Overview
� Introduction to stocks and the market
� Big picture: Analyzing a company
� Financial Statements and Ratios
� Foundations of a Valuation
IntroductionØWhat are (financial) securities?§ Debt: bonds, loans
§ Equity: stocks, shares
§ Derivatives: options, swaps, futures
ØDebt versus equity
ØWhat are stocks/shares?§ Investments/Ownership
ØWhat is the role of the stock market?
BankingNet user of funds
i.e. companies & us
Net saver of funds
i.e. mom dad & us
Personal Loans, Student Loans, Mortgages, Lines of Credit, Credit Card Loans, Collateralized Loans
Savings and Checking Accounts, Certificates of Deposits (CDs), Money Market Accounts, (Mutual Funds, Pension Funds)
Commercial Bank
Investment Bank
Stocks, Bonds, SecuritizedLoans, Treasuries
i.e. Individual & Institutional Investors
i.e. Companies, REITs, Governments
Equity, Debt
They act as the PRIMARY market for capital raising…
The stock market is a SECONDARY market
Risk & ReturnØWhy are there so many different types
of securities?§ Concept of a risk averse investor
• More risk, more return REQUIRED• The concept of beta (correlation & volatility)
§ Importance of time horizon• When is the money needed?
The Market: Easy Way Out
Ø Definition of market§ Mirror the economy
Ø Concept of an efficient market§ Information
Analyzing InvestmentsØWhat is there to know?
ØThe big picture§ Company profile, history, management
ØResearch, research, and more research§ Where to begin?
ØWhat is financial analysis?
Ingredients of AnalysisØCompany overview§ History, management
ØProducts
Ø Industry analysis
ØCompetitor analysis
ØRatio analysis
ØValuation
Company AnalysisØQualitative factors
ØQuantitative factors
ØAnalysis
ØPredictions/Projections
ØEvaluation
Fundamental Analysis
Top-down vs. Bottom-up?Recommendation
Valuation
Analysis
Research
Qualitative Factors
Quantitative Factors&
Qualitative FactorsØ News reports
Ø Press releases
Ø S&P reports
Ø Other sources
Ø Determine qualityof the business operation, future prospects, past performance
Ø Based on common sense and intuition –therefore highly subjective but very important
Quantitative FactorsØGDP
ØOverall economic indicators
ØCensus bureau
ØDepartment of commerce
ØFinancial statements
Financial StatementsØWhy are they important?
ØHow are they used?
ØWho uses them?
ØHow do we get them?
ØWhat are they like?
Importance Of F/SØ In order to make informed prudent
decisions, we need:§ Information
§ Transparency
§ Accountability
Usage Of F/SØAnalytical tool
ØManagement report card
ØEarly warning signal
ØBasis of prediction
ØMeasure of accountability
Users Of F/SØShareholders and investors
ØManagers and employees
Ø Lenders and suppliers
ØCustomers
ØGovernment and regulatory agencies
Obtaining F/SØAll listed (public) companies are
required to submit:§ Audited annual reports (10-K)
§ Unaudited quarterly reports (10-Q)
Ø Importance of the Securities and Exchange Commission (SEC)
Obtaining F/SØSources§ www.sec.gov
§ EDGAR (Electronic Data Gather & Retrieval)
§ Other web sites• www.quicken.com
• cbs.marketwatch.com• www.hoovers.com
§ Bloomberg
Analysis Tool: RatiosØQuantitative
ØGood for comparisons (relative analysis)
ØCan combine components from different statements
ØReflect quality of management team
Warning: Garbage In, Garbage Out (GIGO)
Ratio AnalysisØCan be separated into 5 types:§ Liquidity (current, quick)
§ Asset management (inventory, asset TO)
§ Debt (debt or gearing, debt-equity)
§ Profitability (ROA, ROE, margins)
§ Market (P/E, P/B, BVPS)
ExampleØCurrent Ratio
or simply...
Current Assets
Current Liabilities
Cash + A/R + Inventories
A/P + Accruals + N/P + ST Debt
Cash FlowsØWhy is it so important?
ØCash flows to investors = dividends
ØValue of any investment is the sum of the present values of all expected cash flows
ØTime value of money
Time Value Of MoneyØGiving up a dollar today means giving
up the opportunity to earn interest on the dollar
Ø FV = PV(1+i)n
§ FV = future value
§ PV = present value
§ i = interest
§ n = number of periods
Constant Growth DDMØDividend Discount Model
ØPV = FV/(1+i)n
ØV0 = D1/(1+k)n
§ V0 = Value today
§ D1 = dividend next year
Required Returns RevisitedØRequired return (k) = risk free return +
premium for risk
Ø k = return on risk free investment + (market premium) * beta
k = krf + (km - krf)*b
Next WorkshopØMore depth, more coverage, more detail
ØMore on dividend discount model
Ø Free cash flow (to equity) model
ØRelative valuation (or comparables)
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