Profitability and Efficiency Analysis

Kare Investment

Metincan Duruel

IE399

07/10/2013

Industrial Engineering

Bilkent University

06800 Ankara

Abstract

This report includes information about profitability and efficiency measurement

project that has been conducted during the internship in Kare Investment. Analysis

and implementation of profitability and efficiency of the companies’ shares in Borsa

Istanbul researches are conducted. In addition, this report ends with possible

advantages of working in a group instead of working individually.

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IE399 – Company Identity Card

Company Name: Kare Yatırım

Products/Services Fund and Porfolio Managment

Location: Kare Investment Securities Inc.

Kısıklı Cad. No:4 Ak-Sarkuysan İş Merkezi

34662 Altunizade - İstanbul

Date of Establishment:

1988

Ownership: Kök Financial Investments, Inc.

Suna Kıraç

Ümit Ertuğ Kumcuoğlu

Deniz Akkuş

Zekai Terzi

Area (m2) 2.375 m2

Outdoors: 150 m2

Indoors: 2.125 m2

Number of Workers 72

White Collar:

60

Blue Collar: 12

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Number of IEs:

Annual Production Censored due to company’s secrecy policy

Capacity for major

products/services

Market Share %8

Competitors Is Yatırım, Ak Yatırım, Garanti Yatırım, Integral

Menkul Değerler A.Ş

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Part 2

Kare Investment and Securities, Inc is a financial institution which is

established with the aim of managing Kıraca Holding’s funds and portfolio. In

addition, Kare Invesment is founded to bring new perspective into Turkish financial

markets by becoming the frontrunner in individual, portfolio and fund management

with modern portfolio techniques and expert employees. There are five areas of

activity that is Kare Investment’s concern [1]. They are fund management, portfolio

management, investment advisory, corporate finance and intermediary services which

includes bonds, bills, derivative, options and stocks. The main objective of Kare

Investment is managing portfolio and funds of Kıraca Holding by optimizing risk and

expected rate of return. I performed my internship in fund management and

investment analysis department. With the perspective of Industrial Engineering, I will

explain the services of Kare Investment.

The most significant service of Kare Investment is fund management. There

are five types of fund that is operated by the company. They are Type A variable

fund, Type B variable fund, Type B liquid fund, hedge fund and investment funds.

For Type A and B variable funds the company prefers low risk levels. Kare

Investment prefers the following marketing instrument under these funds. Shares that

have high volume trading at the BIST (Borsa Istanbul) are trading with low risk

levels. Debt securities which include treasury bonds and state bills are selected.

Moreover, repo and reverse repo are selected as financial instrument to increase daily

rate of return. In addition, future contracts which are dealt at the Izmir Derivatives

and Options Exchange are trading with high liquidity. Type B liquid fund includes

market instruments which have maximum maturity of 180 days and weighted average

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maturity of 45 days. Kare Investment set up a hedge fund by applying to the Capital

Markets Board of Turkey. Finally, investment funds which provide yields for the

investors on par value with over market conditions are managed by low risk levels

and liquidated.

Kare Investment also makes offering financial strategies and policies for

institutionalizing or institutionalized companies. It can be called an advisory service

for execution and formation for corporate firms. These might be Public Offering

Intermediation, Financial Advisory, Company Acquisitions, Takeovers and Mergers.

Portfolio Management is the other service of Kare Investment. This includes

managing corporate individual portfolios by using advance financial management

techniques which stays focus on maximum yield at determined risk levels. There are

three funds which are created and managed by Kare Investment.

Investment Advisory has gained importance recently with an acceleration of

globalization. Thus, Kare Investment started to offer Investment Advisory to the

clients to create investment plans, to decide risk preferences, to determine cash

requirement and the status regulations of the clients. According to clients’ desire their

financial status and appropriate investment decisions, customers’ portfolios are

prepared by optimizing the relationship between risk and rate of return with the aim

of maximum profit. In order to do investment advisory Kare Investment has expert

human resources and the requisite certification.

