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Demo course fundamental-analysis

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Demo course fundamental-analysis

  1. 1. FUNDAMENTAL ANALYSIS DEMO
  2. 2. Introduction What is fundamental analysis ? • Equity valuation methodology utilizing financial and economic analysis. • Used to determine intrinsic value of a stock. • Intrinsic value determines whether investor should buy, sell or hold the stock. • Enables informed investment decisions. DEMO Current Market Price Intrinsic Value Decision 100 120 Buy 100 90 Sell 100 100 Hold
  3. 3. Who needs Fundamental Analysis • Equity Analysts • Stock Brokers • Investment Advisors • Portfolio Managers • Mutual Funds • Treasury Managers • Insurance Companies • Governments DEMO • Investors • Research organizations • Academicians • Ratings agencies • Banks • Regulatory bodies
  4. 4. Fundamental analysis approach • Macro economic analysis • Industry analysis • Company analysis • Company Valuation DEMO
  5. 5. Understanding the Basics Time Value of Money Present Value of money An amount available today is worth more than the same amount in future due to its potential earning capacity. For e.g. If you receive Rs 117 after 3 years, then the present value of this amount today would be Rs 100. This is because if today you invested Rs 100 for a period of 3 years and you earn a simple interest of 8% per annum then the maturity amount would be Rs117. DEMO Example PV = FV 100 (1+r)t FV = PV * (1+r)t Where PV = Present Value FV = Future Value 117 r = Discount Rate 0.08 t = Time 2
  6. 6. Understanding the Basics Future Value of Money The value of an amount at a specified date in the future that is equivalent in value to a specified sum today. The future value of Rs 100 invested at 8% per annum earning simple interest is Rs 117 DEMO Example FV = PV * (1+r)t 100 Where PV = Present Value 100 FV = Future Value 117 r = Discount Rate 0.08 t = Time 2
  7. 7. Understanding the Basics Interest rates and discount rates • Interest rates provide the rate of return of an asset while discount rates help us determine the present value of the future earnings of an asset. • To determine the appropriate interest rates to be used for discounting future cash flows, understanding the following concepts is important. • Weighted Average Cost of Capital (WACC) • Risk-free Rate • Equity Risk Premium • The Beta DEMO
  8. 8. Understanding the Basics Weighted Average Cost of Capital (WACC) WACC is the discount rate of the cost of capital required for discounting future cash flows to determine present value of the said cash flows DEMO WACC = D * (1-t) + E * Ke + P * Kp TC TC TC Where D = Debt portion of firm's total employed capital TC = Firm's total capital employed (D+E+P) Kd = Firm's cost of debt t = Firm's effective tax rate E = Equity portion of firm's total employed capital P = Preferred equity portion of firm's total employed capital Kp = Cost of firm's preferred equity capital Ke = Cost of firm's equity
  9. 9. Understanding the Basics Risk-Free Rate (RFR) • The theoretical rate of return of an investment with zero risk, including default risk. The default risk is the risk of an individual or company or even a country would be unable to pay its obligations to its debt holders. • The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. DEMO In practice the RFR does not exist, as even the safest investments carry a very small amount of risk. Hence, often the interest rate of a 3- month U.S treasury bill is used as the RFR.
  10. 10. Understanding the Basics Equity Risk Premium • The excess return provided by a stock or the overall equity market over the risk-free rate (RFR). This is required to compensate investors for the relatively higher risk of the stock. • High risk equity investments have higher risk premiums and the premiums also change constantly, thus reflecting the changing market conditions. DEMO If the return on a stock is 17% and the risk-free rate over the same period is 8% ( e.g. GOI 10 year bond), the equity-risk premium would be 9% for this stock over that period of time.
  11. 11. Understanding the Basics The Beta • Statistical measure indicating the volatility of a stock’s price relative to the price movement of the entire market. • Higher beta stocks have greater price volatility with greater riskiness however such stocks have potential of providing higher returns. Lower beta stocks have lower risks and also have lower returns. DEMO Beta Market Stock Explanation 1 0 No correlation between stock price and market 1 1 Perfect correlation between stock price and market 1 < 1 Stock price less volatile than the market 1 >1 Stock price more volatile than the market
  12. 12. Understanding the Basics Risk Adjusted Return (Sharpe Ratio) • Calculated by subtracting the risk- free rate - such as that of the 10- year GOI bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. • Enables comparable portfolio analysis by adjusting for risk. • Helps to determine whether portfolio returns are due to skilful stock picking or due to excessive risk taking. DEMO S = R - Rf σ S = Sharpe Ratio R = Stock return Rf = Risk free return σ = Standard deviation of the stock Sharpe Ratio Remark 1 - 2 Good 2 - 3 Very Good > 3 Excellent
  13. 13. PART 2 (To be continued…)
  14. 14. Financial Statement Analysis The Director’s Report DEMO
  15. 15. Financial Statement Analysis Management Discussion & Analysis The MDA includes an analysis of the results of operations and discusses management’s opinion about current and future performance. It compares the prior year’s operations with the current year’s and their impact on the company’s financials. It also contains an analysis of the firm’s financial condition. DEMO
  16. 16. Financial Statement Analysis Corporate Governance Report DEMO
  17. 17. Financial Statement Analysis The Auditor’s Report Before issuing annual statements, all publicly held corporations are required to have an independent audit of their financial statements. The CPAs who conduct the audit render an opinion as to the fairness of the statements. DEMO
  18. 18. Financial Statement Analysis Balance Sheet DEMO
  19. 19. Financial Statement Analysis Income Statements DEMO
  20. 20. Financial Statement Analysis Cash Flow Statement DEMO
  21. 21. Financial Statement Analysis Schedules & Notes to Accounts DEMO
  22. 22. Valuation Approach Economy Industry Country (EIC) Analysis DEMO
  23. 23. Valuation Methodologies Discounted Cash Flow (DCF) Models DEMO
  24. 24. Valuation Methodologies Free Cash Flow to Firm (FCFF) based DCF DEMO
  25. 25. Valuation Methodologies Dividend Discount Model DEMO
  26. 26. Valuation Methodologies Free Cash Flow to Equity (FCFE) based DCF DEMO
  27. 27. Valuation Methodologies Sum of the parts (SOTP) DEMO
  28. 28. Valuation Methodologies Price-to-Earnings (PE) ratio DEMO
  29. 29. Valuation Methodologies Price-to-Book Value (PBV) ratio DEMO
  30. 30. Valuation Methodologies Dividend Yield (DY) ratio DEMO
  31. 31. Valuation Methodologies EV / EBITDA DEMO
  32. 32. Valuation Methodologies Price to Sales (P/S) ratio DEMO

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