Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the...
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Transcript of Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the...
![Page 1: Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the components of a company analysis report? How do analysts.](https://reader030.fdocuments.net/reader030/viewer/2022032704/56649d535503460f94a30138/html5/thumbnails/1.jpg)
Chapter 12 COMPANY ANALYSIS: THE
HISTORICAL RECORD
• What are the components of a company analysis report?
• How do analysts evaluate the quality of a company’s management?
• How is the competitive position of a company within its industry evaluated?
• What is financial statement analysis?
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Overview of company analysis• Overall objective of company analysis
• Typical report according to Graham and Dodd
– Description of company’s business
– Financial material
– Past stock price history
– Prospects for the company
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Assessing the quality of management
• Stock price reactions to management changes
• The nature of management
– A definition of management
– Organizational performance
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Figure 12.1 – Sunbeam’s Stock Price and Volume (6/3/96 – 8/31/96)
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Figure 12.2 – Management Process
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Four functions of management– Planning function
– Organizing function
– Leading function
– Controlling function
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Evaluating management
– Age and experience of management
– Effectiveness of strategic planning
– Sound marketing strategy
– Adaptation to changes in the external environment
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Competitive position within the industry– Past growth
– Adequate and appropriate financing
– Good relations with employees
– Positive public image
– Effectiveness of company’s board of directors
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Competitive position of a company
• Why important
– Leading companies produce higher and more consistent earnings
– Everything else being equal, leading companies offer lower-risk investment prospects
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Evaluating a company’s competitive position• Classifying companies within industry
groups
– Items to examine
• Revenues or sales
• Profitability
• Product line
• New products and product innovation
• Operating efficiency
• Pricing
• Patents and technology
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Analyzing financial statements• Types of financial statements
– Income statement
– Balance sheet
– Statement of cash flows
–Market values (cash flows) versus accounting numbers
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Reliability of accounting numbers and financial statements
• Financial ratios
– Liquidity ratios
– Activity ratios
– Leverage and coverage ratios
– Profitability ratios
– Ratios based on market values
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Interrelationship among ratios
• Breaking down ROE (DuPont formula)
• Interpreting financial ratios
• Trend analysis
– Kohl’s
– Johnson & Johnson
– Sunbeam
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Industry comparisons
• Some issues
• Different industries have very different ratios
• Many industries are far from homogeneous
• Many companies operate in several different industries
– Kohl’s versus Target
–Merck versus Pfizer
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Figure 12.5 - Quarterly Receivables and Inventory Turnover for Sunbeam