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FUNDAMENTAL
Analysis
Please read carefully the important disclosures at the end of this publication.
Contents
Chapter 1
Introduction
Chapter 2
Getting Started
Chapter 3
Breaking it Down
Chapter 4
Income Statement
Chapter 5
Balance Sheet
14
Chapter 6
25
Chapter 7
29
Chapter 8
Valuation Analysis
31
Chapter 9
Checklist
42
Chapter 10
Glossary of Terms
45
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1
Introduction
Have you ever wondered how equity analysts arrive at a recommendation or calculate their target price for a
particular stock? Lost among the jargon used by analysts? This mini guide book tries to provide you with a
foundation for understanding Fundamental Analysis, step by step.
While you may not be the next Warren Buffett after reading this book, you should have a better understanding of
common financial terminologies and concepts behind equity analysis.
In contrast to Technical Analysis (see the excellent guide written by our award-winning chartists Trading smart
with technical analysis), fundamental analysis is the foundation on which investing stands. In fact, if you are not
acquainted with fundamental analysis, some would say you are not really investing.
The biggest hurdle in fundamental analysis involves the understanding of financial statements. This relates to the
analysis of the income statement, balance sheet and cash flow statement of a company to gain insight to the
companys financial health and prospective performance.
Fundamental analysis also has a qualitative side whereby one breaks down the intangible aspects of a company.
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2
Getting Started
So, how do I get started?
Step 1: Read a wide variety of information sources such as:
Step 2: After getting a rough idea of what the company does, analyse the companys prospects and earnings
drivers.
Step 3: For the more adventurous, try charting out its historical earnings on a Microsoft Excel sheet and examine
earnings and cost trends. You could even build your own forecasts and compare them with the actual
results to see whether you are more accurate than the analysts!
Step 4: If you have industry contacts, talk to them on a frequent basis and find out what is happening in the
industry. Perhaps you could even take a drive and peek at the companys operations as a picture paints a
thousand words. Along the way, you may even pick up useful information from the employees in the
company.
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3
Breaking it Down
Quantitative & Qualitative
As fundamental analysis involves the study of many fundamental factors, lets make things easier by breaking
down these factors into two segments:
1)
2)
Quantitative as the name suggests, such factors can be expressed in numerical terms.
Qualitative anything else that is non-numerical!
While numbers form the basis of analysis, qualitative factors such as management quality and brand value are
also important and these typically manifest themselves in the companys earnings quality, superior margins
compared with peers or better ROEs (returns on equity).
As an example, when looking at Singapore Airlines, you may like to check quantitative factors such as its earnings
per share, price-to-book ratio, dividend yield etc. to determine if its valuation is attractive. However, how does one
value the brand name of Singapore Airlines, which is one of the worlds leading commercial passenger airlines?
The fact that many associate a great flying experience with the airline contributes to the success of SIA.
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Qualitative Factors
Before jumping into quantitative jargon, lets first take a look at the qualitative factors of a company. Qualitative
factors tend to be difficult to quantify, such as goodwill.
Some examples of qualitative factors:
Brand value
Corporate governance
Quality of Management
If in the past five years, whenever Company As management gives earnings guidance for a financial period, the
company never fails to meet the target given, such credibility in issuing earnings guidance could potentially
translate to a higher valuation as opposed to similar peers as investors ascribe a price premium for uncertainty.
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Quantitative Factors
Numbers are perplexing to many. So, it is no surprise that many investors do not know how to read financial
statements and even find them intimidating. However, financial statements can offer you a world of information
and help paint a clearer picture of the company. For a start, lets get acquainted with the different types of financial
statements.
The three key Financial Statements:
1.
2.
3.
Income Statement
Balance Sheet
Cash Flow Statement
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4
Income Statement
Definition
The Income Statement (also known as Profit & Loss Statement) is a financial statement that summarises a
companys revenues, costs and expenses incurred during a period of time. It also provides information on the
companys ability to generate earnings and its cost structure.
The Income Statement is generally presented in a format shown below, that begins with an entry for revenue and
subtracts from revenue the costs of running the business (i.e. cost of goods sold) to form the Gross Profit.
