analyzing common stock

8/19/2019 Analyzing Common Stock

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Analyzing Common Stocks


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ANALYZING COMMON STOCKS

• Learning Goals1. Discuss the security analysis rocess! inclu"ing goals

an" #unctions.

$. Areciate the urose an" contri%utions o# econo&ic

analysis.'. Descri%e in"ustry analysis an" note ho( it

is use".

). De&onstrate a %asic un"erstan"ing o# #un"a&entalanalysis an" (hy it is use".

$


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ANALYZING COMMON STOCKS

• Learning Goals *cont+",-. Calculate a ariety o# /nancial ratios an" "escri%e ho(

/nancial state&ent analysis is use" to gauge the/nancial itality o#

a co&any.0. se arious /nancial &easures to assess a co&any2s

er#or&ance! an" e3lain ho( the insights "erie"#or& the %asic inut #or the aluation rocess.

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45AT IS S6C7ITY ANALYSIS8

• 9The rocess o# gathering an" organi:ing

in#or&ation an" then using it to "eter&ine the

intrinsic alue o# a share o#

co&&on stoc;.<

)


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45AT IS INT7INSIC =AL68

• Intrinsic =alue

• The un"erlying or inherent alue o# a stoc;! as"eter&ine" through fundamental analysis

• A ru"ent inestor (ill only %uy a stoc; i# its&ar;et rice "oes not e3cee" (hat theinestor thin;s the stoc; is (orth.

• Intrinsic alue "een"s uon seeral #actors>• 6sti&ates o# #uture cash ?o(s

•Discount rate

• A&ount o# ris;

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“ TO@ DO4N” A@@7OAC5 TO

T7ADITIONAL S6C7ITY ANALYSIS• Ste 1> 6cono&ic Analysis

• State o# oerall econo&y

•Ste $> In"ustry Analysis• Outloo; #or seci/c in"ustry

• Leel o# co&etition in in"ustry

• Ste '> un"a&ental Analysis• inancial con"ition o# seci/c co&any

• 5istorical %ehaior o# seci/c co&any2sstoc;

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6ICI6NT MA7K6T

5Y@OT56SIS• Ecient Market> the concet that the

&ar;et is so eBcient in rocessing ne(in#or&ation that securities tra"e ery close

to or at their correct alues at all ti&es• 6Bcient &ar;et a"ocates %eliee>

• Securities are rarely su%stantially &isrice" inthe &ar;etlace

• No security analysis is caa%le o# /n"ing

&isrice" securities &ore #reuently thanusing ran"o& chance


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45O N66DS S6C7ITY ANALYSIS

IN AN 6ICI6NT MA7K6T8• un"a&ental analysis is still

i&ortant %ecause>

• All o# the eole "oing #un"a&ental analysis is thereason the &ar;et is eBcient

• inancial &ar;ets &ay not %e er#ectly eBcient

• @ricing errors are ineita%le

E


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K6Y 6CONOMIC M6AS76S

• Gross Domestic Product (GDP)> &ar;etalue o# all goo"s an" serices ro"uce" ina country oer the erio" o# a year

•Generally! GD@ goes C! econo&y goes C

• Industrial Production> &easure o# theactiityFoutut in the in"ustrial orro"uctie seg&ent o# the econo&y

•

Generally! ro"uction goes C! econo&y goes C


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K6Y 6CONOMIC ACTO7S T5AT

A6CT T56 HSIN6SS CYCL6• Goern&ent iscal @olicy

• Ta3es• Goern&ent sen"ing• De%t &anage&ent

• Monetary @olicy• Money suly• Interest rates

• Other actors• In?ation• Consu&er sen"ing

• Husiness inest&ents• oreign tra"e• Currency e3change rates

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OT567 K6Y 6CONOMIC

M6AS76S6cono&ic Measure 4hat It Trac;s

In"e3 o# Lea"ing In"icators 9@re"icts< "irection o# GD@

@ersonal Inco&e Consu&er %uying ha%its

7etail Sales Consu&er attitu"es

Money Suly Gro(th o# econo&y J in?ation

Consu&er @ricesF In?ation@ro"ucer @rices

6&loy&ent Husiness @ro"uction5ousing Starts Aaila%ility J cost o# &oney

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5O4 DO 46 S6

T56 6CONOMIC OTLOOK8• se it to i"enti#y areas #or

a""itional research• 4hat in"ustries (ill %ene/t8

• 4hat in"ustries (ill %e hurt8

• se it to ealuate in"ii"ual co&anies• 4ill salesFro/ts go u or "o(n8

1$


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IM@O7TANT @OINT TO

76M6MH67• Stoc; rices usually change %e#ore the actual

#orecaste" changes %eco&e aarent in the

econo&y

• Stoc; rice tren"s are another lea"ing in"icatoro#ten use" to hel re"ict the "irection o# theecono&y itsel#

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ST6@ $> INDST7Y ANALYSIS

• 6aluate the co&etitie osition o# a

articular in"ustry in relation to

other industries• Loo;ing #or ne( oortunities Jgro(th otential

• I"enti#y co&anies within the industry that loo; ro&ising

• Loo;ing #or strong &ar;et ositions! ricinglea"ershi! econo&ies o# scale! etc.