Capital Market Board of Turkey allows Kare Investment to invest in all types

of instruments in financial markets. In addition, in primary and secondary stock

markets at BIST, in buying and selling transaction of foreign exchange and contracts

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at the Izmir Derivatives and Options exchange and in buying and selling of State

Internal Borrowing Bills and State Bonds that are dealt at the secondary stock market

of the BIST, Kare investment has required certification and expertise to operate. Also

in order to manage and operate financial instruments, Kare Investment uses Reuters

and Microsoft Excel. In addition, the company has developed software which

optimizes risk and rate of return. Moreover, employees use MS Outlook to

communicate each other and to the clients.

Part 3

3.1 Introduction

As it was mentioned in Part 2, Kare Investment prefers low risk levels when

managing a portfolio. The portfolio of a client might consist of various types of

shares at BIST. In order to build a portfolio, technical analysis and strategies are

conducted by experts in Kare Investment. These technical analysis and strategies

measure quality, efficiency and profitability of the shares at stock market. Although

Kare Investment uses automated service system to optimize risk and rate of return

relationship when deciding profitable and efficient share, the company is conducting

quantitative and qualitative research manually.

3.2 Problem Definition

Managing portfolio requires continuous profit to satisfy customer and the

automated systems cannot provide constant benefit because this automated

optimization programs only do quantitative research by using historical data.

However, these historical records only can provide the company to conduct a

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quantitative forecast and this measurement only foresees the future stock price of the

share at stock market. Kare Investment cannot manage a portfolio only based on

future prices. Also the company should conduct quantitative research to measure

profitability and efficiency of shares by using corporate data such as book values and

quarterly earnings. The system of Kare Investment is required improvement to offer

more secure investment instruments to the customers. Therefore, in addition to the

automated optimization program, quantitative research should be conducted manually

to measure the profitability and efficiency of the shares at stock market by using

corporate data of the companies whose shares are being trading at stock market.

3.3 Analysis and the Solution of the Problems

3.3.1 Profitability Research

Measuring profitability of the corporations provides data to compare each

firm in the same industry. Therefore, when generating a portfolio, Kare Investment

can use corporation’s data and this data should be reliable to select the most secure

share at stock market. In order to calculate profitability of the company, Return on

Equity is used to reveal how much profit a company gains with the capital of

shareholders. As a proportion of shareholders’ equity, the amount of net income is

calculated. Net income of the corporates should be full fiscal year and dividends

which are paid to common stock holders should be negligible. Briefly following

formula is used for Return of Equity calculation. Return on equity = Net Income /

Equity of Shareholders (see Appendix-1).

Basically, Return on Equity technique is based on market capital data. Daily

return of the corporates net income and shareholders’ equity are calculated by using

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daily return and market capital of the corporates. Kare Investment can obtain these

data by using Reuters which provides all information about stock market. Reuters has

integrated system with Microsoft Excel and so required calculations are done by

using MS Excel (see Appendix-2). After calculating Return on Equity for each firm,

each company is ranked by the values of Return on Equity. In this project, top twenty

firms are selected to invest when generating a portfolio. Each firm has equal

investment. However, before creating a portfolio, performance test should be

conducted to the determined portfolio. Last six months historical data is used and the

return of the portfolio is calculated. The return of the portfolio is compared with

BIST30 (XU030) return because performance test should reveal generated portfolio is

profitable investment or not (see Appendix-3). Return on Equity technique also

allows an investor to make the change in portfolio monthly because this project is

conducted by Microsoft Excel which updates required data automatically over

determined period.

3.3.1 Efficiency Research

Measuring efficiency of the corporates reveals the process of stock prices of

the companies at stock market. Hence, Kare Investment can obtain firm’s data which

is based on total asset value regularly to create more secure portfolio that consists of

efficient shares. Efficiency measurement should be done regularly because the

process of the corporate should be observed over a determined period. This

observation can only provide comparable data for same company. Return on Assets is

used to measure efficiency of a company by using its total assets value. In addition,

efficient management generates earnings and so the calculation of Return on Assets is

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dividing a company’s annual earnings by the total assets value of the company (see

Appendix-4).

