ShmoopTube

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Finance a la shmoop what is a high-flyer? nope nothing to do with a Southwest [People sitting on an aircraft]

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Airlines passenger in California's recent legalization of marijuana

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A high flier is a stock that trades at a high multiple of earnings or of

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cash flow or EBITDA or of revenues or whatever metric you care about it is

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flying high because investors expect massive growth from the company going

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forward and while they paid up for that belief in producing a high stock price [Cash falling]

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here well a high flier might earn a dollar this year in trade for $100 a

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share with just five bucks a share in cash and no debt so it's trading at

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ninety five times the equity value of the company why would it trade at

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95 times earnings well in reality it doesn't nobody pays 95

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times earnings for anything at least not believing earnings would be [Man sitting on a couch]

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anything close to flat that is nobody would pay 95 times earnings for

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a company growing earnings from a dollar to a dollar 5, to dollar 10, dollar 15

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and just to frame the math here if they were paying ninety five times that [A sunset framed on a wooden wall]

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dollar well then it did take 95 years to just get your money back and

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lifes short think Danny DeVito yeah so if an investor is paying 95 bucks

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today they're expecting probably something close to three bucks in

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earnings next year and then I don't know like seven bucks in earnings the

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following year so then okay things make sense the company will at that point

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have generated and kept another ten bucks and change in cash so the equity

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value at that point ie in two years would be something like 85

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dollars a share and then in earning seven bucks a share well, the company's

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equity value is trading at something like thirteen-ish times two year forward

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earnings which is actually cheap if they hit their numbers and super cheap if [Cash share values appear]

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they continue to grow anything close to this rate enter and say twelve bucks a

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share the following year like think about this as a flying car company early [Man walks onto runway]

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in its history where the cars actually work and don't crash and you know kill everyone....

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and at that point while the stock would be trading at a single digit earnings

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multiple see the math there yeah all right well the problem with high-fliers

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well they fly high or there's a lot of room to fall should things go awry way [Men appear in a cockpit]

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up there.....High fliers, great until they're not

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