Financial Analysis Of Equities
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Transcript of Financial Analysis Of Equities
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FINANCIAL ANALYSIS OF COMMON STOCKS
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FINANCIAL ANALYSIS
• WHAT IS FINANCIAL ANALYSIS?– DEFINITION: the activity of providing inputs
to the portfolio management process
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FINANCIAL ANALYSIS
• PROFESSIONAL FINANCIAL ANALYSIS ORGANIZATIONS– THE ASSOCIATION OF INVESTMENT
MANAGEMENT AND RESEARCH (AIMR)• acts as an advocate for the financial analyst
profession• it hosts conferencing and workshops
– designed to enhance the knowledge base of the memberships
• it also publishes the Financial Analysts Journal
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FINANCIAL ANALYSIS
• PROFESSIONAL FINANCIAL ANALYSIS ORGANIZATIONS– THE ASSOCIATION OF INVESTMENT
MANAGEMENT AND RESEARCH (AIMR)• acts as an advocate for the financial analyst
profession• it host conferencing and workshops
– designed to enhance the knowledge base of the memberships
• it also publishes the Financial Analysts Journal
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FINANCIAL ANALYSIS
• REASONS FOR FINANCIAL ANALYSIS– TWO PRIMARY REASONS
• to determine certain securities’ characteristics
• to attempt to identify mispriced securities
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FINANCIAL ANALYSIS
• REASON #1: DETERMNING SECURITY CHARACTERISTICS– estimate future sensitivity to major factors– estimate dividend yield
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FINANCIAL ANALYSIS
• REASON #2: ATTEMPTING TO IDENTIFY MISPRICED SECURITIES– use fundamental analysis– approaches
• valuation determines the intrinsic value compared to the current market value
• estimate key financial variables such as– EPS next year
– income growth next year
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TECHNICAL ANAYSIS
• DEFINITION: a form of security analysis that attempts to forecast price changes based on historical price and volume trends
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TECHNICAL ANAYSIS
• Two Groups of Strategies Used:1. Momentum and Contrarian Strategies
2. Moving Average and Trading Range Breakout
Strategies
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TECHNICAL ANAYSIS
1. Momentum and Contrarian Strategies– METHDOLOGY:
• examine the returns over a time period just ended to identify
– momentum investors who seek out stocks recently rising in price for purchase; falling for sale
– contrarians who follow the opposite strategy of most investors
» contrarians base their strategy on the overreation theory
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TECHNICAL ANAYSIS
2. Moving Average and Trading Range Breakout Strategies– MOVING AVERAGE STRATEGY:
• calculate a moving average over the last 200 days of closing prices
• divdied today’s closing price into the moving average (SHORT-TO-LONG RATIO)
• if short-to-long ratio is greater than 1, buy
• if ratio is less than 1, sell
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TECHNICAL ANAYSIS
• 2. Moving Average and Trading Range Breakout Strategies– TRADING RANGE BREAKOUT
STRATEGY:• high and low prices for past 200 trading days are
identified
• if today’s close is greater than the high = buy!
• if today’s close is less than the low = sell!
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FUNDAMENTAL ANALYSIS
• TOP-DOWN V. BOTTOM UP– TOP-DOWN APPROACH
• attempts to forecast in the following order
1. economic activity
2. industry performance
3. firm’s performance
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FUNDAMENTAL ANALYSIS
• TOP-DOWN V. BOTTOM UP– BOTTOM-UP APPROACH:
• attempts to estimate prospects in the following order:
1. The firm
2. The Industry
3. The economy
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FUNDAMENTAL ANALYSIS
• FINANCIAL STATMENT ANALYSIS– INTEGRAL PART OF FUNDAMENTAL
ANALYSIS• it helps the analyst understand a firm’s current
condition
• where it is headed
• what factors affect it
• how the factors affect it
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FUNDAMENTAL ANALYSIS
• FINANCIAL STATMENT ANALYSIS– Review of Accounting Statements
• includes a study of the three major statements prepared monthly by most accountants:
– the balance sheet
– the income statement
– the statment of cash flows
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FUNDAMENTAL ANALYSIS
• FINANCIAL STATMENT ANALYSIS– RATIO ANALYSIS
• DEFINITION: a technique used to examine a company’s financial statements
• Use of Ratios– as an absolute standard
– as a comparative indicator
– as a trend over time
– in combination with technical analysis
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FUNDAMENTAL ANALYSIS
• FINANCIAL STATMENT ANALYSIS– RATIO ANALYSIS
• Types of Ratios– internal liquidity
– operating performance
– risk analysis
– growth analysis
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FUNDAMENTAL ANALYSIS
• internal liquidity ratios:– indicate the ability of the firm to meet future
short-term financial obligations– some liquidity ratios:
• current ratio
• quick ratio
• cash ratio
• receivables turnover
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FUNDAMENTAL ANALYSIS
• operating performance ratios:– indicate how well the management is operating
the business– some examples:
• total asset turnover
• net fixed asset turnover
• equity turnover
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FUNDAMENTAL ANALYSIS
• risk analysis ratios:– indicates the uncertainty of income flows for
the total firm and for the individual sources of capital (debt and stock)
– some examples:• debt to equity ratio
• long-term debt/total capital ratio
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FUNDAMENTAL ANALYSIS
• growth analysis ratios:– indicate how fast a firm should grow– it involves analysis using several other ratios
• net profit margin
• total asset turnover
• total assets/equity