CHAPTER TWENTY-TWO FINANCIAL ANALYSIS. n WHAT IS FINANCIAL ANALYSIS? DEFINITION: the activity of...
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Transcript of CHAPTER TWENTY-TWO FINANCIAL ANALYSIS. n WHAT IS FINANCIAL ANALYSIS? DEFINITION: the activity of...
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CHAPTER TWENTY-TWO
FINANCIAL ANALYSIS
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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
professionit 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
PROFESSIONAL FINANCIAL ANALYSIS ORGANIZATIONS•THE ASSOCIATION OF INVESTMENT
MANAGEMENT AND RESEARCH (AIMR)Chartered Financial Analysts
– a subdivision of AIMR – is a program to establish a hurdle that creates a
common set of investment knowledge for a select membership
– it also promotes an ethical standard for the various types of investment professionals
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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
•approachesvaluation determines the intrinsic value
compared to the current market valueestimate 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 Strategies2. Moving Average and Trading Range
BreakoutStrategies
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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, buyif 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 identifiedif 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 APPROACHattempts to forecast in the following
order1. economic activity2. industry performance3. 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 firm2. The Industry3. The economy
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FUNDAMENTAL ANALYSIS FINANCIAL STATMENT ANALYSIS
•INTEGRAL PART OF FUNDAMENTAL ANALYSISit helps the analyst understand a firm’s
current conditionwhere it is headedwhat factors affect ithow the factors affect it
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FUNDAMENTAL ANALYSIS FINANCIAL STATMENT ANALYSIS
•Review of Accounting Statementsincludes 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 ANALYSISDEFINITION: 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 ANALYSISTypes 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 ratioquick ratiocash ratioreceivables turnover
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FUNDAMENTAL ANALYSIS operating performance ratios:
•indicate how well the management is operating the business
•some examples:total asset turnovernet fixed asset turnoverequity 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 ratiolong-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 ratiosnet profit margintotal asset turnovertotal assets/equity
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END OF CHAPTER 22