4/27/12

COMPANY ANALYSIS
Click to edit Master subtitle style

4/27/12

INTRODUCTION

Once weve completed the economic forecast and industry analysis, we can focus on choosing the best positioned company in our chosen industry a company will involve an analysis of: Basic information Goods and services Strategic analysis Accounting analysis Financial Analysis

Selecting

4/27/12

Contd.
Obviously,

we are looking for companies with the best management, strong financials, great prospects, and that are undervalued by the market

4/27/12

Basic information
Mission

statement and vision of the company.

Values and goals. that have shaped the company.

History Events

Goods and services

Products Quality

4/27/12

the company makes. offered.

and the demand of the products.

Services

4/27/12

Strategy analysis
Strategy

analysis seeks to explore the economies of a firm and identify its profit drivers so that the subsequent financial analysis reflects business realities. focuses on competitive strategy which includes cost leadership (Dell computers)& product differentiation( Mercedes, Raymonds etc) also involves corporate strategy.( firms with diversified set of business)

It

It

4/27/12

Accounting analysis
Accounting

analysis seeks to evaluate the extent to which the firms accounting reports capture its business reality. analyst focuses on the institutional framework for financial reporting, the potential sources of noise and bias in accounting.( forecasting error, increasing the profit)

An

Financial Analysis
Financial

4/27/12

information is analyzed by reviewing financial statements and calculating financial ratios. from this company is compared to other companies in the same industry. An investment analyst start with the historical earnings and dividend , growth and risk analysis.

Information

EARNINGS AND DIVIDEND ANALYSIS

To asses the earnings and dividend level , the investment analyst uses the following metrics :
Return Book

4/27/12

on Equity per share payout ratio per share

value per share

Earnings Dividend Dividend

Return on Equity
The

4/27/12

ratio reveals how profitably shareholders funds are utilized comparison with similar firm throws light on relative performance and competitive advantage. on Equity = Net profit after int,tax and dividend/ Equity shareholders funds.

Return

Example:

ROE

of SBI = 7,370.69/ 64,986.04 *100 =

11%

Book value per share

A

4/27/12

measure used by the owner of equity shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. up equity capital + Reserves and surplus/ No of outstanding equity shares

Paid

Example: Book

value of SBI: 64,986.04/ 635 = RS. 1,023.40

Earnings per share

It

4/27/12

measures the profit available to equity shareholders on a per share value basis. reflects capacity of the firm to pay dividend = Net Profit / Outstanding Shares : Rs.116.07 Rs.82.54 of SBI : of AXIS:

It

EPS

Example EPS EPS

4/27/12

Dividend payout ratio

The

dividend payout ratio represents the portion of equity earnings which is paid out as dividends. companies will typically retain more profits to fund growth and pay lower or no dividends. payout ratio = Equity dividends/ Equity earnings : 1,905.00/ 7,370.69*100 = 670.36/3,388.49 *100 = of SBI : of AXIS:

Growing

Dividend

Example DPS

25%

DPS

Dividend per share

The

4/27/12

dividend per share is simply the dividend declared per share is a better indicator than EPS as the former shows exactly what the owners receive. = EPS * Dividend payout ratio Per share of SBI =116*25% = Per share of AXIS = 82.54* 19% =

DPS

DPS

Example: Dividend

Rs.29

Dividend

Rs. 15.68

GROWTH PERFORMANCE
To

4/27/12

measure the historical growth, the following ratios are computed annual growth rate growth rate

Compound

Sustainable

Compound annual growth rate

The

4/27/12

compound annual growth rate (CAGR) of EPS of SBI and AXIS bank are shown below:

Example

CAGR

of EPS for SBI = (EPS for 2011 / EPS for 2007)^1/5 -1 = (116.07/ 86.29)^1/5 -1 = 6%

CAGR

of EPS for AXIS = (EPS for 2011 / EPS for 2007)^1/5 -1 = (82.54 /23.40)^1/5 -1 = 28%

Sustainable growth rate

Sustainable

4/27/12

growth rate(SGR) is the maximum rate at which a company can grow revenue without having to invest new equity capital. growth rate = Retention ratio* Return on Equity If a company earns a 15%return on equity (ROE), it can grow 15% simply by reinvesting all the earnings in new opportunities and maintaining a stabledebt to equity ratio

Sustainable

RISK EXPOSURE
Risk

4/27/12

is a multi-faceted phenomenon. The following measures are quite useful in handling over the risk. of return on equity

Beta Volatility

Beta
CAPM

4/27/12

model is the most popular risk-return model. The risk of a stock is denoted by its beta which measures how sensitive is the return on the stock to variations in the market return.

Volatility of Return on Equity

It =

4/27/12

may be defined as follows

Range of return on equity over n years/ Avg return on equity over n years. :

Example Volatility =

of Return on Equity of SBI

Max return Min return from 2007-11/ Avg return on equity from 2007-11 =11.68%/15.48% =0.75

4/27/12

Contd
Volatility

of Return on Equity of AXIS

= Max return Min return from 2007-11/ Avg return on equity from 2007-11 = 5.2%/ 4.1% = 1.2

FAVOURABLE AND UNFAVOUABLE FACTORS

Favourable factors Un Favourable factors

4/27/12

Earnings level

High book value per share

Low book value per share

Growth level

High return on equity High CAGR in sales and EPS High sustainable growth rate

Low return on equity Low CAGR in sales and EPS Low sustainable growth rate

Risk exposure

Low volatility of return High volatility of return on equity on equity Low beta High beta

Price Earnings ratio

This

4/27/12

ratio reflects the price investors are willing to pay for every rupee of earnings per share. ratio helps the investor to decide whether to invest in a particular firm. shows the market appraisal of the performance of the firm. = Market price per share/ EPS : 2061.95 / 116.07= 17.76 ratio of SBI =

This

It

Example PE PE

ratio of AXIS = 1051.10 / 82.54=

Dividend Yield Ratio

The

4/27/12

dividend yield is expressed in terms of market price per share. Yield = Annual dividend per share / Market price per share : Yield Ratio of SBI = 29/ 2061*100 =

Dividend

Example Dividend

1.4%
Dividend

Yield Ratio of AXIS = 15.65/1051 *100 =1.48%

4/27/12

Evaluating Management
Strong

management is vital for companies to perform in accord with the highest expectations of investors evaluating the quality of a companys management team is very difficult, especially for individual investors have the advantage in that they have many contacts within the industry who are familiar with the management team, and they can visit the company and talk with the team personally

Unfortunately,

Professionals