The post Download Gordon Growth Model in Excel (with MarketXLS™ Template) appeared first on .

]]>Consider a company that is in a stable business and is expecting to grow at a constant growth rate over the next few years. Also, the company pays all its free cash flow as dividends to its shareholders. We can calculate the intrinsic value of such a company as the present value of its expected dividends, assuming that the company will continue to grow at the constant growth rate and will live for ever.

**V = D1/(k-g)**

Where:

- D1 is the expected dividend in the next period. if we have the current year’s dividend(D0), we can calculate D1 as D0(1+g)
- k is cost of equity or the required rate of return by shareholders
- g is the dividend growth rate

The model is most effective when used for valuing large stable companies in maturing markets that have a predictable dividend growth rate.

The model has a few underlying assumptions:

- The firm must have a stable business model and is not expecting to change it’s operations significantly over the next many years
- The firm’s free cash flow to equity (FCFE) and therefore, dividends will grow at a constant growth rate. Dividends refer to money paid to shareholders out of a company’s earnings. Dividends are usually equal to a percentage of earnings per share.
- The firm has a stable financial leverage in order to keep the cost of equity constant. Any change in financial leverage affects the cost of equity capital.
- The firm pays out all the free cash flow to equity as dividends. This is not always true because we can’t trust managers to always payout the FCFE to shareholders. For this reason, the most common implementations of the Gordon Growth Model only consider dividends for stock valuation.

For the purpose of explaining the model, we will take the stock of Duke Energy (NYSE: DUK). This fits our assumptions about the firm’s stable approach to business. Below are the stock’s data and assumptions:

- The stock has a beta of 0.12. With a risk-free rate of 3.5% and a market risk premium of 5.5%, the cost of equity is 4.1% (refer excel sheet for details).
- The dividend paid in year 2016 is 3.36.
- We assume a constant dividend growth rate of 1%.

We these details, the Gordon Growth Model, calculates the stock’s value to be 108.16 which is higher than the current market price of 85.95. So, if are assumptions are accurate, then according the GGM, the stock is undervalued and investors should buy it.

We have developed Gordon Growth Model in Excel template that you can use to value any stock using this model. The excel template also showcases the Duke Energy example as shown above. The excel template makes use of the MarketXLS hf_ functions to fetch all market data. This includes data such as beta, current year dividends, the stock’s current market price, etc.

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]]>The post Using MarketXLS and Excel to easily see a real time snap shot of your portfolio appeared first on .

]]>MarketXLS, combined with my knowledge of Excel, allow me to do manage my stock portfolio in Excel.

Since I’m only about 2 years away from retirement, my primary goal has been to create an income stream that will replace at least 60% of my projected living and discretionary expenses. Social Security will supply the other 40%.

The majority of my investment savings is in work-related 403b funds and I don’t have much control over these.

So I’ve been practicing with a small (but growing) amount of money, trying to build my confidence so that I feel comfortable taking control of all my savings when I retire.

As I’ve practiced, I’ve finally settled on Dividend Growth Investing as the style that meets my goals and feels comfortable to me. This means that I mostly buy stocks that pay a dividend and have a history of increasing the dividend each year. Capital gains are icing on the cake.

I also try to buy stocks when they are undervalued, based on several metrics such as current vs historic P/E, projected earnings growth, and current price as it relates to the 52-week highs and lows. This increases the dividend yield on cost (YOC), which is one of the portfolio performance measures that I track.

MarketXLS supplies the values in the gold-colored cells…I refresh them whenever I open the spreadsheet.

