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<p>I have been noticing (while reading several articles) that a few financial analysts believe profitability should not be the essential sole predictor for stock returns. Obviously, most investors concentrate on financial information and earning prospects to both evaluate a firm’s intrinsic equity value and anticipate the cross section of average returns. Typically, most investors utilize profitability measures to come up with better predictions about the expected returns. Yes, it’s true that, in 2006, Fama and French found that corporations that are more profitable would generate higher returns. However, in 2013, Novy-Marx suggested that profitability is not the single method (tool) to use in order to measure cross section of average returns, book-to-market ratio can be utilized as well.</p><p>Historically speaking, there have been some corporations that have gone bankrupt while having profitable income statements. For instance, Enron and WorldCom showed that profitable GAAP income statements can survive while having negative operating or free cash flows for years. Therefore, investors might make inaccurate and poor financial decisions when focusing solely on income statements. Instead, investors should analyze a firm’s cash flows as well.</p><p>Sometimes, it would depend upon what kind of a firm investors are trying to evaluate and predict its earnings. In other words, financial services companies (e.g. banks, insurance firms, etc.) are sort of difficult to value because it’s a bit complicated to analyze their cash flows due to unclear definition of capital expenditures and working capital. However, on a large scale investors and analysts should look at more than one parameter (income statements, cash flow statements, etc.) to come up with informed recommendation on purchasing new stocks.</p><p><span style="text-decoration: underline;" data-mce-style="text-decoration: underline;">Author</span>: Ahmed Almuhr</p>

Predicating Stocks Returns

Iconic rock-cut tomb in Hegra, Saudi Arabia

<p>Financial globalization has added considerable value to countries as well as to corporations. Financial globalized markets both have enticed very sophisticated investors and increased liquidity in the markets. When there is a sufficient liquidity in a market, firms will have much more cash to invest or expand their businesses and this would strengthen the economy. With strengthening the economy, plenty of jobs will be created. With the increase of financial globalization, the improvement of domestic financial markets can be accelerated and when there is an accelerating development of a domestic financial market, capital flows can boost the economy.</p><p>Corporations and countries will benefit from this financial globalization when they attempt to hedge to offset their positions. Also, foreign participation in financial markets would enhance markets deepening, meaning, numerous shares will be bought and sold without any significant effect on the price of stocks. According to Investopedia, unlike thin market stocks, prices of deep market stocks become more stable and less volatile. https://www.investopedia.com/terms/d/deep-market.asp</p><p>Moreover, the local financial system will be integrated with international financial institutions and markets which would, perhaps, incentivize some countries to adopt some global accounting rules. Such action will make it much easier for firms to prepare their financial statements by utilizing specific accounting standards and policies. With global accounting standards that are going to be followed by corporations, there will be much more transparency. In other words, buying and selling decisions made by analysts will not be poor and inaccurate due to some misunderstanding of the way a firm's financial information recorded.</p><p>Financial institutions can make a substantial economic development. Several non-financial industries will have the ability to use the money "that is invested by financial corporations" to improve their productivity and/or invent new products. For example, many technology firms might have brilliant and innovative notions and they would hope to turn their ideas into a reality. However, given their lack of cash, they would need to attract those companies to invest in their firm. Therefore, having financial globalization would give those companies choices to raise capital whether from domestic or international venture capitalists.</p><p>I believe that there will be much more improvement of local market conditions if there are an enormous growth and escalation in foreign financial participation. Noticeably, we see Saudi open its doors even wider for foreign investors to come in and this would promote economic growth. We will have very sophisticated investors who will add more value to the companies by sharing their different experiences and knowledge. Also, another potential advantage of financial globalization is that Saudi financial system will greatly evolve. The government encouragement to foreign financial participation will increase the availability of funds for its citizens which will lead to greater competition.</p><p>I am absolutely certain that financial globalization poses some challenges and there will be some drawbacks associated with such phenomenon. The most prominent disadvantage is if there is any economic collapse (such as Dot-Com bubble, Wall Street crash in 2008, Asian financial crisis, etc.) known as global systematic risk, it will have a negative impact on the markets. However, I believe that the benefits our market will gain from financial globalization are exceedingly significant.</p><p><span style="text-decoration: underline;" data-mce-style="text-decoration: underline;">Author</span>: Ahmed Almuhr</p>

Financial Globalization! "liberalizing Saudi domestic financial market"

