Question

In: Finance

Do stock values reflect what, short or long term cash flows expectations? Why are quarterly earnings...

Do stock values reflect what, short or long term cash flows expectations? Why are quarterly earnings important for the companies? for stock values? What do you think is happening right now with the company valuations?

Solutions

Expert Solution

Stock price is nothing but present value of all the future cash flows the stock is going to generate. Since, it's present value of all the future cash flows, stock values reflect both short term and long term cash flows expectations.

Quartrly earnings are important for the companies because:

  • that gives a picture of what the year will loo like, in advance
  • It acts as a caution to the investor if something is not going as per exepctation
  • It prevents year end surprises
  • It's a way company interacts with its shareholders

Quartrly earnings are important for the stock values because:

  • it lays down the actual performance vis a vis projected performance
  • It shows the expectations for the coming year
  • It prevents year end surprises and thus leads to reduction in volatility of the cash flows
  • It's a way company builds trust in the projected cash flows

Right now, the globe across is in the wake of Covid 19. The crisis has led to a euphoria and hysteria. The pandemic has crashed the markets, and markets have lost all the fundamental backing. Sentiments are down, pessimism has taken over and the fall is sharp. The markets don't have any positive trigger. The lockdowns across the globe has adversely impacted the business, growth and margins. The entire impact on business is yet to be evaluated. Hence, company valuations are difficult to be judged, quantified and stable. So, company's are in general witnessing a decline in valuation, but this is largely due to pessimism and poor investors' sentiments, rather than fundamentals.


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