Several columns are created using Excel formulas that rely on the data in the gold cells. For example:

- Current Mkt Value is just the Current Price x # of shares
- P/L $ is the capital gain (or loss) on that equity (you can see that is not my primary focus!)
- Forward Annual Dividends is the Annual Dividend per Share x # of shares. I now receive $2900 in income each year…this is a 5.58% yield on cost. Thankfully, as the companies increase their dividends each year, this will grow….like getting a raise every year.
- YOC and YO Mkt Value are hopefully self-explanatory.
- Then I look at the % of my portfolio represented by that equity; and also the % of income I receive from that equity. You can see that > 20% of my income is from NRZ and T….so I probably don’t want to buy any more of those stocks for a while. I need to diversify a bit so that all my income eggs are not in the same basket.
- The last 3 columns are used to identify stocks in my portfolio that might be overpriced (and good candidates for selling or trimming), or undervalued (and good candidates for buying additional shares). These columns were created as follows:
- Add to Share Count uses the formula =IF(H2<(0.25*(R2-Q2)+Q2),”Buy”,”Too High”) which is basically looking at the difference between 52-wk low and high, and where the current price is on the continuum. For example, if the low = $10, and the high = $20, and the current price = $14, then the current price is 40% of the distance between the low and high. My formula will show “Buy” if the stock price is less than 25% of the distance between the low and the high. This is my somewhat arbitrary personal preference. I then use Conditional Formatting to make the word “Buy” have a green background so I can see it more easily. This is just a preliminary flag to buy (you may need additional due diligence)
- Take Profits column is very similar. It uses the formula =IF(H2>(0.9*(R2-Q2)+Q2),”Sell”,”No”) which will suggest I should consider selling or trimming the position of a stock if it is more than 90% of the distance between its 52-week low and high. Again I use Conditional Formatting to Highlight the word Sell. And again I would use this signal as a preliminary suggestion that would require additional due diligence before making a trade.
- The Mkt Price vs 52-Week Range calculates the exact point along the range.

- At the bottom of the table I calculate the cost basis, current value, forward dividends, yield, etc for the portfolio as a whole.

. Here are a few examples:

This first pivot chart breaks things down by sector (I take some liberties with sector assignment…for example I track Business Development Companies – BDC – separate from other Financial Sector stocks).

- My cost basis for all the stocks in that sector is in the blue column.
- The green column is the current market value for all the stocks in that sector.
- The red line uses the Y-axis on the right-hand side and shows which sectors have a capital gain and which have a capital loss, and how much

I also like to look at where my income (dividends) comes from. The columns in the chart above show forward annual dividends by sector. The blue line, which uses the Y-axis on the right, shows the cost basis for the stocks in that sector. You can see my cost basis is highest in the Telecom sector but both the REIT and BDC sectors generate more income (they tend to have higher yields).

(I had too much fun playing with colors on this one).

I also plot the last column from the first table I showed you….to see a graphical representation of which of my stocks are doing great, and which are not so good (from a cap gains perspective).

As shown, Orchid Paper (TIS) is pretty beat down, while Johnson and Johnson (JNJ) is near its 52-week high.

These are just a few of the fun (and useful!) things you can do when you combine MarketXLS with your knowledge of Excel. I love being able to manage my stock portfolio in Excel (from 3 brokerage accounts) easily. Without MarketXLS I could not really do this. I would have to manually update the gold fields in the table, and that would be no fun at all.

** By kindkath – MarketXLS User

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]]>The post Covered Call Income Generation (With Excel Template) appeared first on .

]]>An options strategy refers to buying and selling a combination of options along with the underlying assets to create a certain payoff. Any option strategy will involve the investor going long/short the stock and buying or writing call or put option contracts. The option strategies are generally classified as covered strategies, spread strategies and combined strategies. Covered strategies involve taking the position in the underlying stock and the option. Spread strategies involve taking positions in two or more call options of the same type to take advantage of the spread. In this article we will look at the covered call strategy.

A covered call strategy involves being long on a stock and short on a call option of the same stock. In a call option, the writer (short) of the call option grants the buyer of the option the write to buy the underlying stock at the exercise price (which is fixed at the time of selling the option. There are two key components of a call option: 1) The exercise price (also called the strike price) which is the price on which the call option buyer has the right to buy the underlying stock. 2) The expiration date (the date on which an option expires and becomes worthless).