<p>Many economists, investors, lenders, government agencies, corporations, and financial institutions closely monitor Treasury yields (government bond yields). But why?</p><p>First, let’s define what a Treasury yield is. It represents the annualized return that bondholders earn if they hold a U.S. government bond until maturity. These bonds serve as debt instruments issued by the U.S. government to finance both short-term and long-term operations. Large institutions and investors favor Treasuries primarily for their predictable returns. When institutions seek to balance their portfolios across (debt, equity, crypto, etc.) with low-risk assets or aim to preserve capital, U.S. Treasuries are often a preferred choice.</p><p>So, how are Treasury prices determined? When the U.S. government issues, for example, a $10 billion bond offering, two main types of buyers participate: noncompetitive bidders (individual investors) and competitive bidders (institutions). Noncompetitive bidders accept the yield set by the government (e.g., 3%), while competitive bidders specify the yield they are willing to accept. After they purchased them, these bonds can be traded in the market, where their prices fluctuate based on factors such as supply &amp; demand, time to maturity, and yields of other securities issued by the U.S government. Please note that the U.S. government does not set bond prices once they enter the market.</p><p>What does it mean when people say, “The Fed is going to raise or lower interest rates”? This refers to the <strong>Federal Funds Rate (FFR)</strong>—the target interest rate range set by the Federal Open Market Committee (FOMC), the policymaking body of the Federal Reserve System (the Fed). The FFR dictates the rate at which banks lend and borrow money from each other overnight.</p><p>Since the Fed controls monetary policy, it can lower the FFR, reducing the cost for banks to borrow from the central bank and from one another. This, in turn, allows banks to offer lower interest rates to consumers and businesses. As borrowing becomes cheaper, demand for loans increases (including mortgages, business loans, and student loans), leading to more transactions, higher economic activity, and ultimately, economic growth.</p><p>Because of these dynamics, Treasury yields hold significant importance, influencing financial, investment, budgeting, and valuation decisions across various sectors.</p><p><span style="text-decoration: underline;" data-mce-style="text-decoration: underline;">Author</span>: Ahmed Almuhr</p>

(Interest Rate) The Treasury Yield is the Oxygen of the Economy!

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<h2>Understanding Working Capital</h2><p>For any business, whether a fledgling startup or a seasoned corporation, understanding and managing working capital is crucial. It is the lifeblood that keeps daily operations running smoothly and efficiently. But <strong>what </strong>exactly is working capital, and <strong>why</strong> is it so important?</p><p>Working capital is the difference between a company's current assets, like cash and accounts receivable, and its current liabilities, such as accounts payable. In simpler terms, it is the capital available to fund a company's day-to-day operations. A positive working capital indicates that a company can cover its short-term liabilities, while a negative working capital suggests potential financial trouble (however, in rare scenarios, a negative WC can be favorable as businesses may collect their receivables rapidly and delay paying their suppliers, Apple. Inc is a great example).</p><figure id="figure-4sr9ch26mm79lqj4j"><img id="4sr9ch26mm79lqj4j" src="https://cdn.durable.co/getty/bGdV7UPn7gwASaHgLxBtEmupglpLPZICuKVvoS92ezwQEaa4rtzWd4zFSpVpIeps.jpeg" alt="financial management" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://cdn.durable.co/getty/bGdV7UPn7gwASaHgLxBtEmupglpLPZICuKVvoS92ezwQEaa4rtzWd4zFSpVpIeps.jpeg" data-mce-style="aspect-ratio: 16/9;"></figure><h3>The Components of Working Capital</h3><p>Working capital comprises several key components, each playing a vital role in maintaining the financial health of a business. These components include:</p><ul><li><strong>Cash and Cash Equivalents:</strong> These are the most liquid assets and include bank balances and marketable securities.</li><li><strong>Accounts Receivable:</strong> Money owed to the company by its customers for goods or services delivered.</li><li><strong>Inventory:</strong> The raw materials, work-in-progress, and finished goods a company holds.</li><li><strong>Accounts Payable:</strong> Money the company owes to its suppliers and creditors.</li></ul><p>Managing these components effectively ensures that a business maintains sufficient liquidity to meet its obligations and invest in growth opportunities.</p><h3>The Importance of Efficient Working Capital Management</h3><p>Efficient working capital management is crucial for several reasons. Firstly, it helps improve a company's liquidity by ensuring there is enough cash flow to meet immediate needs. Secondly, it optimizes profitability by reducing unnecessary expenses and maximizing the use of current assets.</p><p>A company with strong working capital management can also enjoy increased operational efficiency. By maintaining optimal inventory levels and managing receivables and payables effectively, businesses can reduce waste and improve productivity.</p><h3>Strategies for Managing Working Capital</h3><p>There are several strategies businesses can employ to manage their working capital effectively:</p><ol><li><strong>Optimize Inventory Levels:</strong> Implement inventory management systems to avoid overstocking or understocking.</li><li><strong>Streamline Receivables:</strong> Use invoicing software to speed up collections and offer incentives for early payments.</li><li><strong>Negotiate Better Payment Terms:</strong> Work with suppliers to extend payment terms without incurring penalties.</li></ol><p>By adopting these strategies, businesses can maintain a healthy balance between their assets and liabilities, ensuring long-term sustainability.</p><h3>The Impact of Poor Working Capital Management</h3><p>Poor working capital management can lead to severe financial challenges. Companies may face cash shortages, leading to difficulties in meeting financial obligations. This can result in increased borrowing and interest costs, negatively impacting profitability.</p><figure id="figure-szxa9lofrhm79lqt6k"><img id="szxa9lofrhm79lqt6k" src="https://media.gettyimages.com/id/1249390843/photo/young-woman-struggling-with-bills.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=76Ebl2H4beHNv9qVn65YlvVwOAVbkSa9tyHQTLvakfQ=" alt="Young woman struggling with bills" title="Young woman struggling with bills" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9; object-position: center center;" data-corners="default" data-aspect="16:9" data-caption="" data-positionx="null" data-positiony="null" data-fullwidth="false" data-mce-src="https://media.gettyimages.com/id/1249390843/photo/young-woman-struggling-with-bills.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=76Ebl2H4beHNv9qVn65YlvVwOAVbkSa9tyHQTLvakfQ=" data-mce-style="aspect-ratio: 16/9; object-position: center center;"></figure><p>Moreover, businesses with inadequate working capital may struggle to seize growth opportunities, as they lack the necessary funds to invest in new projects or market expansion. This can hinder competitiveness and long-term success.</p><h3>Conclusion: The Path Forward</h3><p>Understanding the importance of working capital and implementing effective management strategies are essential for any business aiming for success. By focusing on liquidity, profitability, and operational efficiency, companies can ensure they remain resilient in the face of financial challenges.</p><p>Ultimately, effective working capital management not only safeguards a company's financial health but also paves the way for growth and innovation in an ever-evolving business landscape.</p><p><span style="text-decoration: underline;" data-mce-style="text-decoration: underline;">Author</span>: Ahmed Almuhr</p>

