Laws of Demand and Supply Fundamental to an understanding of economics are the basic concepts of demand and supply.

Law of Demand The law of demand states that there is an inverse relationship between the price of a good and the amount buyers are willing to purchase of such a good. Law of Supply The law of supply states that there is a direct relationship between the price of a good and the amount offered for sale.

 Economic Factors The decision to invest in the securities of a particular company is based internal factors and external factors. Internal Factors are those within the control of the company. External Factors are factors that generally considered beyond the control of a company.

 GNP and GDP there are several indicators that are used to measure the economic activity in a country. Two of the more popular ones are GNP and GDP. Gross National Product (GNP) represents the total value of goods and services produced by Philippine nationals in a given year, regardless of whether such goods and services are produced within or outside the Philippines.

 Gross Domestic Product (GDP) represents the output of goods and services produced within the geographic borders of the Philippines in any given year, regardless of whether such goods and services are produced by Filipinos or foreign nationals. Nominal values are expressed in current pesos while real values are values that have been adjusted for the effects of inflation.

 Philippine Consumer Price Index (PCPI) The PCPI is an indicator of the general level of prices by measuring changes in the prices of a fixed basket of selected consumer goods and services, using some specified year as the base year. Inflation is an economic condition characterized by a continuing rise in the general level of prices of goods and services.

 Deflation is the opposite of inflation and is therefore a period of declining prices of goods and services. From another viewpoint, inflation reduces the purchasing power of money while deflation increases the relative value of money.

 Money Supply This is the amount of money that exists in the economy at any given time. It consists of:
M1 Also referred to as narrow money and includes currency in circulation and demand deposits. M2 Also called broad money and consists of M1 plus time deposits and savings account in the banking system.

 M3 The broadest measure of money supply and consists of M1 and M2 plus the assets and liabilities of financial institutions. Also called Domestic Liquidity. M4 Also called liquidity money. These include M3 plus transferable deposits, treasury bills and deposits held in foreign currency deposits. Almost all shortterm, highly liquid assets will be included in this measure.

 The government has three major means of controlling money supply:

Establishing reserve requirements for banks and other depository institutions. Buying and selling government securities in the open market. Setting the interest rate of which the Bangko Sentral ng Pilipinas (BSP) will loan funds to banks and other depository institutions.

 Increasing money supply is called an expansionary monetary policy and is achieved by reducing reserve requirements, buying government securities in the open market, and lowering discount rates to banks. In contrast, decreasing money supply is called restrictive money supply and is accomplished by increasing bank reserve requirements, selling government securities in the open market, and raising the discount rate to banks.

 Interest Rates In the broadest sense, interest is the price of money and is the result of a choice between spending the money today or postponing spending until the later date. The Bangko Sentral ng Pilipinas (BSP) is the premier financial institution of the government.

 The Bureau of Treasury (BTr) also plays an important role in the determination of interest rates as they decide what bids to accept or reject during auctions of T-Bills and T-Notes. The weighted average interest rates (WAIR) for the different tenors are then used by banks, financing companies, issuers of debt securities and other financial institutions as benchmarks for their lending and borrowing rates.

 The Business Cycle Over time, the economy goes through alternating periods of prosperity and depression called the business cycle. The business cycle has four (4) phases: expansion, peak, recession, and trough.

Peak

Expansion

Recession

Trough

 In the expansion phase, there is an upturn in business activity where industrial production, investments, property values, consumer demand and GNP are increasing while underemployment is decreasing. As the cycle moves into the peak, the economy starts to overheat. Eventually, there is overproduction and build-up of excessive amounts of inventory beyond present levels of demand.

 Following the peak is a period of contraction or recession. Production starts to go down together with interest rates, prices, and investments. Underemployment begins to rise when recession bottoms out and production levels go off. At this point, there is nowhere to go but up.

 Financial Statements are the main source of financial information for major investment decisions. There are four corporate financial statements that are most important and available to the investing public: the Statement of Financial Position, Income Statement, Accumulated Retained Earnings Statement, and the Statement of Cash Flows.

