Prepared By: Noorulhadi Lecturer GCMS Peshawar

Portfolio Management

Prepared By:

Noorulhadi QureshiLecturer Govt College of Management Sciences

Peshawar

LECTURE FOUR

Fundamental Analysis

Company Analysis

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Company Analysis

External resources of information are those

generated independentlyoutside the company.

These are prepared by investment services and

the financial press.

Internal information consistsof data and events made

public by companies concerning their operations. Its include annual report toShare holder, public and

private stakeholders.

Final Stage of fundamental AnalysisBroad outline of the prospect of--

Growth in the economy.

Company Analysis deal with Return and risk of individual

Share and security.Analyst tries to forecast the Future earning which has Direct effect on share price.

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Financial Statements

• Two Basic financial statement are:– Balance Sheet (picture of Company asset and liabilities.)– Profit and Loss Account. (It postulates the earning of company).

• It helps to asses the profitability and financial health.• Balance Sheet gives the list of assets and liabilities.

– Fixed Assets are intended to be used up over a period of several years.

– Current assets are intended to be converted into cash with in one year.

– The outside liabilities are short and long term liabilities.– Liability toward share holder show the share capital value.

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Financial Statements

• Income statement reveals the revenue earned and the cost incurred for a period in the company.

• Profit is • Profit is • Profit is \z

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Financial Analysis

• Assessment of the firm’s past, present and future financial conditions

• Done to find firm’s financial strengths and weaknesses

• Primary Tools:– Financial Statements– Comparison of financial ratios to past,

industry, sector and all firms

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Financial Statements

• Balance Sheet

• Income Statement

• Cashflow Statement

• Statement of Retained Earnings

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Sources of Data

• Annual reports– Via mail, SEC or company websites

• Published collections of data– e.g., Dun and Bradstreet or Robert Morris

• Investment sites on the web– Examples

• http://moneycentral.msn.com/investor• http://www.marketguide.com

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Review: Major Balance Sheet Items

Assets• Current assets:

– Cash & securities– Receivables– Inventories

• Fixed assets:– Tangible assets– Intangible assets

Liabilities and Equity• Current liabilities:

– Payables – Short-term debt

• Long-term liabilities• Shareholders' equity

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Abbreviated Balance Sheet

• Assets:– Current Assets: +– Non-Current Assets: +– Total Assets: +

• Liabilities:– Current Liabilities: +– LT Debt & Other LT Liab.: +– Equity: +– Total Liab. and Equity: +

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Review: Major Income Statement Items

• Gross Profit = Sales - Costs of Goods Sold• EBITDA

= Gross Profit - Cash Operating Expenses• EBIT = EBDIT - Depreciation - Amortization• EBT = EBIT - Interest • NI or EAT = EBT- Taxes• Net Income is a primary determinant of the firm’s

cashflows and, thus, the value of the firm’s shares

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Abbreviated Income Statement

Sales +Costs of Goods Sold +Gross Profit +Cash operating expense -EBITDA +Depreciation & Amortization -Other Income (Net) -EBIT +Interest -EBT +Income Taxes -Special Income/Charges -Net Income (EAT) +

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Objectives of Ratio Analysis• Standardize financial information for

comparisons• Evaluate current operations• Compare performance with past

performance• Compare performance against other

firms or industry standards• Study the efficiency of operations• Study the risk of operations

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Rationale Behind Ratio Analysis

• A firm has resources• It converts resources into profits through

– production of goods and services– sales of goods and services

• Ratios– Measure relationships between resources and

financial flows– Show ways in which firm’s situation deviates from

• Its own past• Other firms• The industry• All firms-

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Types of Ratios

• Financial Ratios:– Liquidity Ratios

• Assess ability to cover current obligations

– Leverage Ratios• Assess ability to cover long term debt obligations

• Operational Ratios:– Activity (Turnover) Ratios

• Assess amount of activity relative to amount of resources used

– Profitability Ratios• Assess profits relative to amount of resources used

• Valuation Ratios:• Assess market price relative to assets or earnings

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• Current Ratio:

• Quick (Acid Test) Ratio:

Liquidity Ratio

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• Debt Ratio:

Leverage Ratio

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• Return on Assets (ROA):

• Return on Equity (ROE):

Profitability Ratio

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Profitability Ratio

• Net Profit Margin:

• Retention Ratio

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• Total Asset Turnover Ratio:

• Inventory Turnover Ratio:

Activity (Turnover) Ratio

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The DuPont System

• Method to breakdown ROE into:– ROA and Equity Multiplier

• ROA is further broken down as:– Profit Margin and Asset Turnover

• Helps to identify sources of strength and weakness in current performance

• Helps to focus attention on value drivers

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The DuPont System

Profi t M argin T ota l A sse t T urnover

RO A E quity M ultip l ie r

RO E

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The DuPont System

Profi t M argin T ota l A sse t T urnover

RO A E quity M ultip l ie r

RO E

EquityCommon

Assets Total

Assets Total

IncomeNet MultiplierEquity ROAROE

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The DuPont System

Profi t M argin T ota l A sse t T urnover

RO A E quity M ultip l ie r

RO E

Assets Total

Sales

Sales

IncomeNet TurnoverAsset TotalMarginProfit ROA

Prepared By: Noorulhadi Lecturer GCMS Peshawar

The DuPont System

Profi t M argin T ota l A sse t T urnover

RO A E quity M ultip l ie r

RO E

EquityCommon

Assets Total

Assets Total

Sales

Sales

IncomeNet MultiplierEquity TurnoverAsset TotalMarginProfit ROE

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The DuPont System

Multiplier EquityROA

Multiplier EquityTurnover Asset TotalMarginProfit Equity Common

AssetsTotal

AssetsTotal

Sales

Sales

IncomeNet ROE

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Summary of Financial Ratios

• Ratios help to:– Evaluate performance– Structure analysis– Show the connection between activities and

performance• Benchmark with

– Past for the company– Industry

• Ratios adjust for size differences

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Limitations of Ratio Analysis

• A firm’s industry category is often difficult to identify

• Published industry averages are only guidelines

• Accounting practices differ across firms• Sometimes difficult to interpret deviations

in ratios• Industry ratios may not be desirable

targets• Seasonality affects ratios

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Ratios and Forecasting

• Common stock valuation based on– Expected cashflows to stockholders– ROE and are major determinants of cashflows to

stockholders• Ratios influence expectations by:

– Showing where firm is now– Providing context for current performance

• Current information influences expectations by:– Showing developments that will alter future

performance

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How Might Ratios Help Me on the IEM?

• Analysis of AAPL, IBM and MSFT, and comparisons to the S&P500 companies can help to:– Assess the (absolute and relative) financial state of

each company– Show each company’s strengths and weaknesses– Predict sustainable growth rate

• Combined with current information, this can help to:– Assess likely future performance– Predict future valuation and earnings growth– Predict returns

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Prepared By: Noorulhadi Lecturer GCMS Peshawar

Prepared By: Noorulhadi Lecturer GCMS Peshawar