This is typically followed by Operating Expenses and Interest Expense is then netted off to derive the Pretax Profit.
Net Profit, otherwise known as the bottom line, is the final derivative in the Income Statement after deducting Tax
Expense.
2007
284.2
200.0
84.2
2008
433.7
350.0
83.7
11.0
3.0
1.0
69.2
13.8
55.3
20.0
2.0
1.0
60.7
12.1
48.6
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Expenses
There are many kinds of expenses, but the two most common are cost of goods sold (COGS) and selling, general
and administrative expenses (SG&A). Cost of goods sold is the expense most directly involved in creating
revenue. It represents the cost of producing or purchasing the goods or services sold by the company. For
example, if NTUC pays a supplier $2 for a carton of milk, which it sells to customers for $5, NTUCs cost of goods
sold for the carton of milk would be $2.
Next, costs involved in operating the business are classified under SG&A. This category includes marketing costs,
salaries, utility bills, technology expenses and other general costs associated with running a business.
There are also financial costs, notably taxes and interest payments, which need to be considered.
Points to note:
1. Investors need to adjust expenses to see what the companys core profit from operations is. Given that
exchange gains/losses and other non-core items such as gains from the sale of stocks and shares are now
booked above the net profit line, there is a need to back out these numbers to see how the company is actually
performing.
2. If times are bad and sales are decreasing, keep a close watch on the companys costs by looking at the yoy
growth in expense.
3. Costs should also exhibit some relationship to sales (costs as a percentage of sales).
4. If similar listed peers are available, it would be useful to compare their cost structures.
5. Keep a tab on raw material cost trends, minimum wage laws and the supply/demand conditions of skilled
workers.
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Profits
Profit, most simply put, is equal to total revenue minus total expenses. However, there are several commonly used
profit benchmarks that can tell investors how well or badly the company is performing. Gross profit is calculated as
revenue minus cost of sales. Returning to the NTUC example, the gross profit from the sale of the milk would have
been $3 ($5 sales price less $2 cost of goods sold = $3 gross profit).
Gross
Gross Profit
Profit Margin
Margin == Gross
Gross Prof
Profitit// Sales
Sales
Companies with high gross margins (expressed in percentage terms) will have substantial sums of money left over
to spend on other business operations, such as R&D or marketing. However, do look out for margin erosion over
time as this is usually the first symptom of stress to the bottom line, also known as net profit. When cost of goods
sold rises rapidly, the rise is likely to lower gross profit margins - unless, of course, the company can pass on
these costs to customers in the form of higher prices.
Points to note:
1. A companys ability to defend its margins by passing on costs to customers reflects the extent of its economic
moat. If customers have no choice but to buy from a certain supplier and this supplier can enjoy price increases
every year, its earnings model is strong.
2. This could mean a lack of substitute product or a high switching cost for customers.
Operating profit is equal to revenue minus the cost of sales, SG&A and other operating expenses. This number
represents the profit a company makes from its actual operations, and typically, we would back out non-core
items.
High operating margins can mean the company has effective control of costs, or that sales are increasing faster
than operating costs.
Net profit, also known as net income, generally represents the company's profit after all expenses, including
financial expenses such as interest and taxes, have been paid.
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Points to note:
1. Financial expenses give an indication of whether the company is working for its bankers instead of
shareholders. If the company has little profit that it can pass on to its shareholders after paying off interest on
its loans, questions should be raised about its business model and capital structure. The company may have to
consider alternative ways of financing such as convertible bonds and warrants.
2. Taxes are another area to keep an eye on. We should favour companies that can generate strong margins
even if they do not enjoy tax benefits. Taking a practical case, most S-chips or companies that set up
businesses in China used to enjoy 2-year tax holidays and three years of taxation at half the official rate. This
form of protectionism is beneficial to a company only if it is able to use this period to develop its business in
preparation for the expiry of such tax benefits. While it took the government a long time to finally implement tax
unification, this eventually occurred and companies that were resting on their laurels with the benefit of zero or
low tax rates saw their earnings suffer.