 The Statement of Financial Position, which is recently called Balance Sheet, represents the financial condition of a corporation as of a particular date. It shows what the corporation owns, what is owes, and what its net worth is. The balance sheet formula is: Assets = Liabilities + Stockholders Equity

BETANIA INCORPORATED Statement of Financial Position December 31, 2011

ASSETS Current Assets: P 500,000 Cash 2,500,000 Marketable Securities 2,450,000 Accounts Receivable 7,420,000 Inventories 130,000 Supplies P Total Non-Current Assets: Land/Buildings 25,000,000 Machinery/Equipment 12,000,000 Total P TOTAL ASSETS LIABILITIES & STOCKHOLDERS EQUITY Current Liabilities: P 1,540,000 Accounts Payable 1,360,000 Notes Payable 210,000 Accrued Expenses/Taxes Total P 3,110,000 Long-Term Liabilities: 13,000,000 5,000,000 Mortgage Bonds 3,000,000 Bank Loans Total 8,000,000 Stockholders Equity: 37,000,000 30,000,000 Capital Stock 50,000,000 3,000,000 Capital Surplus 5,890,000 Retained Earnings Total 38,890,000 TOTAL LIABILITIES & STOCKHOLDERS EQUITY P 50,000,000

ASSETS Current Assets: Cash Marketable Securities Accounts Receivable Inventories Supplies Total Non-Current Assets: Land/Buildings Machinery/Equipment Total TOTAL ASSETS

P 500,000 2,500,000 2,450,000 7,420,000 130,000 P 13,000,000

25,000,000 12,000,000

37,000,000 P 50,000,000

LIABILITIES & STOCKHOLDERS EQUITY Current Liabilities: P 1,540,000 Accounts Payable 1,360,000 Notes Payable 210,000 Accrued Expenses/Taxes Total Long-Term Liabilities: 5,000,000 Mortgage Bonds 3,000,000 Bank Loans Total Stockholders Equity: 30,000,000 Capital Stock 3,000,000 Capital Surplus 5,890,000 Retained Earnings Total TOTAL LIABILITIES & STOCKHOLDERS EQUITY

P 3,110,000

8,000,000

38,890,000 P 50,000,000

 The Income Statement is also referred to as Profit and Loss Statement and Statement of Operations. It summarizes the results of the corporations operation for a given period of time (usually a year).

BETANIA INCORPORATED Income Statement For the Year Ended December 31, 2011 Net Sales Less: Cost of Good Sold Gross Profit Less: Selling & Administrative Expenses Operating Income Add: Other Income Earnings Before Interest and Taxes (EBIT) Less: Interest Expense Earnings Before Taxes (EBT) Less: Taxes NET INCOME P 12,500,000 5,200,000 P 7,300,000 3,350,000 3,950,000 40,000 3,990,000 880,000 3,110,000 1,026,300 P 2,083,700

 This is a statement which shows how the firm used it profits; whether they were retained in the company or paidout to stockholders as dividends.

BETANIA INCORPORATED Accumulated Retained Earnings Statement For the Year Ended December 31, 2011 Retained Earnings, Beginning Add: Net Income Less: Cash Dividends Retained Earnings, End P 5,306,300 2,083,700 ( 1,500,000 ) P 5,890,000

 This statement is a summary of cash provided by and used in operating, investing, and financing activities of the corporation and the aggregate effect of these activities on the cash balance.

BETANIA INCORPORATED Statement of Cash Flows For the Year Ended December 31, 2011 Cash Flows from Operating Activities: Net Income P Add: Depreciation Expense Increase/Decrease in Operating Assets: Marketable Securities P 570,000 Accounts Receivable 400,000 ( 3,250,000 ) Inventories (3,700 ) Supplies Increase/Decrease in Operating Liabilities: Accounts Payable 360,000 (240,000 ) Notes Payable Accrued Expenses/Taxes 30,000 Net Cash Provided by Operating Activities Cash Flows from Financing Activities: (1,500,000 ) Decrease in Dividends Payable Increase in Loans Payable 500,000 Net Cash Used in Financing Activities Net Increase in Cash Cash Balance, January 1 Cash Balance, December 31 P 2,083,700 1,250,000

(2,283,700 )

150,000 1,200,000

(1,000,000 ) 200,000 300,000 500,000

 This analysis involves the use of traditional economic and business concepts in the examination of economic and company variables that leads to an estimation of the value of an investment. The examination of these variables is called the valuation process of which there are two approaches: the top-down approach and the bottom-up approach.

