In order to understand the impact of architecture on the businesses we are trying to study we need to establish which metrics we are trying to measure for making investment decisions.
To start the baseline, we will start with the value driven approach. Value driven approaches look at the following metrics:
1. Price to Earnings: This reflects how much is the market willing to pay for each $1 of earnings. This reflects to me the quality of earnings.
2. Price to Book: This reflects whether the current price exceeds or falls short of current assets of a company. Essentially if the thing fails, what value of assets did I buy for each dollar I paid.
3. Profit Margin: This indicates how much profit did the company make from operations.
4. Dividend Yield: If the company pays a dividend, how much is it.
5. Payout Ratio: How much percentage of the money generated by the company is paid out in dividends, assuming of course the company pays dividends.
6. Free Cash Flow: How much actual cash does the business generate. It can be calculated as following:
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
It can also be measured by subtracting Capital Expenditures from Operating Cash Flow.
There may be more that we need to establish as we go along, but so far so good.
Next, we need to understand how Architecture will impact these variables. Firstly, Architecture has to match strategy, but later whether the strategy worked and the architecture met its stated objectives can be measured by coming back to the numbers stated above.
That's it folks.
To start the baseline, we will start with the value driven approach. Value driven approaches look at the following metrics:
1. Price to Earnings: This reflects how much is the market willing to pay for each $1 of earnings. This reflects to me the quality of earnings.
2. Price to Book: This reflects whether the current price exceeds or falls short of current assets of a company. Essentially if the thing fails, what value of assets did I buy for each dollar I paid.
3. Profit Margin: This indicates how much profit did the company make from operations.
4. Dividend Yield: If the company pays a dividend, how much is it.
5. Payout Ratio: How much percentage of the money generated by the company is paid out in dividends, assuming of course the company pays dividends.
6. Free Cash Flow: How much actual cash does the business generate. It can be calculated as following:
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
It can also be measured by subtracting Capital Expenditures from Operating Cash Flow.
There may be more that we need to establish as we go along, but so far so good.
Next, we need to understand how Architecture will impact these variables. Firstly, Architecture has to match strategy, but later whether the strategy worked and the architecture met its stated objectives can be measured by coming back to the numbers stated above.
That's it folks.
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