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5
Balance Sheet
Definition
The Balance Sheet is a financial statement that summarises a company's assets, liabilities and shareholders'
equity at a specified point in time. These three segments give investors an idea on what the company owns and
owes, as well as the amount invested by shareholders. The balance sheet has to always abide by the following
formula:
Asset
Assetss == Liabilit
Liabilities
ies ++ Shareholders'
Shareholders' Equit
Equityy
Each of the three segments will have many accounts that document the value of each account. Accounts such as
cash, inventory and property are on the assets side of the balance sheet, while on the liabilities side, there are
accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by
company and by industry.
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2007
19.7
4.6
22.8
47.1
18.2
79.9
79.6
1.3
179.1
22.0
43.0
14.9
79.9
0.0
1.9
1.9
144.4
2008
24.3
4.6
22.1
51.0
27.4
137.7
108.5
0.8
274.5
31.0
64.5
21.3
116.8
3.7
1.9
5.6
203.1
Assets
There are two main types of assets: current assets and non-current assets.
Current assets are those likely to be converted into cash or its equivalent usually within a year. Three very
important current asset items found on the balance sheet are: cash, inventory and accounts receivables.
Non-current assets are defined as anything not classified as a current asset. They include items that are fixed,
such as property, plant and equipment (PP&E). Such assets are usually carried at historical cost on the balance
sheet less accumulated depreciation.
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Average
Average receivables
receivables days
days out
outst
standing
anding == Average
Average receivables/
receivables/ Sales
Sales xx 365
365
Points to note:
Long receivable days were a regular feature of many S-Chips. While this raises discomfort, the risk that these
receivables may not be collected is lower when the weather is fair. However, with the global financial tsunami, one
should look for companies actively shortening their credit policies and diligently collecting their receivables.
1.
2.
3.
We should also look at related party transactions to analyse if the receivables are due from parties related to
the major shareholders as this could be a mean to siphon cash from the listed entity.
Another area to look at is changes in other receivables. Investigate any significant increase in other
receivables.
Also, take a look at the notes to the accounts in the annual report to see if the company has revealed the
customer breakdown for its receivables as well as the aging of the receivables. In some cases, a company
may have half of its receivables due from only one customer, significantly increasing its credit exposure risk.
Real Case
In its FY07 annual report, Company A highlighted that 47% of its receivables were due from one customer and
another 28% were also due from one single customer.
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Collections from the above customers are very much dependent on market acceptance of the Groups products
and these customers ability to pay is dependent on their ability to collect from their debtors. Additionally, Customer
B is also a customer of Customer A. Accordingly, Customer As ability to pay is also dependent on its ability to
collect from Customer B.
There were events occurring after the balance sheet date (Note 38) which may have a direct impact on the ability
of the above customers to pay their debts in future.
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Subsequently. Company A announced that its major customer had defaulted on its payments. This resulted in
bankers calling in their loans and Company As ability to continue as a going concern came into question.
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Liabilities
There are current liabilities and non-current liabilities. Current liabilities are obligations a firm must pay within a
year, such as payments owing to suppliers. Non-current liabilities, meanwhile, represent what the company owes
in a year or more time. Typically, non-current liabilities represent bank and bondholder debt.
Investors typically look at average payable days with a higher number being favoured as this means the company
is able to hold off paying suppliers longer.
Average
Average Payables
Payables Days
Days == Average
Average Payables/
Payables/ Sales
Sales xx 365
365
Investors usually want to see a manageable amount of debt. When debt levels are falling, that's a good sign.
Generally speaking, if a company has more assets than liabilities, it is in a decent condition. By contrast, a
company with a large amount of liabilities relative to assets ought to be examined with more diligence. Having too
much debt relative to the cash flows required to pay for interest and debt repayments is one way a company can
go insolvent.
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Current
Current Asset
Assetss
Current
Current Rat
Ratio
io
=
Current
Current Liabilit
Liabilities
ies
A ratio greater than 1.0x is desired as that means the current assets exceed current liabilities.
A further derivative of the Current Ratio is the Quick Ratio. This ratio is calculated by subtracting inventory from
current assets and then dividing by current liabilities. If the ratio is 1 or higher, the company has enough cash and
liquid assets to cover its short-term debt obligations.
