SA Chapter 7
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Transcript of SA Chapter 7
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SECURITY ANALYSISSECURITY ANALYSIS
LECTURE-05LECTURE-05
Instructor:
Ayaz Ali Maitlo
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COMPANY ANALYSIS
• Income statement is basic statement or analyzing t!ecom"any "erormance.
• #!e income statement is "er!a"s use$ more t!an any ot!erto assess t!e uture o t!e irm% an$ most im"ortant isearning "er s!are !as became &ey igure on t!is statement.
• 'arning "o(er !as $irect im"act on t!e "rice o s!are o t!ecom"any.
• #!is c!a"ter !as t(o aims: ) *sing inancial statement (e (ill e+amine t!e ,c!emistry- o earnings.
) #!e tra$itional met!o$s a""lie$ by analysts in assessing t!e outloo&or e/enue% '+"enses an$ 'arnings in t!e irm o/er a or(ar$!ol$ing "erio$% gi/en t!e economic an$ in$ustry outloo&.
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COMPANY ANALYSIS
• #!e /arious ingre$ients in t!e inancialstatement can be relate$ in suc! a (ay t!at t!eanalyst is able to /isualize t!e critical as"ects oa irm0s o"erations t!at $ictate t!e le/el% tren$%
an$ stability o earnings.• #!e met!o$s t!at (ill e+"laine$ are
) #!e return on in/estment 1OI2 a""roac!
) #!e mar&et3s!are4"roit margin a""roac! ) An in$e"en$ent% sub5ecti/e a""roac! to t!e orecast
o re/enues an$ e+"enses.
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C6'MIS#Y O7 'ANIN8S
• One o t!e most eecti/e (ays o getting ,insi$e-earnings is to e+"lore t!e inancial statement or all"ossible e+"lanations o a c!ange % or lac& o
c!ange% in earnings.• C!anges can be resulte$ rom
) O"erations o t!e business
An$4or
) In t!e inancing o t!e business
• #!at is c!anges in "ro$ucti/ity or in t!e resourcesbase.
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ASS'# PO9*C#II#Y AN9'ANIN8S
• Assets are use$ by management togenerate re/enue an$ net income.
• 7un$s are ac;uire$ rom 9ebt < ';uitymo$es o inancing.
• eturn on e;uity (ill $e"en$ u"on t!erelations!i" bet(een return on total ca"ital
an$ t!e cost o borro(e$ un$s. ) eturn on Assets
) O"erating cycle o business
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ASS'# PO9*C#II#Y AN9'ANIN8S
• #!e &ey to o/erall return on un$scommitte$ to t!e com"any is
) On utilization o asset base
) Proit on sale
• =e can say t!at return on assets is t!e"ro$uct o t!e
) #urn o/er o assets
) Margin o "roit
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9'># 7INANCIN8 AN9 'ANIN8S
• 9ebt inancing "ro/i$e Le/erage tocommon3stoc& !ol$ers.
• I t!e cost o borro(e$ un$s is less t!en
t!e return on in/estment% you are a!ea$ oit.
• #!e "ro$ucti/ity o un$s is calle$ Return
on Assets an$ t!e cost o borro(e$ un$sis calle$ t!e Effective Interest Rate.
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'?*I#Y 7INANCIN8 AN9 'ANIN8S
• Com"anies obtain e;uity inancing rom: ) Issuance o ne( s!ares an$4or ) etention o 'arnings
• S!are can be sol$ on cas! or can e+c!anges(it! ot!er com"any.
• #!e eect o issuing ne( s!ares $e"en$s"rimarily u"on t!e relations!i" on t!e sale
"rice to t!e asset /alue o outstan$ing s!ares. ) Asset alue "er S!are
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'77'C#S O7 #A
• #!e eects o ta+es on income can beaccommo$ate$ in our mo$el by ma&ing t!eollo(ing transormation
'A#B13T 2DR E1R-I 2L/E FE
• #!e notion 13#2 is really in$icating (!at"ercentage o eac! Go income in a/ailableater satisying ta+ing aut!orities.
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'ANIN8S AN9 9II9'N9 P' S6A'
• #o con/ert 'A# to a "er3s!are basis% (e nee$ only$i/i$e it by t!e number o common s!aresoutstan$ing:
'PS B
'PS B
9i/i$en$ "er s!are can be calculate$
9PSB13>21'PS2
'A#Numbers o s!ares outstan$ing
13T 2DR E1R-I 2L/E FE
Numbers o s!ares outstan$ing
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7O'CAS#IN8 IA #6' 'ANIN8SMO9'L
• Our em"!asis t!us ar in t!e "resentationo t!e OI met!o$ !as been to /ie( it as a$e/ice or analyzing t!e eects o an$
interaction bet(een t!e return a irm earnson its assets an$ t!e manner in (!ic! it isinance$.
• 6o(e/er% t!is analytical $e/ice can beuse$ as a orecasting tool.
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7O'CAS#IN8 IA #6' 'ANIN8SMO9'L Cont.
• 7or e+am"le% assume t!at a irm0s ta+ brac&et isorecast to be H "ercent in JK% H "ercent(ill be earne$ on its assets% an$ t!at it (ill "ayan eecti/e interest rate o "ercent.
• 7urt!er assume t!at t!e irm (ill !a/e Gmillion ';uity < G million o 9ebt in itsca"ital structure in JK. i (e substitute t!ese
/alues into t!e mo$el :'A#B13T 2DR E1R-I 2L/E FE
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7O'CAS#IN8 IA #6' 'ANIN8SMO9'L Cont.
• Subtract any orecast "roere$ $i/i$en$ an$ $i/i$eremin$er by a/erage outstan$ing s!ares to arri/e at 'PS.
• #o continue our e+am"le% i our irm is e+"ecte$ to !a/e million s!are outstan$ing an$ a P4' ratio o H in JK
1Mar&et alue 4 'arning "er s!are2 t!e "rice "er s!are (ill be G• #!is can be translate$ by subtracting t!e beginning "er3s!are
"rice% a$$ing $i/i$en$s "ai$ in JK an$ $i/i$ing by beginning"rice "er s!are.
• I t!e "rice at t!e en$ o JK is GH an$ no $i/i$en$s are
e+"ecte$ $uring JH% t!en "ro5ecte$ return on e;uity (ill be J"ercent.
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MA'# S6A'4PO7I# MA8IN APPOAC6
• #!e mar&et3s!are4"roit3margin a""roac!emanate$ $irectly rom t!e in$ustryanalysis.
• I in/estor !as c!oice% !e (ill un$oubte$lyselect a lea$er rat!er t!an a ollo(er. #!ust!e ne+t logical ste" or t!e analyst is to
$etermine (!at s!are o t!e in$ustry0s totalmar&et t!e irm un$er analysis canreasonably be e+"ecte$ to ac!ie/e.
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MA'# S6A'4PO7I# MA8IN APPOAC6 Cont.
• Assume t!at t!e analyst is stu$ying an$ in$ustry t!at"ro$uces au+iliary s(imming3"ool e;ui"ment.
• #!e in$ustry sales or JJ are G million an$ yourcom"any !as "ercent s!are o t!e total mar&et.
• 7orecaste$ increase in total in$ustry sales is J"ercent because o more a/orable economic climate.I your com"any assume t!at it (ill increase itsmar&et s!are by J "ercent $ue to aggressi/e mar&etcam"aign% (!at (ill be to total Sales in $ollar amount.