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ISS6S T5AT A6CT AN

INDST7Y• 4hat is the nature o# the in"ustry8

• Is the in"ustry regulate"8

• 4hat role "oes la%or lay in the in"ustry8

• 5o( i&ortant are technological"eelo&ents8

• 4hich econo&ic #orces hae the &ost i&acton the in"ustry *e.g.! interest rates! #oreigntra"e,8

• 4hat are the i&ortant /nancial an" oeratingconsi"erations *e.g.! access to caital,8

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G7O4T5 CYCL6 STAG6S

AND IN=6STM6NTS• Gro(th Cycle re?ects the itality o# an in"ustry or

a co&any oer ti&e.

• Initial Development> in"ustry is ne( an" ris;s

areery high

• Rapid Expansion> ro"uct accetance isgro(ing an" inestors %eco&e ery intereste"

• Mature Growth> e3ansion co&es #ro& gro(thin the econo&y an" returns are &ore re"icta%le

• ta!ilit" or Decline> "e&an" #or ro"uct is"i&inishing an" inestors aoi" this stage

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ST6@ '> NDAM6NTAL

ANALYSIS• 6aluate the /nancial con"ition an"

oerating results o# a seci/c co&any• Co&etitie osition•

Co&osition an" gro(th in sales• @ro/t &argins an" "yna&ics o# earnings• Asset &i3 *i.e. cash %alance! inentory! accounts

receia%le! /3e" assets,• inancing &i3 * i.e. "e%t! stoc;,

• The alue o# a stoc; is in?uence" %y the

/nancial er#or&ance o# the co&any thatissue" the stoc;

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45676 DO 46 STA7T8

• Interreting inancial State&ents

• sing inancial 7atios

• un"a&ental analysis is o#ten the &ost"e&an"ing an" &ost ti&econsu&ing hase o#stoc; selection

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INANCIAL STAT6M6NTS>

T56 HALANC6 S566T• Su&&ary o# a co&any2s assets! lia%ilities! an"

sharehol"ers2 euity at a oint in ti&e• #ssets> (hat the co&any o(ns *i.e. cash!

inentory! accounts receia%le! eui&ent!

%uil"ings! lan",• $ia!ilities> (hat the co&any o(es *i.e. %ills! "e%t,• E%uit"> caital the stoc;hol"ers hae ineste" in

the co&any

• 4hat are (e loo;ing #or on the %alance sheet8• 7elatie a&ounts *large s. s&all,

• Tren"s *i&roing s. "ecreasing,

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'$E * CO7@O7AT6

HALANC6 S566T

$


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T56 INCOM6 STAT6M6NT• Su&&ary o# a co&any2s oerating results oer

a seci/c erio" o# ti&e! usually one year• Revenues> #un"s receie" #or roi"ing ro"ucts

an"For serices•

Expenses> #un"s use" to ay #or &aterials! la%or! an"other %usiness costs

• Pro+t,$oss> reenues less e3enses

• 4hat are (e loo;ing #or on the inco&estate&ent8

• 7elatie a&ounts *large s. s&all,•

7elationshis *Are e3enses gro(ing #aster or slo(erthan reenues8,

• Tren"s *i&roing s. "ecreasing,

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'$E - CO7@O7AT6

INCOM6 STAT6M6NT

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T56 STAT6M6NT O CAS5 LO4S• Su&&ary o# a co&any2s cash ?o(s an" other

eents that cause" changes in co&any2s cash• ources of .ash> rocee"s #ro& sale o# ro"uctsF

serices! sales o# eui&ent! %orro(ing &oney! sale

o# stoc;• /se of .ash> ay&ent o# (ages an"For &aterials!

ay&ent o# oerating e3enses! urchases o#eui&ent! ay&ent o# "e%t! ay&ent o# "ii"en"s

• 4hat are (e loo;ing #or on the cash ?o( state&ent8• 7elatie a&ounts *&ore cash or less cash,•