The rationale for subtracting inventories is that inventories may not be liquid and may be forced-sold at lower
prices.
Current
Current Asset
Assetss Invent
Inventories
ories
Quick
Quick Rat
Ratio
io
=
Current
Current Liabilit
Liabilities
ies
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Gearing Risk
Analysts use net gearing to determine the leverage risk of a company.
All
All int
interest
erest bearing
bearing debt
debt-cash
-cash
Net
Net Gearing
Gearing (x)
(x)
=
Equit
Equityy
A net gearing of more than 1.0x is a warning sign. The key risk is that bankers may not refinance the company
when its loans are due.
Company B
Based on its 1HFY6/08 balance sheet, net gearing was 0.52x which was not particularly alarming.
Cash and fixed deposits
=
Rmb 1.0bn
Short-term interest bearing debt
=
Rmb 2.3bn
Long term interest bearing debt
=
Rmb 2.2bn
Equity
=
Rmb6.7bbn
In this case, we should back out goodwill from the equity which yields an equity of Rmb2.9bn. If the goodwill was
not backed out, equity would have been Rmb6.7bn and net gearing would have been 0.5x.
This companys problem started when its cash flow was not sufficient to repay its bankers who pulled back their
loans. This led to a suspension of trading in its shares as the companys ability to continue as a going concern was
thrown into question.
In addition, the company was on thin ice with a current ratio of 1.0x and a quick ratio of 0.6x. A demand for faster
repayments by its suppliers would have easily toppled the company.
Net
Net Gearing
Gearing == (2.3+2.2-1.0)/
(2.3+2.2-1.0)/ 2.9
2.9 == 1.2x
1.2x
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Equity
Equity represents what shareholders own, so it is often called shareholders equity. As described previously, equity
is the residual value after total liabilities is subtracted from total assets.
Equit
Equityy == Tot
Total
al Asset
Assetss Tot
Total
al Liabilit
Liabilities
ies
The two important equity items are paid-in capital and retained earnings. Paid-in capital is the amount of money
shareholders inject into a company. Retained earnings are a tally of the money the company has reinvested in the
business rather than pay to its shareholders. Investors should look closely at how a company puts retained capital
to use and how it generates a return on it.
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6
Cash Flow Statement
Definition
The Cash Flow statement shows whether a company is generating positive cash from operations, how the cash
generated is being used or how the cash deficit is being financed.
Looking at the cash flow statement can help us determine if the company needs financing.
The cash coming into the business is called cash inflow, and the cash going out is called cash outflow. The
statement shows how changes in the Balance Sheet and Income Statement affect cash, and breaks the analysis
down to operating, investing, and financing activities. As an analytical tool, the statement of cash flows is useful in
determining the short-term viability of a company, particularly its ability to pay bills.
Cash flow is akin to blood in humans and as such, particular attention should be paid to the cash flow statement.
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2007
31.2
7.1
(43.8)
(3.8)
0.2
(9.1)
(3.5)
5.1
0.8
2.4
25.5
(0.2)
(9.5)
(2.0)
13.8
7.1
(18.4)
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2008
45.1
13.4
(74.4)
(6.7)
0.2
(22.3)
(6.1)
0.4
0.2
(5.6)
25.2
39.3
(25.0)
(2.4)
37.1
9.2
(16.0)
[ 26 ]
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Net
Net Income
Income
++ Amort
Amortizat
ization
ion // Depreciat
Depreciation
ion
Change
in
Working
Capit
al
Change in Working Capit al
Capit
Capital
al Expendit
Expenditure
ure
== Free
Free Cash
Cash Flow
Flow
Ideally, investors would like to see that a company can pay for its investments without the need to rely on outside
financing. A company's ability to pay for its own operations and growth signals to investors that it has very strong
fundamentals.
Points to note:
1. Balance sheet and cash flow were given less importance before the Asian Financial Crisis as investors were
looking for earnings growth driven by capacity and economic expansion. The Asian Financial Crisis jolted the
investment community into giving more respect to balance-sheet strength and cash-flow-generating capability.