The Importance of Working Capital

<h2>Understanding the Importance of Financial Health</h2><p>Achieving and maintaining robust financial health is crucial for any business aiming for long-term success. Financial health reflects a company's ability to generate profit, manage expenses, and grow sustainably. Without a solid financial foundation, even the most innovative firms can struggle to stay afloat. In this blog post, we'll explore key strategies to enhance your firm's financial well-being.</p><h3>Implement Cost-Effective Practices</h3><p>Cost management is an essential component of financial health. By implementing cost-effective practices, businesses can optimize their resources without compromising on quality. This could involve negotiating better terms with suppliers, adopting energy-efficient technologies, or streamlining processes to reduce waste. The goal is to maximize value while minimizing unnecessary expenses.</p><h2>Leverage Technology for Financial Management</h2><p>In today's digital age, leveraging technology can play a significant role in enhancing your firm's financial health. Implementing advanced financial software can improve accuracy, automate routine tasks, and provide real-time insights into your financial performance. This helps in making more informed decisions and identifying opportunities for growth.</p><h3>Focus on Revenue Diversification</h3><p>Diversifying revenue streams is another strategy for strengthening financial stability. By expanding your product offerings or entering new markets, you can reduce dependence on a single source of income. This not only mitigates risk but also opens up new avenues for revenue generation, ensuring a more balanced and resilient financial structure.</p><p><img id="034q8a71wm75evn2u" src="https://cdn.durable.co/getty/70OEk5qQtq0dEUGdYdI6eArGYOLirvxDYsiqxtgz3AmtXyaODwIHBPLYbwonaLqr.jpeg" alt="financial education" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://cdn.durable.co/getty/70OEk5qQtq0dEUGdYdI6eArGYOLirvxDYsiqxtgz3AmtXyaODwIHBPLYbwonaLqr.jpeg" data-mce-style="aspect-ratio: 16/9;"></p><h2>Monitor Cash Flow Diligently</h2><p>Effective cash flow management is critical for maintaining liquidity and ensuring smooth operations. Regularly monitoring cash flow helps you anticipate potential shortfalls and plan accordingly. Developing a cash flow forecast allows you to manage expenses more effectively and ensure that you have sufficient funds to cover operational needs.</p><h3>Build Strong Relationships with Financial Partners</h3><p>Finally, cultivating strong relationships with banks, investors, and other financial partners can provide your firm with the necessary support during challenging times. These relationships can offer access to favorable financing options, strategic advice, and potential collaborations that can enhance your firm's financial position.</p><p>By implementing these key strategies, businesses can significantly boost their financial health, paving the way for sustainable growth and long-term success. Remember, a proactive approach to financial management is the cornerstone of a thriving enterprise.</p><p><span style="text-decoration: underline;" data-mce-style="text-decoration: underline;">Author</span>: Ahmed Almuhr</p>

Insights & Blog

Predicating Stocks Returns

Financial Globalization! "liberalizing Saudi domestic fin...

(Interest Rate) The Treasury Yield is the Oxygen of the E...

The Importance of Working Capital

Boosting Your Firm's Financial Health