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COMPANY ANALYSIS

COMPANY ANALYSIS
Economic analysis & Industry analysis act as a fore runner to company analysis-Company analysis assumes more importance since investment is done in the company and not in the economy or industry.

Company analysis is a study of all variables that influence the future of a firm quantitatively and qualitatively.
The analyst tries to predict the future profitability and earnings of the firm and arrive at the intrinsic value.

COMPANY ANALYSIS Contd.


1.Companys ability in sales growth in sales stability of sales competitive position competitive edge.

2.Interpreting financial statements


Balance sheet Summary of assets (what the company owns fixed assets and current assets); liabilities (what the company owes, long term & short term, secured & non-secured); equity (capital of the stake holders). Analyst looks at changes (large Vs small) and trends (improving Vs decreasing). Income statement
Revenues funds received for providing products and / or services. Expenses funds used to pay for materials, labour and other business costs. Profit / Loss = revenue expenses.

Analyst must look for


Changes relative amounts large or small. Relationships are expenses growing faster or slower than revenues. Trends going up or down.

COMPANY ANALYSIS Contd.


3.Key financial ratios
Study of relationships between various accounts / categories in the financial statement. Purpose is to develop information about the past that can be used to get a glimpse of the future.

Analyst must do x-ray of the financial statements and look for meaningful relationship between numbers; analyze historical trends to see if they are increasing or decreasing. Look at industry standards and see how the compares to competitors.

MAJOR GROUPS OF FINANCIAL RATIOS


1. LIQUIDITY RATIOS Companys ability to meet day to day operating expenses and satisfy short term obligations as they become due. 2. ACTIVITY RATIOS How well the company is managing its assets. 3. LEVERAGE RATIOS Extent of debt used by the company and effect there of. 4. PROFITABILITY RATIOS Measures how successful the company is at creating profits. 5. COMMON STOCK RATIOS Converts key financial information into per-share basis to simplify financial analysis.

MAJOR GROUPS OF FINANCIAL RATIOS


Cont
Liquidity Ratio 1) Current ratio = CURRENT ASSETS CURRENT LIABILITIES It indicates extent of short term funds available for clearing short term liabilities. Higher the ratio better. Lower the ratio worse. Liquidity Ratio 2) Net working capital (NWC) = CA CL Amount of working capital available to meet the Commitments and grow the business. Higher the amount better. Lower the amount worse.

ACTIVITY RATIOS
1.Accounts receivable turnover ratio = ANNUAL SALES ACCOUNTS RECEIVABLE In respect of credit sales, how quickly is company is collecting the receivables. [higher ratio better; lower ratio worse] 2.Inventory turnover ratio = ANNUAL SALES INVENTORY Indicates how quickly the company is selling its inventory. [higher ratio better; lower ratio worse] 3.Total assets turnover ratio = ANNUAL SALES TOTAL ASSETS How efficiently company is using its assets to support sales. [higher ratio better; lower ratio worse]

LEVERAGE RATIOS
1.Debt-equity ratio = LONG TERM DEBT
SHARE HOLDERS EQUITY Indicates how much debt company is using to support its business compared to how much equity it is using to support its business. [higher ratio more risk; lower ratio less risk] 2.Time interest earned = EBIT ANNUAL INTEREST It measures the ability of the firm to meet its fixed obligations by way of interest. [higher ratio less risk; lower ratio more risk]

PROFITABILITY RATIOS
1.Net profit margin = NET PROFIT AFTER TAXES
TOTAL REVENUES Indicates the amount of profit earned from sales another operations. [higher ratio better; lower ratio worse]

2.Return on assets = NET PROFIT AFTER TAXES


TOTAL ASSETS Indicates amount of profit earned on amount invested in assets; measures managements efficiency at using assets. [higher ratio better; lower ratio worse]

PROFITABILITY RATIOS Contd..


3.Return on equity = NET PROFIT AFTER TAXES
STAKE HOLDERS EQUITY Measures managements ability in using stake holders equity in realizing profits. [higher ratio better; lower ratio worse]

4.Breaking down ROA,


ROA = NET PROFIT MARGIN x TOTAL ASSETS TURNOVER * Helps the analyst to identify the components that are driving company profits; * Find out the impact on ROA, signs of improvement in profit margin and / or its total assets turnover.

PROFITABILITY RATIOS Contd..


5.Breaking down ROE,
ROE = ROA x EQUITY MULTIPLIER EQUITY MULTIPLIER = TOTAL ASSETS TOTAL STAKE HOLDERS EQUITY Helps to identify the impact of financial leverage on company returns. ROE moving up or coming down will indicate how the company is managing its assets to create share holder return.
.

COMMON STOCK RATIOS

1.Price-Equity ratio
Price-Equity ratio(P/E)
= MARKET PRICE OF THE SHARE EPS EPS = Net profit after taxes Preference dividend Number of equity shares outstanding

Helps to know how the stock market is pricing the stocks. [higher ratio more expensive is the stock; lower ratio less expensive]

2.Price Earnings Growth ratio (PEG)


PEG = STOCKS P/E RATIO 3 TO 5 YEAR GROWTH RATE IN EARNINGS Compares companys P/E ratio to the rate of growth in earnings. Ratio > 1; stock may be fully valued. Ratio = 1; stock price is in line with earnings growth. Ratio < 1; stock may be under valued.
.

3.Dividend Per Share


Dividend per share = ANNUAL DIVIDEND PAID

No. OF EQUITY SHARES OUTSTANDING

Indicates amount of dividend paid to equity share holders.

4. Dividend pay out ratio


Dividend pay out ratio = DIVIDEND PER SHARE EARNINGS PER SHARE
Indicates how much of its earnings, the company pays as dividends to equity share holders.

5.Book value per share


Book value per share = NET WORTH No. OF EQUITY SHARES OUTSTANDING
.

6.Price To Book Value


Price to book value = MARKET PRICE OF SHARE BOOK VALUE PER SHARE
Higher the ratio Stock is fully priced or over priced. Lower the ratio Stock is not fully priced or under priced.

COMPANY ANALYSIS OTHER FACTORS


Consistency in accounting policies
Depreciation policies. Valuation of inventory. Remarks in audit report.

Other income Income from non-operating sources credited to P & L account. In most cases they are not capable of being repeated in future, hence they have to be totally deleted in analyzing present as well as future earnings.

ANALYSING MANAGEMENT FACTOR


Risk taking capability. Project conceiving skills. Project implementing skills. Hunger for market leadership. Attitude towards creating wealth for share holder. Ability to carry others with you. Thrust towards new product development. R & D investments.

ANALYSING MANAGEMENT FACTOR


Contd

Arrive at the future P/E ratio: P/E ratio is affected by sales growth, earnings growth, dividend payout, leverage deployed, institutional share holding.

MANAGEMENT ANALYSIS
Project conceiving skills. Visionary environment analysis. Project implementation skills. Maintain competitiveness. Identify growth opportunities. Innovate R & D. Cost reduction & cost control measures. Dividend policies. Dynamic capital structure. Corporate governance.

INTRINSIC VALUE
True economic worth of a financial asset. In case, there is less than complete information, the actual price of the stock is away from the intrinsic price.