While building a covered call strategy, the holder of the stock is writing a call option on the same stock, i.e., he is granting the buyer the right to purchase the underlying stock at the pre-decided strike price. Selling the option earns the writer a small income called the premium. This is a conservative strategy because the seller of the option is taking only a limited risk as he already holds the underlying stock. The long position in the stock acts as a cover for the short position in the call option. Thereby, it protects the option seller from the market price of the stock. If the option buyer decides to exercise the option, the option seller that the option seller holds can be delivered.

Let’s review the salient features of a covered call income generation strategy:

**Strategy:** Long 100 stocks + Short call option

**When to use:** Investor should consider this strategy if he is neutral to slightly bullish about the market.

**Reward:** Reward is limited in the form of the premium received. There is also a notional gain equivalent to the price rise upto the strike price.

**Risk:** Risk is limited from the short call but can significantly affect you if the stock prices fall.

Let’s say an investor creates a covered call with the following details:

The payoff diagram for this covered call will look as follows:

You can download the attached Covered Call Strategy excel template that you can use to form a “covered call” strategy for any stock. The template allows you specify a stock and an options contract for that stock. Once you specify these details, the template will perform all calculations and plot the payoff diagram. Furthermore, the template uses MarketXLS functions to fetch real-time data for both stocks and options.

Download Option Strategies Excel Template

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]]>The post Fibonacci Retracement Calculator appeared first on .

]]>*0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.*

Download Fibonacci Retracement Excel Template

On of the most interesting outcomes of the Fibonacci sequence is the Golden ratio which is the ratio of the two consecutive numbers in the sequence. As we move further in the sequence, the ratio approximates to 1.618 – the golden ratio – the reverse of which is 0.618 of 61.8%.

In stock markets, the idea behind retracement is that the markets will retrace (reverse direction) a predictable portion of a move. After which they will continue to move in the original direction.

Traders use Finonacci retracement ratios as guide for the levels where they would expect the retracement to occur.

The most common Fibonacci ratios used are **23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%**.

We calculate the 61.8% ratio by dividing a number by its next consecutive number (34/55 = 0.618). Similarly, we calculate the 38.2% by dividing a number by the number two places higher (13/34 = 0.382). Finally, we calculate the ratio 23.6% by dividing a number by the number three places higher (13/554 = 0.236).

Traders use the Fibonacci retracement levels as support and resistance levels

Apart from Fibonacci retracement levels, we also have Fibonacci extension levels as shown below:

**0%, 38.2%, 61.8%, 100%, 138.2%, 161.8%**

Traders use the Fibonacci extension levels as profit taking levels

We have created a Fibonacci Retracement Calculator excel template. The template automates the calculation of Fibonacci Retracement and Extension ratios in both uptrend and downtrend scenarios. The excel template fetches the day’s high and low for a stock from MarketXLS and then calculates these levels.

Download Fibonacci Retracement Excel Template

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]]>The post Altman’s Z score in Excel Calculator (Includes MarketXLS Template) appeared first on .

]]>In this article, I will provide you with a quick introduction to Altman Z score for public companies and how to calculate Altman z score in Excel using MarketXLS functions. Altman’s Z score is probably one of the more famous credit scoring models have survived 30 years of application more than that. Sometimes when a company enters bankruptcy it’s kind of thing that people have seen it months or even years coming. But sometimes it’s just a complete surprise. We all know examples of some companies that just imploded and people did not see coming, and investors in people end up losing millions and billions of dollars.

So, what if there was a way to predict the bankruptcy. There was a way and by looking at some financial numbers we could get an idea if there is a likelihood of a company going bankrupt, even if there may be other people were not quite seeing that coming. So that’s really was what Altman’s Z score was developed for, it’s basically a formula that outputs the z score and then that score can be an indicator to suggest if the company is at a high risk of going bankruptcy or not.

This model was created by combining five different financial ratios, calculated by using the accounting data of those companies that had already gone bankrupt in the past. The model itself was developed in 1968 but it is still one of the most widely used models.