Liui"ity• Tren"s *i&roing s. "ecreasing,

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'$E 0 STAT6M6NT O

CAS5 LO4S

$)


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SO7C6S O7 INANCIAL

STAT6M6NTS• Co&any2s Annual 7eort

• Co&any2s 1K

• Co&any2s 1

• Securities J 63change Co&&ission• (((.sec.go

• Standard & Poor’s or Moody Reports

• Internet /nancial ortals

• Hro;erage /r& reorts

$-


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MAO7 G7O@S O INANCIAL

7ATIOS• $i%uidit" Ratios> the co&any2s a%ility to &eet "ayto

"ay oerating e3enses an" satis#y shortter&o%ligations as they %eco&e "ue

• #ctivit" Ratios> ho( (ell the co&any is &anaging

its assets

• $evera1e Ratios> a&ount o# "e%t use" %y the co&any

• Pro+ta!ilit" Ratios> &easures ho( success#ul theco&any is at creating ro/ts

• .ommon tock Ratios> conerts ;ey /nancial

in#or&ation into ershare %asis to si&li#y /nancialanalysis

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LIIDITY 7ATIOS

• .urrent Ratio> ho( &any "ollars o#

shortter& assets are aaila%le #or eery

"ollar o# shortter& lia%ilities o(e"

• 5igher ratio> %etter• Lo(er ratio> (orse

$

Current ratio =Current assets

Current liabilities


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LIIDITY 7ATIOS *CONT+D,

• 2et 3orkin1 .apital> ho( &any

"ollars o# (or;ing caital are aaila%le

to ay %ills an" gro( the %usiness

• 5igher a&ounts> %etter•

Lo(er a&ounts> (orse

$E

Net working capital = Current assets − Current liabilities


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ACTI=ITY 7ATIOS

• #ccounts Receiva!le &urnover>ho( uic;ly the co&any is collectingits accounts receia%le *sales to

custo&ers on cre"it,

•5igher ratio> %etter

• Lo(er ratio> (orse

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Accounts receivable turnover =Annual sales

Accounts receivable


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ACTI=ITY 7ATIOS *CONT2D,

• Inventor" &urnover> ho( uic;ly

the co&any is selling its inentory

• 5igher ratio> %etter•

Lo(er ratio> (orse

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Inventory turnover = Annual salesInventory


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ACTI=ITY 7ATIOS *CONT+D,

• &otal #sset &urnover> ho(

eBciently the co&any is using its

assets to suort sales



'1

Total asset turnover = Annual salesTotal assets


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L6=67AG6 7ATIOS

• De!t4E%uit" Ratio> ho( &uch "e%t theco&any is using to suort its %usinessco&are" to ho( &uch stoc;hol"ers2

euity it is using to suortits %usiness

•5igher ratio> &ore ris;

• Lo(er ratio> less ris;

'$

Debt-equity ratio =Long-term debt

Stockholders’ equity


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L6=67AG6 7ATIOS *CONT+D,

• &ime Interest Earned> &easures the

a%ility o# the /r& to &eet its /3e"

interest ay&ents

• 5igher ratio> less ris;• Lo(er ratio> &ore ris;

''

Times interest earned = Earnings before interest and taxes

Interest expense


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@7OITAHILITY 7ATIOS

• 2et Pro+t Mar1in> a&ount o# ro/t

earne" #ro& sales an" other

oerations



')

Net profit margin = Net profit after taxesTotal revenues


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@7OITAHILITY 7ATIOS

*CONT+D,• Return on #ssets> a&ount o# ro/tearne" on each "ollar ineste" inassets &easures &anage&ent2s

eBciency at using assets

• 5igher ratio> %etter• Lo(er ratio> (orse

'-

ROA =Net profit after taxes

Total assets


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@7OITAHILITY 7ATIOS

*CONT+D,• Return on E%uit"> a&ount o# ro/t

earne"on each "ollar ineste" %y stoc;hol"ers

&easures &anage&ent2s eBciency atusing stoc;hol"ers2 #un"s



'0

ROE =Net profit after taxes

Stockholders’ equity


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H76AKING DO4N

76T7N ON ASS6TS *7OA,• Hrea;ing "o(n 7OA allo(s inestors to

i"enti#y the co&onents that are "riingco&any ro/ts.

• Inestors (ant to ;no( i# 7OA is &oingu *or "o(n, %ecause o# i&roe&ent *or

"eterioration, in the co&any2s ro/t&argin an"For its total asset turnoer.

