Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the...
-
date post
20-Dec-2015 -
Category
Documents
-
view
216 -
download
1
Transcript of Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the...
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?
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
Assessing the quality of management
• Stock price reactions to management changes
• The nature of management
– A definition of management
– Organizational performance
Figure 12.1 – Sunbeam’s Stock Price and Volume (6/3/96 – 8/31/96)
Figure 12.2 – Management Process
Four functions of management– Planning function
– Organizing function
– Leading function
– Controlling function
Evaluating management
– Age and experience of management
– Effectiveness of strategic planning
– Sound marketing strategy
– Adaptation to changes in the external environment
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
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
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
Analyzing financial statements• Types of financial statements
– Income statement
– Balance sheet
– Statement of cash flows
–Market values (cash flows) versus accounting numbers
Reliability of accounting numbers and financial statements
• Financial ratios
– Liquidity ratios
– Activity ratios
– Leverage and coverage ratios
– Profitability ratios
– Ratios based on market values
Interrelationship among ratios
• Breaking down ROE (DuPont formula)
• Interpreting financial ratios
• Trend analysis
– Kohl’s
– Johnson & Johnson
– Sunbeam
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
Figure 12.5 - Quarterly Receivables and Inventory Turnover for Sunbeam