2. A key difference to note is the operating cash flow before and after working capital requirements. Typically,
distributors suffer from a poor cash cycle. It takes them a long time to collect payments from customers, they
are saddled with inventory by their suppliers and at the same time, suppliers demand to be paid fast. As such,
distributors tend to have glowing operating cash flow before working capital and less flattering operating cash
flow after working capital.
3. Since cash flow is usually derived from pretax profit, a prerequisite for strong cash flow is strong profitability,
which is in turn driven by higher sales and lower costs.
4. Look for companies with sustainable free cash flow as this provides the foundation for a consistent dividend
payout policy and can be used to check if attractive dividend yields are sustainable or just one-off.
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7
Important Attachments to the
Financial Statements
Financial statements, however, are not the only parts of an annual report that you should read. In fact, the ancillary
sections behind the numbers help fill in the gaps. The following are examples of such sections.
Auditors report
The auditors' job is to express an opinion on whether the financial statements are reasonably accurate and provide
adequate disclosure. This is the purpose behind the auditor's report. An auditor's report is meant to scrutinize the
company and identify anything that might undermine the integrity of the financial statements. While the auditor's
report won't uncover any financial bombshells, audits give credibility to the figures reported by management.
Investors should exercise caution if the financial statements have not been given the green light by the auditors.
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8
Valuation Analysis
As the name suggests, valuation analysis involves ascribing a value to a stock usually in monetary terms. The
analysis typically involves looking at historical financials and making projections. However, while analysts and
investors may agree on the use of a certain valuation metric, they are unlikely to agree on the exact value of the
stock. For instance, Analyst A might think a stock should be valued at 3x P/E while Analyst B may opt for 4x.
For equities, the most common valuation metric used is the price-to-earnings ratio (P/E), expressed as a multiple
(x). Other valuation methods include:
1)
Ratio Valuation
a. P/E-to-growth (PEG x);
b. Price-To-Book (P/BV - x)
2)
3)
4)
Discounted Cash Flow (DCF) such as free cash flow valuation, dividend discount model
Sum-of-parts Valuation
Revalued Net Asset Value (RNAV - used typically for property stocks).
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Ratio Valuation
Financial ratios are formula-based calculations using figures mainly from the financial statements. The ratios are
generally analysed for an idea of a company's valuation and financial performance.
The P/E ratio compares the market price of a stock to its earnings per share (EPS), usually over a 12-month
period.
The P/BV ratio compares the market price of a stock to its book value per share.
Points to note:
1. For P/E ratios, you need to have an E, that is, this method only works if the company is profitable. Also, as
there could be many Es, you need to understand what goes into the derivation of the earnings. At the same
time, if the company has substantial dilutive instruments such as convertible bonds, warrants etc, it would be a
good idea to determine the fully-diluted EPS as well.
2. For P/BV ratios, companies should generally trade above their book value. The exception is when the market
senses that the company is heading for a period of declining ROEs or an extended period of losses. If the
companys ROE cannot exceed its cost of equity, a case can be made for investors to pay less than book
value.
3. Also, be wary of companies with substantial intangibles such as goodwill since companies are required to test
their goodwill for impairment yearly. In such cases, it would be useful to determine the P/NTA ratio (price to net
tangible asset ratio).
4. In many cases, intangibles such as goodwill only occur in the case of an acquisition and it may be hard to
quantify if the goodwill is justifiable.
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Market
Market Value
Value Per
Per Share
Share
=
Earnings
Earnings Per
Per Share
Share (EPS)
(EPS)
Going deeper
A high P/E ratio implies that investors expect higher earnings growth in prospective periods from the company as
compared to one with a lower P/E. However, the P/E ratio is unable to provide a full picture. Typically, it is more
useful to compare the P/E ratio of a company with others in the same industry and of a similar market
capitalisation.
However, nothing is perfect in this world. Investors should note an important problem that can arise with the P/E
ratio. The denominator, EPS, is based on an accounting measure of earnings that is susceptible to forms of
manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.
P/E ratios are also compared to the sector average (peer valuation) as well as the companys own past trading
history to provide some sense of relative valuation.
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Points to note:
1.
