finance, this takes the form of a hurdlerate , a minimum acceptable return on an investment, for it to be funded.
In this post, I will focus on how companies around the world, and in different sectors, performed on their end game of delivering profits, by first focusing on profitability differences across businesses, then converting profitability into returns, and comparing these returns to the hurdlerates that I talked about in my last data update post.
The Variables The variables that I report industry-average statistics for reflect my interests, and they range the spectrum, with risk, profitability, leverage, and dividend metrics thrown into the mix. Since I teach corporate finance and valuation, I find it useful to break down the data that I report based upon these groupings.
Risk and HurdleRates In investing and corporate finance, we have no choice but to come up with measures of risk, flawed though they might be, that can be converted into numbers that drive decisions. In corporate finance, this takes the form of a hurdlerate , a minimum acceptable return on an investment, for it to be funded.
Financial institutions can better understand the risk profiles of small suppliers by leveraging alternative data and machine learning, thus expanding access to financing. It requires accurate data, robust technology, and thorough risk assessment, crucial to ensuring the creditworthiness of suppliers at all levels.
When valuing or analyzing a company, I find myself looking for and using macro data (risk premiums, default spreads, tax rates) and industry-level data on profitability, risk and leverage. will become dated as the year goes on, and especially so if the market moves up or down significantly.
The dividend principle, which is the focus of this post is built on a very simple principle, which is that if a company is unable to find investments that make returns that meet its hurdlerate thresholds, it should return cash back to the owners in that business.
With more mature companies, as investment opportunities become scarcer, at least relative to available capital, the focus not surprisingly shifts to financing mix, with a lower hurdlerate being the pay off.
When valuing or analyzing a company, I find myself looking for and using macro data (risk premiums, default spreads, tax rates) and industry-level data on profitability, risk and leverage. Per-employee Statistics Profitability Financial Leverage Reinvestment 1. EV/EBIT and EV/EBITDA 4. High-Low Price Risk Measure 5.
In fact, that may explain why firms that trade at low EV to EBITDA multiples are more likely to become targets in leveraged buyouts (LBOs) or leveraged recapitalizations. Business risk : Not surprisingly, for any given level of cash flows and marginal tax rate, riskier firms will be capable of carrying less debt than safer firms.
You do the math and you’re like, “Okay, well, an advisor can handle about 100 clients, an associate advisor can help with some of those clients, you can leverage maybe an associate advisor with a couple of advisors, but there’s a capacity limit for each of the roles.” And then we have the 0% cap.
But the true change comes when, hey, you know what, those loyal to that technological change figure out over not one, two, but three, five years, how to drive change and how to leverage it. That means a low hurdlerate. And that’s been true through time. We’re going to be a lower fee than almost everybody out there.
But I would say generally, there’s less leverage in the system. But I don’t think this is a wholesale shift, we’re in a higher rate environment, obviously, for now. So you’ve got to be really mindful that you’re getting paid enough on a nominal return basis versus the risk-free rate.
I mean, I didn’t want to blow my own trumpet up too much because most of the positions were in place, the quality funds, which more defensive and less leveraged, and low allocation to — a relatively low allocation to equities, and then the hedge funds sort of long/short positions that benefited in the financial crisis.
The cost of debt is lower than the cost of equity : If you review my sixth data update on hurdlerates , and go through my cost of capital calculation, there is one inescapable conclusion. Data Update 4 for 2025: Interest Rates, Inflation and Central Banks! Data Update 6 for 2025: From Macro to Micro - The HurdleRate Question!
So you’ve got, you’ve got a modeling hurdlerate that you need to figure out when you’re adding diversifiers. This is implicitly leverage. Leverage is a tool that accentuates both the good and the bad. And you need to be aware of the leverage risk that’s embedded. The second is behavioral.
00:26:19 [Speaker Changed] It, it’s, it’s usually it is aggressive shorts from leveraged funds on s and p futures. So it’s gonna take a little more confidence, you know, and equities to, because you get your, your hurdlerates higher, you know? You can see it also in futures positioning.
We organize all of the trending information in your field so you don't have to. Join 39,000+ users and stay up to date on the latest articles your peers are reading.
You know about us, now we want to get to know you!
Let's personalize your content
Let's get even more personalized
We recognize your account from another site in our network, please click 'Send Email' below to continue with verifying your account and setting a password.
Let's personalize your content