Mainly, Return on Assets technique focusses on net income by using current

assets of a company and it is displayed as a percentage. Return on Assets gives

comparative data because mostly public companies vary from industry to industry

and Return on Assets value is dependent on the industry. The assets of a firm contain

both debt and equity. All types of financial status are considered to measure total

assets. Thus, Return on Assets technique gives an idea of how efficiently the

company is transforming total investment into the net income. Kare Investment can

collect required data by using Reuters which provides all information about the

corporates. Reuters has an integrated system with Microsoft Excel. Necessary

calculations are done by using Microsoft Excel (see Appendix-5). After calculating

Return on Assets for each firm, the companies are ranked in terms of Return on

Assets value. In this project top twenty firms are determined to invest with equal

investment. But before generating a portfolio, performance test should be conducted

to measure security of portfolio. Last six months historical records are used and the

return of the portfolio is compared with BIST30 (XU030) (see Appendix-6). This

project allows an investor to change in portfolio because required data is updated by

Microsoft Excel automatically over determined period.

3.4 Literature Survey Related with My Project

There are many ways to measure the profitability and efficiency of a

company’s share. International banks are leading financial institutions which are

conducting numerous researches about efficiency and profitability stock markets.

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After doing literature survey, I found a reference report of JP Morgan which is about

quantitative research to measure strategies of profitability and efficiency of Emerging

Markets.There are approximately fifteen different ways to conduct a research.

However, for this project, two quant techniques might be applied. Firstly, I analyzed

1 year forward P/E factor performance [2]. This strategy focuses on price and earning

of a stock. Therefore, P/E factor performance measures profitability over earning and

provides comparable data. To measure profitability of my project, also this model

could be used and but it could not be the best way because P/E factor performance

could not compare the firms in the same industry. However, this strategy can be used

to compare each share with one another without industry restriction [3]. Another

solution is Historical P/Book Value Ratio analysis [4]. This strategy measures

efficiency of the stock markets. This technique is based on historical price of a share

and book value of the company. Dividing price by the book value is an indicator of

efficiency of a share because P/Book Value Ratio uses total book value of a firm and

with related price this ratio could be an indicator whether a stock is overpriced or vice

versa. Hence, by using a comparable data, an investor can measure whether his

investment is efficient or not.

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Part 4

General Manager of Kare Investment assigned only one intern for this

project. Therefore, trading department of Kare Investment followed General

Manager’s decision. If I have worked in a group, there could be three main

differences in this project.

First of all, required literature searching takes fifteen days. If I have worked

in a group, I could conduct necessary literature research approximately in one week

because at least twenty financial reports are investigated and analyzed to determine

the most appropriate strategy. Briefly, working in a group might save time when

doing research before implementing quantitative strategy to measure profitability and

efficiency of the companies’ stock.

In order to implement determined financial technique, numerous data should

be collected. After collecting requisite data, quantitative strategy is implemented on

obtained data. Finally, performance test is done to foresee the result of the project. If I

worked in a group, performance test, obtaining numerous data and implementing

quantitative strategy could take less time. Hence, working in a group could provide

save time.

For calculating efficiency and profitability of the companies’ stock, I

suggested one solution both efficiency and profitability. However, working in a group

could save time and as a group we could offer more than one solution to compare

each other. Hence, offered solution could be more reliable.

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References

[1] Kare Investment 2007. About us December 2007, accessed at

http://en.kareyatirim.com.tr/about_us/detail.aspx?SectionID=Yq4Vvt1HWV4AunjjA
af%2fTA%3d%3d&ContentID=t1VybIV7ipAhNlP2Ae%2frpw%3d%3d as of
Septermber 2013

[2] Malin, Steve 2008. “JP MorganEmerging Markets Factor reference book”, Value
Factors, 38-39.

[3] Malin, Steve 2008. “JP Morgan Emerging Markets Factor reference book”, Value
Factors, 36-37.

[4] Menem, Marc 2007. “The Alpha Sparkles in GEM JP Morgan Quant”,
Profitability and Efficiency, 96-97.

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Appendixes

Appendix-1

Return on Equity Formula

Appendix-2

Return on Equity Values

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Appendix-3

Return of Equity Performance Result

Appendix-4

Return on Equity Formula

Appendix-5

Return on Assets Values

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Appendix-6

Return of Assets Performance Result

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