Peer valuation is a relative valuation measure. The way this works is that analysts typically calculate the
sector average P/E ratio and peg a target price to the stock they are recommending based on a premium or
discount to the sector average as justified by differences in the market cap, ROEs, margins, dividend yields or
net gearing. However, if the valuation of the basket of stocks changes, the P/E multiple also changes, even if
there are no changes for the stock being recommended.
2.
A more meaningful way for analysts to upgrade their target prices would be via convictions in their earnings
estimates. Keeping the same P/E multiple, stocks could be worth more if they can generate higher earnings
and thus higher EPS.
3.
In using historical valuations, stocks are cheap if they are trading below the low P/Es that they had tested in
previous downturns. The important thing to remember is that every downturn is different. History provides only
a mirror; it does not guarantee that the low P/E or P/BV ratios in the past cannot be exceeded.
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P/
P/ BV
BV == Market
Market Price
Price // Book
Book Value
Value Per
Per Share
Share
Equit
Equityy (ie.
(ie. Asset
Assetss Liabilit
Liabilities)
ies)
Where
Where Book
Book
Value
Per
Value Per Share
Share
=
Number
Number of
of Shares
Shares Out
Outst
standing
anding
Going deeper
A lower P/BV ratio typically suggests that a stock is undervalued.
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Market
Market Price
Price
P/
P/ NTA
NTA
=
NTA
NTA Per
Per Share
Share
Net
Net Tangible
Tangible Asset
Assetss (ie.
(ie. Tangible
Tangible Asset
Assetss Liabilit
Liabilities)
ies)
Where
Where NTA
NTA Per
Per Share
Share
=
Number
Number of
of Shares
Shares Out
Outst
standing
anding
Tangible assets exclude goodwill and other form of intangibles such as brand value etc.
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CF
CF11
DCF
DCF
CF
CF22
CF
CFnn
++
+
1
(1
(1 ++ r)
r)1
2
(1
(1 ++ r)
r)2
n
(1
(1 ++ r)
r)n
For example, if we know that Company A will generate $1 per share in cash flow for its shareholders every year
into the future, we can calculate how much this cash flow is worth today. This value is then compared to the
current value of the company to determine whether the company is a good investment, depending on whether it is
undervalued or overvalued.
There are several techniques within DCF, depending on the type of cash flow used in the analysis. The dividend
discount model focuses on the dividends a company pays to shareholders, while the cash flow model looks at the
cash that can be paid to shareholders after all expenses, reinvestments and debt repayments have been made.
But conceptually, they are the same, as it is the present value of these streams that are taken into consideration.
The difficulty lies in the implementation of the model as it involves a lot of estimation and assumptions. Just
imagine, forecasting the revenue and expenses for a firm three or five years into the future is difficult enough, let
alone 10 years.
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Points to note:
1.
DCF is useful as it forces one to think about the companys future cash-flow-generating capability. This means
pondering over its future capex, sales growth, margin sustainability, how long its high growth can last etc.
2.
It is useful to check the implied prospective P/E and P/BV using the DCF-derived target price.
3.
One should also look at the sensitivity analysis table to see how the DCF value changes with different
terminal growth rates and discount rates.
4.
Beware of DCF forecasts with high sales growth in the future and ever increasing operating margins. Also,
look out for high terminal growth rates as a large chunk of the DCF-derived value comes from the terminal
value. The higher the terminal growth rate, the higher the terminal value and hence the higher the DCFderived target price. A company should eventually only grow as fast as the economy, in general.
5.
DCF requires steady cash flows and should not be used on start-ups or companies in the early growth stage.
6.
Remember that DCF is a mathematical discounting model. Garbage in, garbage out.
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Sum-of-parts Valuation
Basically, this valuation method involves valuing a company, which usually has many disparate business divisions,
by determining how much these individual divisions are worth should the company be broken up and spun off or
acquired by another company.
Different valuation methods can be applied to each division before a final value of the whole group is derived.
Example:
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Source of revenue
Where are its key markets and the economic outlook for the respective markets
Business environment
Where is its base of operations? Would the region be susceptible to any political risks or natural disasters?
Management quality
Major shareholders
While sell-side research is no doubt useful to help you keep abreast of key company and industry developments, it
should NEVER be taken as a substitute for independent analysis and assessment! All the best!
