3 company analysis
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COMPANY ANALYSIS
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COMPANY ANALYSIS Economic analysis & Industry analysis act as a fore
runner to company analysis-Company analysis assumesmore importance since investment is done in thecompany and not in the economy or industry.
Company analysis is a study of all variables thatinfluence the future of a firm quantitatively andqualitatively.
The analyst tries to predict the future profitability andearnings of the firm and arrive at the intrinsic value.
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COMPANY ANALYSISContd . 1.Companys ability in sales growth in sales stability of
sales competitive position competitive edge.
2.Interpreting financial statements Balance sheet Summary of assets (what the company owns
fixed assets and current assets); liabilities (what the companyowes, long term & short term, secured & non-secured); equity(capital of the stake holders). Analyst looks at changes (large Vssmall) and trends (improving Vs decreasing).
Income statement Revenues funds received for providing products and / or services. Expenses funds used to pay for materials, labour and other business
costs. Profit / Loss = revenue expenses.
Analyst must look for Changes relative amounts large or small. Relationships are expenses growing faster or slower than revenues. Trends going up or down.
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COMPANY ANALYSISContd.
3.Key financial ratios Study of relationships between various accounts /
categories in the financial statement. Purpose is to develop information about the past that can
be used to get a glimpse of the future.
Analyst must do x-ray of the financial statements andlook for meaningful relationship between numbers;analyze historical trends to see if they are increasing ordecreasing. Look at industry standards and see how thecompares to competitors.
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MAJOR GROUPS OF FINANCIAL RATIOS
1. LIQUIDITY RATIOS Companys ability to meet day today operating expenses and satisfy short termobligations as they become due.
2. ACTIVITY RATIOS How well the company is
managing its assets.3. LEVERAGE RATIOS Extent of debt used by the
company and effect there of.4. PROFITABILITY RATIOS Measures how successful the
company is at creating profits.5. COMMON STOCK RATIOS Converts key financialinformation into per-share basis to simplify financialanalysis.
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MAJOR GROUPS OF FINANCIAL RATIOSCont
Liquidity Ratio 1) Current ratio = CURRENT ASSETS
CURRENT LIABILITIESIt indicates extent of short term funds available for clearingshort term liabilities.Higher the ratio better. Lower the ratio worse.
Liquidity Ratio
2) Net working capital (NWC) = CA CLAmount of working capital available to meet theCommitments and grow the business.Higher the amount better. Lower the amount worse.
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ACTIVITY RATIOS1.Accounts receivable turnover ratio = ANNUAL SALES
ACCOUNTS RECEIVABLEIn respect of credit sales, how quickly is company is collectingthe receivables. [higher ratio better; lower ratio worse]
2.Inventory turnover ratio = ANNUAL SALESINVENTORYIndicates how quickly the company is selling its inventory.[higher ratio better; lower ratio worse]
3.Total assets turnover ratio = ANNUAL SALESTOTAL ASSETS
How efficiently company is using its assets to support sales.[higher ratio better; lower ratio worse]
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LEVERAGE RATIOS
1.Debt-equity ratio = LONG TERM DEBTSHARE HOLDERS EQUITY
Indicates how much debt company is using tosupport its business compared to how muchequity it is using to support its business. [higherratio more risk; lower ratio less risk]
2.Time interest earned = E B I TANNUAL INTEREST
It measures the ability of the firm to meet itsfixed obligations by way of interest. [higher ratio
less risk; lower ratio more risk]
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PROFITABILITY RATIOS
1 .Net profit margin = NET PROFIT AFTER TAXESTOTAL REVENUES
Indicates the amount of profit earned from sales another
operations. [higher ratio better; lower ratio worse]
2 .Return on assets = NET PROFIT AFTER TAXES
TOTAL ASSETS Indicates amount of profit earned on amount invested
in assets; measures managements efficiency at usingassets. [higher ratio better; lower ratio worse]
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PROFITABILITY RATIOSContd..
3 .Return on equity = NET PROFIT AFTER TAXESSTAKE HOLDERS EQUITY
Measures managements ability in using stake holders equityin realizing profits. [higher ratio better; lower ratio worse]
4 .Breaking down ROA,ROA = NET PROFIT MARGIN x TOTAL ASSETS TURNOVER* Helps the analyst to identify the components that are
driving company profits;* Find out the impact on ROA, signs of improvement in profit
margin and / or its total assets turnover.
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PROFITABILITY RATIOSContd..
5 .Breaking down ROE,ROE = ROA x EQUITY MULTIPLIEREQUITY MULTIPLIER
= TOTAL ASSETS . TOTAL STAKE HOLDERS EQUITY
Helps to identify the impact of financial leverage oncompany returns.
ROE moving up or coming down will indicate how thecompany is managing its assets to create share holderreturn.
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COMMON STOCK RATIOS
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1.Price-Equity ratio
Price-Equity ratio(P/E)= MARKET PRICE OF THE SHARE
EPSEPS = Net profit after taxes Preference dividend
Number of equity shares outstanding
Helps to know how the stock market is pricing thestocks. [higher ratio more expensive is thestock; lower ratio less expensive]
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3.Dividend Per Share
Dividend per share= ANNUAL DIVIDEND PAID .
No. OF EQUITY SHARES OUTSTANDING
Indicates amount of dividend paid to equity
share holders.
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4. Dividend pay out ratio
Dividend pay out ratio = DIVIDEND PER SHARE
EARNINGS PER SHARE
Indicates how much of its earnings, the
company pays as dividends to equity shareholders.
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5.Book value per share
Book value per share
= NET WORTH.
No. OF EQUITY SHARES OUTSTANDING
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6.Price To Book Value
Price to book value = MARKET PRICE OF SHARE
BOOK VALUE PER SHARE
Higher the ratio Stock is fully priced or over priced.
Lower the ratio Stock is not fully priced or underpriced.
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COMPANY ANALYSIS OTHER FACTORS
Consistency in accounting policies Depreciation policies. Valuation of inventory.
Remarks in audit report. Other income Income from non-operating
sources credited to P & L account. In most cases they are not capable of being
repeated in future, hence they have to be totallydeleted in analyzing present as well as futureearnings.
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ANALYSING MANAGEMENT FACTOR
Risk taking capability. Project conceiving skills. Project implementing skills. Hunger for market leadership. Attitude towards creating wealth for share holder. Ability to carry others with you. Thrust towards new product development. R & D investments.
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ANALYSING MANAGEMENT FACTORContd
Arrive at the future P/E ratio:P/E ratio is affected by sales growth, earningsgrowth, dividend payout, leverage deployed,institutional share holding.
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MANAGEMENT ANALYSIS Project conceiving skills. Visionary environment analysis. Project implementation skills. Maintain competitiveness. Identify growth opportunities. Innovate R & D. Cost reduction & cost control measures. Dividend policies. Dynamic capital structure. Corporate governance.
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INTRINSIC VALUE
True economic worth of a financial asset. Incase, there is less than complete information,the actual price of the stock is away from theintrinsic price.