Download the Altmans Z Score Calculator in MarketXLS

It is a long formula but it is not very difficult to calculate once you have all the numbers. Altman’s Z score is a linear discriminant model, that means it divides potential borrowers into two classes, either high risk or low risk. This score does not directly produce a probability of going bankrupt however you can take this score map it to a credit rating and translate that credit rating to a probable default. This score is essentially a credit classification model. The idea is, that we take a look at some fundamental variables and essentially plug these into a linear function to produce the Altman Z score in Excel.

Following equation is used to calculate the score.

1)

Working Capital is Current Assets minus the current liabilities. BBRY is at cell B2 and Year is at cell C2.

Using MarketXLS functions you can calculate this factor as highlighted below in Yellow.

2)

Part of that theory here is that the younger companies would have less of the tenure to accumulate retained earnings so there a little bit more likely to default compared to the older companies.

3)

4)

This factor major has much in common with the structural approach to the credit risk. As the market value of equity reduces company has less of a cushion to pay back its liabilities so its much more likely to default.

5)

If the score is higher than 2.99 it means that the possibility of company’s bankruptcy is very low. This interval is known as safe zone. The value between 1.8 and 2.99 represent a Grey zone, suggesting that company is facing some kind of financial stress.

If the value is below 1.8, the possibility of the company’s bankruptcy is high. This group is known as the distress zone.

In our example for the period ending 2016 BBRY was under some kind of financial stress. Once I had this model I could simply replicate this for other companies. So, I compared the BBRY with GOOGL for Altsman Z score for the period of 2011 to 2016 and plot the scores.

Please however note, that this model does not calculate the exact probability of company’s bankruptcy. It is more of a statistics-based model. So, you cannot rely on it alone. But looked along with credit rating of the company it could provide good indication of financial health of a company.

Google is consistently getting higher and higher and that of BBRY is going the other way down. I based the model on Yearly numbers, however with MarketXLS you can calculate the same by quarter. All you have to do is add one more argument in functions for quarter. More details on how to use MarketXLS hf functions, please see our knowledge-base here.

With the Altman Z score in Excel model in place, I went on to find a company that filed for Bankruptcy in recent time so I could check if this score can validate itself if we put into the model the numbers from that company.

So, i found the article below…

https://seekingalpha.com/article/4058519-ocean-rig-files-bankruptcy about Ocean Rig with the symbol of ORIG.

So, I ran the same model with ORIG and found the results below. The results seem to indicate that the Altman’s Z score is a valid indicator of possible bankruptcy of a company.

Download the Altmans Z Score Calculator in MarketXLS

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]]>The post Sortino Ratio in Excel appeared first on .

]]>Download Sortino Ratio Template for MarketXLS

Sortino ratio is a modified version of Sharpe Ratio. It is named after Dr. Frank Sortino from the Pension research Institute. A higher Sharpe ratio signifies relatively less risk. In other words, even if a portfolio’s performance is average and the risk is low, the Sharpe ratio will become large. This is, however, not enough because investors don’t just want to look at the average performance of a portfolio. And this is where Sortino ratio differs from Sharpe ratio. Instead of using standard deviation as denominator, the Sortino ratio uses only the downside deviation.

Th Sortino ratio measures excess return to the risk of not meeting an investor’s MAR.

Here MAR is the Minimum Accepted Return by the investor which may be an absolute return, an index return, risk-free rate, or even zero.

The important thing to note here is that Sortino ratio quantifies downside volatility without penalizing upside volatility thereby addressing the shortcomings of Sharpe ratio.

Sortino ratio is suitable as a relative measure to compare performance of portfolios, one fund with another, or to compare a fund with a benchmark index. A higher ratio indicates better risk-adjusted performance. It indicates a low risk of incurring large losses (because it considers only downside volatility).

Let’s take an example to understand this. Let’s say you are considering investment in two funds A and B. Fund A has a return of 10% in the first year and -10% in the second year. Fund B has 0% return in first year and 20% return in second year.

For both Funds A and B, the total variance is the same, i.e., 20%. However, Fund B is definitely a better investment . Sharpe ratio will not differentiate between the two investments. However, Sortino ratio will spot the negative volatility in Fund A and will be able to identify Fund B as a better investment.