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ROA = Net profit margin × Total asset turnover


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H76AKING DO4N76T7N ON ASS6TS *7OA, *CONT+D,

• Hrea;ing "o(n 7O6 allo(s inestors to i"enti#y thei&act o# /nancial leerage on co&any return.

• Inestors (ant to ;no( i# 7O6 is &oing u *or"o(n, %ecause o# ho( &uch "e%t the co&any isusing or %ecause o# ho( the /r& is &anaging itsassetsan" oerations.

'E

ROE = ROA × Equity multiplier

Equity multiplier =Total assets

Total stockholders’ equity


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COMMON STOCK 7ATIOS

• Price,E%uit" Ratio> sho(s ho( the stoc;&ar;et is ricing the co&any2s co&&on stoc;

• One o# the &ost (i"ely use" ratios in co&&on stoc;selection

•O#ten use" in stoc; aluation &o"els

• 5igher ratio> &ore e3ensie• Lo(er ratio> less e3ensie

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P/E =Market price of common stock

EPS

EPS =Net profit after taxes − Preferred dividends

Number of common shares outstanding


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COMMON STOCK 7ATIOS

*CONT+D,• 4hat is the @F6 ratio #or a co&any

(ith ro/ts o# P1'. &illion!01!E1-! outstan"ing shares o#

co&&on stoc; an" a current &ar;etrice o# P)1.- er share8

)

EPS =$139,700,000

61,815,000 shares or $2.26

Price/Earnings ratio = $41.50$2.26

or 18.4


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COMMON STOCK 7ATIOS

*CONT+D,• Price,Earnin1s Growth Ratio (PEG)>

co&ares co&any2s @F6 ratio to the rate o#gro(th

in earnings

• 7atio Q 1> stoc; &ay %e #ully alue"

• @6G R 1> stoc; rice in line (ith

earnings gro(th• 7atio 1> stoc; &ay %e un"eralue"

)1

PEG ratio= Stock’s P/E ratio3- to 5-year growth rate in earnings


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COMMON STOCK 7ATIOS

*CONT+D,• Dividends per share> the a&ount o#

"ii"en"s ai" out to co&&on

stoc;hol"ers

)$

Dividends per share =Annual dividends paid to common stock

Number of common shares outstanding


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COMMON STOCK 7ATIOS

*CONT+D,• Pa"out Ratio> ho( &uch o# its

earnings a co&any ays out tostoc;hol"ers in the #or&

o# "ii"en"s• Tra"itional ayout ratios hae %een ) to

0

• 7ecent tren"s hae %een lo(er ayoutratios! (ith &ore ta3 eBcient stoc; %uy%ac;

rogra&s use" #reuently• 5igh ayout ratios &ay %e "iBcult to&aintain an" the stoc; &ar;et "oes not li;ecuts in "ii"en"s

)'

Payout ratio = Dividends per shareEarnings per share


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COMMON STOCK 7ATIOS

*CONT+D,• 'ook 5alue per hare> "iUerence %et(een

assets an" lia%ilities *euity, er share

• # compan" should !e worth more thanits

!ook value

))

Book value per share = Common stockholders’ equityNumber of common shares outstanding


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COMMON STOCK 7ATIOS

*CONT+D,• Price4to4'ook Ratio> co&ares stoc; rice

to %oo; alue to see ho( aggressiely the

stoc; is %eing rice"

• 5igher ratio> stoc; is #ullyrice" oroerrice"

• Lo(er ratio> stoc; &ay %e #airly rice"or un"errice"

)-

Price-to-book-value =Market price of common stock

Book value per share


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INT67@76TING INANCIAL

7ATIOS• Loo; at historical ratio tren"s #or theco&any

• Loo; at ratios #or the in"ustry

• 6aluate the /r& relatie to t(o or three&aVor co&etitors

• Try to "eter&ine i# the /nancial in#or&ation istelling you a goo" story a%out the co&anyor a %a" story

• se the story to "eci"e i# you thin; the stoc;has intrinsic alue #or you as an inestor

)0


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COLD T5676 H6 T7OHL6

H764ING8 The #ollo(ing /nancial state&ent "eelo&ents coul"

in"icate a co&any hea"ing #or /nancial ro%le&s>

• Inentories an" receia%les gro(ing #aster than sales

• A #alling current ratio! cause" %y current lia%ilities

increasing #aster than current assets

• A high an" rai"ly increasing "e%ttoeuity ratio!suggesting ro%le&s (ith sericing "e%t in #uture

• Cash ?o( #ro& oerations "roing %elo( net inco&e

• @resence o# lots o# in"ecihera%le oU%alance sheet

accounts an" e3traor"inary inco&e entries

)

analyzing common stock

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