 Top-down approach begins with an assessment of the economy and the financial markets. This followed by an analysis of different industries and how they are affected (favorably or adversely) by prevailing economic and market conditions.

 Bottom-up approach is more concerned with the analysis, selection, and pricing of securities. This entails a detailed examination of companies and an appraisal of the value of their securities (whether they are underpriced, overpriced or fairly priced).

 One of the most important tools that fundamental analysis use in the assessment of corporate performance is called financial ratio analysis, which is the study of meaningful relationships between various accounts appearing in the financial statements of a company.

 There are four broad categories of ratios used in financial ratio analysis: profitability (earnings), activity (efficiency), liquidity (short-term solvency), and leverage (level and coverage of long-term debt).

 Profitability (Earnings) Ratios These ratios reflect the results of the companys profit seeking activities.
Gross Profit Margin (GPM) The GPM indicates the basic cost structure of the company. An analysis over time of a companys GPM compared to industry standards will reveal its relative cost-price structure. Operating Profit Margin (OPM) This ratio compares operating profits to net sales.

 Net Profit Margin (NPM) This ratio uses the same concept as the OPM, but considers other income, interest expenses and tax payments. Return on Common Equity (RCE) The RCE measures the return on investment by common stockholders. When the RCE is consistently higher than the cost of capital, it is considered a good investment.

 Earnings Per Share (EPS) a favorite among fundamental analysis because the EPS, when correlated with the market price of shares, gives an indicator of whether such shares are fairly priced or not. Price/Earnings Ratio (PE) also referred to as the corporations earnings multiple. A high P/E indicates that investors are paying a high market price for todays earnings.

 Dividend Payout Ratio (DP) measures the percentage of net income paid to common stockholders as cash dividends. Dividend Yield The dividend yield for common stock expresses the rate of return that the dividend represents on the stocks current market price.

 Activity (Efficiency) Ratios These ratios are a gauge of the companys ability to effectively manage its assets.
Inventory Turnover This ratio is the number of times per year a corporation turns over its inventory. It is a measure of the companys ability to market its product and manage its inventory. Days in Inventory The approximate number of days it takes to convert inventory into sales.

 Receivables Turnover a measure of a companys efficiency in collecting receivables and in managing credit. A low receivables turnover means that the company is not efficient in collecting from its customers and this can put a lot of strain on the companys cash position. Average Collection Period The approximate number of days it takes to collect receivables.

 Liquidity Ratios These ratios measure a corporations solvency or its ability to meet short-term obligations.
Net Working Capital the difference between the current assets and current liabilities. It gives an indication of how much liquid assets would be available for operations if the company were to pay off all its short-term obligations. Current Ratio this ratio indicates the corporations ability to pay its current liabilities using its current assets.

 Quick Ratio a more stringent measure of solvency and includes only the companys more liquid assets. Inventories are excluded from the computation because it takes some time to convert them into sales and eventually into cash. This is also called Acid Test Ratio. Cash Ratio the most severe test of the corporations short-term debt paying ability and includes only Cash and Marketable Securities to cover current liabilities.

 Coverage Ratios These ratios measure a companys financial leverage (level of debt) and risk. They also measure the protection to the companys long-term creditors and investors.
Debt-to-Equity Ratio (DE) a board picture of a companys capital structure and basically presents the relationship of what is owed and what is owned.

 Times Interest Earned - Also called Interest Coverage Ratio and is a measure of protection to creditors. An interest cover of 1x means that the company has just enough earnings to make interest payments on loans and bonds. Book Value Per Share (BV) approximate residual value per share that is available for distribution to common stockholders if the corporation is to be liquidated.

 Technical Analysis involves the examination of past market data, such as prices and the volume trading, which leads to an estimate of future price. It is based on the belief that the values of securities are primarily the result of supply and demand forces in the market, and not of earnings and/or dividends.

 They also believe that supply and demand are affected by numerous factors, rational and irrational. This means that prices are influenced not only by fundamental variables but also by psychology and sentiment of buyers and sellers.