We have created a template to calculate Sortino Ratio in Excel. Especially relevant is that we can calculate Sortino ratio in Excel using MarketXLS functions. In the template, where you can enter your stock portfolio and it will automatically calculate the Sortino Ratio of the portfolio. Also, the template is flexible and we can extend it to calculate Sortino ratio of any portfolio.

Let us review the steps involved in calculating Sharpe Ratio of Portfolio in Excel.

Get daily stock prices for the last one year for each stock in your portfolio. To do this, simply add the stock symbols in excel, select the cells containing the symbols, and then press the ‘**1 Year Data**’ button in the MarketXLS panel.

Calculate daily returns for the period using the following formula:

*Daily Return = (Price 1 – Price 0) / Price 0*

Using the daily returns and MAR, you can calculate the excess returns and also the negative excess returns.

We can now calculate the annualized excess returns and also the downside volatility using the negative excess returns.

Finally you can calculate the Sortino ratio using the formula provided above.

Download Sortino Ratio Template for MarketXLS

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]]>The post Warren Buffet Investment Portfolio Through The Last 50 Years appeared first on .

]]>Berkshire’s per-share book value has increased to $146, 186 in 2014 from $19. In 2017 March it stands at $118.72. In Dec 2016 it stood at $114.74.

Berkshire has always compared the S&P 500 to it’s own per share book value as a tracking mechanism. In its earlier years of operation both its intrinsic value and book value were quite close. Over the years though Berkshire has acquired and operated businesses whose value outweighs a pure cost-based carrying value. This had led to a widening of the book value versus intrinsic value.

Early on Buffet made some strange and not very wise decisions like investing in the mills of New England…Berkshire being one of them. He acquired them when most of the mills were closing down. Soon enough they did start shutting down. Buffet’s logic was that these companies had one last – kick to offer, not unlike the last nicotine puff of a cigar. He quickly realized this strategy might earn him short- term gains but not long-term ones. It was here his long-term partner Charlie Munger stepped in to undertake course correction. His advice which helped Buffet build his profitable business was “Forget what you know about buying fair businesses at wonderful prices; instead buy wonderful businesses at fair prices.”

Berkshire Hathaway has invested in several companies. Some of them include Applied Underwriters, BoatUS, Brooks Sports, The Buffalo News, Business Wire, Clayton Homes, Dairy Queen, Duracell, Forest River, Helzberg Diamonds, Jordan Furniture, Lubrizol, The Pampered Chef, See Candies and Star Furnitures.

They also hold minority holdings in Wal-Mart stores, UPS, Visa, Verizon, Mastercard, Kinder Morgan, Goldman Sachs, IBM, Delta Airlines, Apple to name a few.

Buffet firmly believes in American companies and he has strong faith in the American economy. He also strongly believes in the concept of intrinsic value. He hopes Berkshire will continue to build intrinsic value by:

- Improving the earning power of it’s subsidiaries
- Increasing earning through bolt-on acquisitions
- Benefit from the growth of investees
- Repurchasing Berkshire shares when available at reasonable prices
- Making a few large acquisitions that will add value to Berkshire

Berkshire has made wise investments in car, home, computer, credit card, insurance, retail, banking industries –all of whom are required at all times by the public.

According to Buffet, in 2014 Berkshire’s pre-share investments increased 8.4% to $140,123 and non-insurance, non-investment earnings increased to 19% to $10,847 per share. Since 1970 pre-share investments have increased at a rate of 19% annually and earnings at 20.6%.

Buffet sees himself operating in 4 key areas and assesses each separately. Therefore, Warren Buffet Investment Portfolio primarily consists of these four sectors.

This sector has helped Berkshire grow continuously from the 60’s with their investments in National Indemnity and National Fire & Marine.

Berkshire has invested in BNSF, a utilities company and Berkshire Hathaway Energy Company. These companies are both characterized by earnings that will cover their interest payments even in the worst of economic conditions.

Warren Buffet Investment Portfolio (Berkshire Hathaway) has shares in the largest home builder in America, Clayton Homes. Given below is a snapshot of companies that Berkshire has in Finance and financial products.

