Company analysis


‡ Effect of a business cycle on an individual company may be different from that on the industry in general ‡ The product mix of a company may be such that the sales revenue and the earnings of a company may respond more than or less than proportionately to the microeconomic and industry impact ‡ In company analysis the focal point is the relationship between revenues and expenses of the firm and the economic and industry changes

‡ A rational investor is interested to find out leaders and innovators in the group ‡ Basic objective of company analysis is to identify better performing and competitively placed companies ‡ Company analysis presupposes that the economic and industry analysis have already been made and now the objective of company analysis are ‡ To analyze the expected earnings of the company ‡ To find out the fair value( intrinsic value) of the share .

‡ Two major components of company analysis are ‡ Financial ‡ Non financial ± Analysis of financial statistics must be supplemented with an appraisal. of a qualitative nature. ± of company¶s present situation and prospects ± and the quality of its management .

absenteeism-labour relations 2. employee turnover. Evaluation of management 1.Sizing up the present situation and prospectsfollowing factors to be considered ‡ Availability and cost of inputs-cost advantages/disadvantages of the company vis a vis competitors ‡ Order position-represents how many months of production-improving or deteriorating ‡ Regulatory framework-licensing policy. . products in the portfolio of the company etc ‡ Human resources and personnel-over/under staffed. accounting policies. price/distribution controls etc ‡ Technological and production capacities ‡ Marketing and distribution-loyalty-distribution network ‡ Finance and accounting-access to external financing.

the analyst should ask questions like- .µthe mark of good management is not simply how it runs its businesses but how well it changes them¶¶ ‡ We subscribe to the view that quality of management is an important factor shaping the success of the firm and returns to the shareholders and hence calls for a separate evaluation ‡ To assess the quality of management.‡ Theodore levitt wrote.

integrity.‡ What is the calibre. dynamism of the top management? ‡ Does the management have specific objectives. plans. and time bound programmes? ‡ How effective is the organizational structure? ‡ How investor friendly is the management? ‡ How sound are the management systems of the company? . motivation.

Financial Analysis .

Dividend discount model 2. Interpretation of financial analysis 4.1. Analysis of financial statements through financial ratios ‡ ‡ ‡ ‡ ‡ ‡ ‡ Liquidity Leverage Profitability Activity Valuation Trend analysis Industry comparison 3. Earnings multiplier model . Financial statements ‡ ‡ ‡ Income statement Balance sheet Statement of cash flow 2. Intrinsic value of share 1.

Factors to be considered before analyzing financial statements Accurate.identified if statements are certified or legally audited by a qualified CA Complete-in all aspects and should take into account any change that have taken place Comparable-type of the information furnished in the statement should be standard so that can be evaluated in a uniform manner Consistency-comparison of firms performance over a period of time . 4. 3. 2.Financial statements ‡ 1.

after tax net income.shows changes in financial position of the firm-activities generating cash (sources). earnings from regular operations etc Balance sheet-assets and liabilities of the firm along with share holders equity Statement of cash flow.‡ Income statement-used to assess current management performance and future profitability ‡ Key items to be considered-inventory cost methods. activities that spend cash (uses) . depreciation.

Leverage and coverage ratios-debt ratio (total assets/total liabilities).inventory turnover. . debt to equity etc. Market value ratios. 5. Dividend ratio etc. debtors turnover. Profitability ratios. Return On Assets etc. 4. Return On Equity.Gross Profit ratio. Net Profit ratio.PE ratio. fixed assets turnover etc.Financial ratios 1. Liquidity ratios-current and quick 2. Activity ratios. 3.

if there is a trend next step is to determine the cause of the trend and whether the trend suggest strength or weakness ‡ Industry comparison-finds out company ratios that appear out of line with industry averagesthree things to be kept in mind‡ Different industries have different average ratio ‡ Many industries are not homogenous ‡ Many companies operate in several different industries .Interpretation of financial ratios ‡ Trend analysis-analyst examine same set of ratios over a number of years to look for obvious trends.

Po= D1/k ± g Where.Dividend discount modelIntrinsic value. D1 = expected dividend k= required rate of return g = estimated future growth rate of dividends .Intrinsic value of a share ‡ Intrinsic value of a stock is the price justified by a company¶s financial variables ‡ Intrinsic value or the estimated value of a stock can be calculated using two models1.

Intrinsic value (Po) = Estimated Earnings Per Share x Estimated Price Earning ratio . Earnings multiplier model.used for short run estimate of intrinsic value.2.

Establish Price Earning ratio 3.the procedure employed by investment analyst to estimate the intrinsic value of a share consist of following1.Earnings multiplier approach Estimation of Intrinsic value. Develop a value anchor and value range ‡ . Estimate expected EPS 2.

product prices etc. ‡ Better to work with the range rather than a single number ‡ Paint few scenarios optimistic. and assumptions about the behavior of revenues and costs ‡ As an investor look at earnings forecast. examine assumptions made by analyst for demand growth. raw material prices.‡ Estimate of EPS is an educated guess about the future profitability of the company. pessimistic and normal ‡ EPS= Profit after interest and tax/total number of outstanding shares . market share.

‡ Establish PE ratio.PE ratio depends on dividend payout ratio. required return on equity and expected growth rate in dividends ‡ If PE ratio lower than justified by stock growth prospects.price earnings ratio reflects the price investors are willing to pay per rupee of EPS. the stock is said to be over valued . the stock is said to be under valued ‡ If P/E ratio higher than justified than as justified by growth prospects.

projected EPS x appropriate PE ratio-the product is called value anchor -for example value comes at Rs.35decisions of buy. 34. . sell and obtained by.‡ Determine value anchor or value range.

Projected financial statements-item wise analysis of revenues. expenses. interest . Market share/profit margin approach. depreciation etc. Earnings model-ROI used-predicted data relating to assets.Methods of forecasting earnings 1. Regression and correlation analysis-analyzing relationships between several variables of company. operating income. industry and economy. etc 4.Break even analysis used 3. .EAT forecasted 2.

5 Trend a technique that systematically repeats the application of rule or formula to know outcomes in different situations . each one representing a possible outcome7 simulation. cyclical and erratic fluctuations of the variable under consideration over a time period.time series analysis that permits identification of seasonal. 6 Decision trees-contains branches.