May 2011
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9
Checklist
Step 1:
Look through the stock list and decide which stocks interest you. These will be the stocks that you aim to
specialise in. It would be ideal if you could match the stocks you pick to your personal interests as this would make
the understanding process a whole lot easier.
Another advantage is to invest in companies that are engaged in businesses you are familiar with. For example, if
you are a healthcare professional, you would probably have an idea how the healthcare business works. Thus,
stocks such as Parkway Holdings and Raffles Medical Holdings could be companies you may consider investing
in.
Step 2:
Strike off the stocks that are barely traded in the market as share prices work on the theory of demand and supply.
If no one buys and no one sells, the share prices will basically remain the same. Buying illiquid stocks can cause
you heartache when you need to sell in a hurry but there is no buyer.
Step 3:
Read relevant industry reports issued by the press and analysts reports to better understand the industry cycle
and the factors that move it. In addition, do spend some time checking the SGX website for company
announcements in the last few months to understand the companys latest focus and developments.
A good way to invest would be to keep a stock log or journal and pencil down the reasons you are buying a
particular stock, your exit price, course of action if the price falls after you have bought the stocks.
Recommendations from third parties should not be the sole consideration. Remember that at the end of the day,
you are putting in your hard-earned money. As such, you need to be aware of your own risk profile and cash-flow
requirements.
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Step 4:
Scan the financial statements and check the key financial ratios to determine if a company is in a healthy position.
It would also be good to do a peer comparison with a similar company and see where each stands.
Understand that there is a difference between speculating (trading) and investing. If you are trading, you would be
going for concept plays, rumours, high volumes and establish strict take-profit and cut-loss levels.
If you are investing, you would be looking for companies with a strong balance sheet, growth, good dividend
yields, high ROEs etc.
Step 5:
Call your broker or place your trade online.
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Useful websites
www.fallstreet.com
www.prudentbear.com
www.financialsense.com
www.dailyreckoning.com
www.fool.com
www.investopedia.com
www.frontlinethoughts.com
www.fullermoney.com
www.gmo.com
Suggested books
The Intelligent Investor
Investing the Templeton Way
The Traders Guide to key Economic Indicators
Damodaran on Valuation
Bull! A history of the boom 1980 1999
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10
Glossary of Terms
Financial Terms & Definitions
Terms
Definition
Asset utilisation
Capital employed
Creditors turnover
Dividend payout
Dividend Yield
Debtors Turnover
EBIT
EBITDA
Equity multiplier
Profit after tax, minorities and preferred dividends but before extraordinaries /
Weighted average number of common shares
Enterprise Value
Interest burden
Pretax / EBIT
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Interest cover
(Short term debt + Long term debt Cash and near cash items) /
(Shareholders funds + Minority interest)
PEG
ROCE
ROE
Net profit after tax and minority interest but before extraordinary items / Average
shareholders funds
Shareholders funds
Stock turnover
Tax retention
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Definition
Capital base
Cost-income ratio
Cost of funds
General provisions
Interest-earning assets
Cash and short term funds, securities purchased under resale agreement,
deposits with FIs, dealing securities, investment securities, loans and advances
Interest-bearing liabilities
Interest-in-suspense (IIS)
Loan book
Gross loans
Loan-deposit ratio
Specific provisions
Tier-1 capital
Tier-2 capital
Total capital
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Definition
Expense rate
Total expenses / Total premium income (excluding single premiums) & Annuity
premiums
Forfeiture rate
Net interest
Surrender rate
Claims ratio
Earned premiums
Gross premiums
Losses that have occurred during a period but not reported to insurer by that
date
Net premiums
Retention ratio
Underwriting gain/loss
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Notes:
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Notes:
May 2011
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Notes:
May 2011
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DISCLAIMER
The publisher and author of this book makes no representation or warranty (express or implied) and shall have no
responsibility or liability in respect of any information contained herein for its adequacy, accuracy, completeness,
reliability, fairness or suitability for any purpose and no representation or warranty is made or is to be implied that such
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liability for, their accuracy. The author and the publisher has no, and will not accept any, obligation to check or ensure
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May 2011
[ 52 ]
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