A snapshot of the 15 common stock investments (from Warren Buffet Investment Portfolio) with the highest yield at Berkshire Hathaway is given below.

Buffet looks on his investing history of 5o years and has this to share.

“The unconventional, but inescapable conclusion to be drawn in the past fifty years is that it has been safer to invest in a diversified collection of American Businesses than to invest in securities – Treasuries for example – whose values have been tied to American currency. This was also true in the preceding half-century, the period including The Great depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.”

He continues:

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency –denominated instruments are riskier investments-far riskier investments-than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEO’S astray.”

Buffet and his team have followed a consistent strategy of maintaining a diversified portfolio in sound businesses with good financials. Of course there have been some misses but by and large he has done good by his investors.

Buffet has often been chastised by his Vice-Chairman Charlie Munger for the times he has indulged in thumb-sucking – a metaphor for sitting without taking decisions investment-wise. Despite this, Buffet has managed to pull out some aces, work steadily and strongly to generate wealth for his investors every year.

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]]>The post Ben Graham Formula appeared first on .

]]>Download the Benjamin Graham Formula Excel MarketXLS Template

The Ben Graham formula is a simple and straightforward formula that investors can use to evaluate a stock’s intrinsic value. The stock’s intrinsic value is the key idea behind it. The belief is that the stock market doesn’t really reflect the intrinsic value of the company. The intrinsic value itself is an estimate of a company’s value and depends on both tangible and intangible aspects of the company. We calculate intrinsic value using fundamental analysis. With this view, if the stock price is below the intrinsic value by a significant margin, then the investors should invest the stock for long-term to gain excess returns.

The Ben Graham Formula is provided below:

There are four key inputs:

- Value is the intrinsic value that we are calculating
- EPS: The trailing 12-month EPS (Earnings per Share). This helps us adjust EPS to a more normalized number
- 8.5: The constant represents the PE ratio of the company with 0% growth as proposed by Graham. It is reasonable to assume this number to be anywhere between 7 and 8.5.
- g: the company’s long-term (5-10 years) earnings growth rate
- 4.4: The minimum required rate of return. The risk-free rate was 4.4% in around 1962, when this model was introduced
- Y: The current 20-year AAA corporate bond rate

Using the Ben Graham Formula, we can calculate Relative Graham Value (RGV) by dividing the stock’s intrinsic value by its stock price. If the RGV is above one, as per theory the stock is undervalued and is a good buy. If the RGV is below 1, then the stock is overvalued and is a good sell.

We should note that many modern investors consider the formula to be too simplistic. Also, they doesn’t reflect our learning in the modern financial theory. However, studies have shown that the approach does work. Just like any other value investing approaches, we should not look at the intrinsic value we calculate using the formula as the absolute fair value of the stock, but rather as an indicator of the value.

The Ben graham Formula also has a drawback that it considers growth rate as an important element. It is important for analyst to exercise care while choosing an appropriate growth rate.

We have setup an excel template that we can use to calculate the intrinsic value of a stock using the Ben Graham Formula. The excel template is very flexible and we can extend and customize it to value any stock. You can also make assumptions according to your requirements. The spreadsheet makes use of MarketXLS functions to fetch the various inputs such as EPS, and stock prices.

Download the Benjamin Graham Formula Excel MarketXLS Template

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]]>The post Calculate Sharpe Ratio of Portfolio in Excel (with MarketXLS) appeared first on .

]]>Download Portfolio Sharpe Ratio Excel Template

The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is a measure for calculating risk-adjusted return of an asset. Hence, it is calculated as the mean returns earned by an asset or a portfolio in excess of the risk-free rate per unit of volatility.

The higher the Sharpe Ratio, the better the portfolio or fund has performed in proportion to the risk taken by it.

**Sharpe ratio = (Average Portfolio Returns – Risk-Free rate)/Standard Deviation of Portfolio**

If the Sharpe ratio of a portfolio is 1.3 per annum, it implies 1.3% excess returns for 1% volatility.

