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analysis
Company Analysis:
i) Study of Financials
Ii) Study of other factors
References:
P.F.Drucker : A new score card for management “ the wall street journal ,
September , 1976
Theodore Levitt : “Dinosauras among the Bears and Bulls” HBR, Jan-Feb ,1975
Estimation of Intrinsic value
i) Estimate the Expected EPS
Assumptions about future prospects :
( Normal, optimistic and pessimistic)
Demand growth,
Market share,
Raw materials Price
Import duties
Product prices
Interest rates
Assets Turnover ratio
Income tax rate
Cash flow per share ( PAT+ Dep. / No. of shares )
Estimation of Intrinsic value
ii) Establish P/E ratio:
a) Dividend discount model : D/P ratio
r-g
b) Cross section analysis: similar firms P/E ratios in the industry take
a view
c) Historical Analysis : Historical P/E ratio of the company and take
a view ( consider recent changes in capital market)
d) Weighted P/E ratio :
+ P/E ratio based on DDM
+ P/E ratio based on Historical analysis
+ Assign weight age to each one
+ Find out weighted P/E ratio
Estimation of Intrinsic value
Price to
Book value
Ratio
Low
Low High
Return on Equity
Tools for judging under valuation
or over valuation of stocks
2. Growth Duration Matrix:
Over valued
Dividend
Low cows
Low High
ABC ‘s base line value : Cash flow per share / cost of equity
: 10/0.15 = 66.7
For instance : Estimation of ERI
a) Proportion of stock price coming from investor expectations of the future growth
opportunities : Market price – Base line price
Market price
150 – 66.7/150 = 55.6%
b) ABC ‘s Ratio of expected future growth rate to recent growth ( Acceleration ratio)
Acceleration Ratio : Expected future growth rate / Recent growth rate
: 1.50/1.20 =1.25
ERI is defined as
= Proportion of stock price coming from investors x Acceleration ratio
0.556 x 1.25 = 0.695 or 69.5%
NOTES:
Lower ERI , the greater chance of achieving expectations, and higher expected
return for the investors
Higher ERI , the smaller chance of achieving expectations, and Lower expected
return for the investors
Equity research in Ethiopia
Institutional Investors :
Ethiopian Insurance Corporation ,
Commercial Bank of Ethiopia
Ethiopian Airline ( Asky – 25% stake – 24 million $)
Equity culture ( the shylvia pankhurst Educational & training
institute – Floated public shares)
FFIS : ( Foreign Financial Institutions )
The Private Multi National Bank ( ECOBank)
The Economic community of West African states
( ECOWAS)
Bank of Investment and Development
African Development Bank
Equity research in Ethiopia
Corporate consulting :
Access Capital , Zemen Educational and Training Institute
African Investment Bank ( 170 Million USD ) – Libya ( Tripoli)
African Monetary Fund – Central Africa
African Central Bank – Nigeria
New Generation Business centre – MOCB,German govt. , OTITB, and
New generation University college
ECX launch coffee trading in January 2009
ECX CEO – Dr.Eleni Crebre-Medhin - New initiation in coffee trading
and research in derivative markets in Ethiopia
UN –under secretary general –ECA stated that “ several african
countries have experienced volatility in their stock market and exchange
rates since outset of global financial crisis