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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.
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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.
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
Financial Statements
• Balance Sheet
• Income Statement
• Cashflow Statement
• Statement of Retained Earnings
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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) +
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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-
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
• Current Ratio:
• Quick (Acid Test) Ratio:
Liquidity Ratio
Prepared By: Noorulhadi Lecturer GCMS Peshawar
• Debt Ratio:
Leverage Ratio
Prepared By: Noorulhadi Lecturer GCMS Peshawar
• Return on Assets (ROA):
• Return on Equity (ROE):
Profitability Ratio
Prepared By: Noorulhadi Lecturer GCMS Peshawar
Profitability Ratio
• Net Profit Margin:
• Retention Ratio
Prepared By: Noorulhadi Lecturer GCMS Peshawar
• Total Asset Turnover Ratio:
• Inventory Turnover Ratio:
Activity (Turnover) Ratio
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
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
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
IncomeNet MultiplierEquity ROAROE
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
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
The DuPont System
Multiplier EquityROA
Multiplier EquityTurnover Asset TotalMarginProfit Equity Common
AssetsTotal
AssetsTotal
Sales
Sales
IncomeNet ROE
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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
Prepared By: Noorulhadi Lecturer GCMS Peshawar
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