Let’s say an investor earns a return of 6% on his portfolio that has a volatility of 0.6. Assuming a risk-free rate of 4.2%, the Sharpe ratio is (6% – 4.2%)/0.6 = 3.

Below are a few important points about Sharpe ratio:

- The higher the Portfolio’s Sharpe ratio, the better the risk-adjusted performance. For this reason, investors are advised to pick stocks or funds with higher Sharpe ratio.
- Investors can alter their portfolio’s Sharpe ratio by either increasing the returns or by decreasing the risk taken.
- It is also a good measure to compare funds or indexes with similar returns, or to compare investments with similar risk profile.

Especially relevant is that we can calculate Sharpe ratio of portfolio in Excel using MarketXLS functions. To do so, we have created a template, where you can enter your stock portfolio and it will automatically calculate the Sharpe Ratio of the portfolio. Also, the template is flexible and we can extend it to calculate Sharpe ratio of any portfolio.

Let us review the steps involved in calculating Sharpe Ratio of Portfolio in Excel.

Get daily stock prices for the last one year for each stock in your portfolio. To do this, simply add the stock symbols in excel, select the cells containing the symbols, and then press the ‘**1 Year Data**’ button in the MarketXLS panel.

Calculate daily returns for the period using the following formula:

*Daily Return = (Price 1 – Price 0) / Price 0*

Calculate the standard deviation of each stock. Furthermore, we can do this using the Excel function STDEV() and apply it to the daily returns:

*Standard Deviation of Stock = STDEV(Daily Returns)*

Finally, standard deviation can be annualized by multiplying with with the square root of 252.

Since we have a 3 stock portfolio, we can use the correlation matrix to calculate the portfolio variance. To calculate correlation between each pair of stocks, we will use the Excel’s CORR() function.

Once we have the stock’s individual volatility and correlation matrix, we can calculate the annual volatility of the portfolio using the following formula:

This will give us the annual variance. Then we will calculate the annual volatility as the square root of annual variance.

Now we can calculate the Sharpe ratio using the following formula:

*Sharpe ratio = (Average Portfolio Returns – Risk-Free rate)/Standard Deviation of Portfolio*

Download Portfolio Sharpe Ratio Excel Template

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]]>The post Cash Generating Power Ratio appeared first on .

]]>The Cash Generating Power Ratio is calculated dividing the cash generated from operations of the firm (CFO) by the total cash generated by the firm from all three activities, namely, operations, investments and financing. It measures the proportion of a company’s positive cash flow that comes from operating the business vs. cash from investments or financing activities. We calculate this as follows:

*CFO / (CFO + Cash from Investing Inflows + Cash from Financing Inflows)*

It’s a powerful ratio at it measures the company’s ability to generate cash from its operations compared to the total cash flows. Not that it only uses the cash inflows from investing and financing, instead of the all investing and financing activities.

Analysts should evaluate the Cash Generating Power Ratio of a company on an annual basis, in addition to comparing these values from one year to the other. A reduction in this ratio over time should be seen as a concern.

We can calculate Cash Generating Power Ratio by analyzing the Statement of Cash Flows of a company. Here are the steps:

- Start with the Cash Flow from Operations. This figure is directly available in the statement of cash flows.
- Calculate the cash inflows from investing activities. This can include things such as sale of investments and other investing activities.
- Calculate the cash inflows from financing activities. This can include things such as issuance of debt or equity.

Once we have these three figures, we can apply the above mentioned formula to calculate the Cash Generating Power Ratio.

In the following example, we calculate the Cash Generating Power Ratio for Google for the year 2016.

We used MarketXLS to fetch this data. We can get the cash flow and lots of other fundamentals data using MarketXLS historical fundamentals ‘hf’ functions.For example, to get Net Cash Flow from operations, use this formula: `=hf_Net_Cash_Flow_from_Operations("GOOG","2016")`

Based on this data, we can calculate the Cash Generating Power Ratio as follows:

= 36040/(36040+240+67840+8730)

= 0.32

Similarly, you can calculate the ratio for any stock to understand their ability to generate cash from operations, before making your investment decision.

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]]>