Company Analysis Welcome to the session Thought for the session - - PDF document
2012/09/04 Company Analysis Welcome to the session Thought for the session Through faith and perseverance, even the snails reached Noahs ark Company and Share Analyses Assume you want to enter the capital market to buy shares, where do
– Exercise 1
Analysing a listed company requires information gathering from many sources:
Published results (investor relations) SENS reports Media reports Company research Quantitative Review – review of numeric data Qualitative Review – Review of the company’s business model
E.g. How does the company achieve a competitive advantage and is it sustainable? For example; is undercutting competitors a sustainable strategy?
Sample Balance Sheet Current Assets Current Liabilities Cash Deferred T axes Accounts Receivable Accounts Payable Inventory Income taxes payable Investments (stocks) Long term Liabilities Other assets which may be Outstanding Bonds in issue converted to cash quickly Stockholders Equity Fixed Assets Ordinary share capital Property, Plant and Equipment Retained Earnings
Assets - Liabilities = Owners Equity
Sample Income Statement Turnover xxx
xxx = Gross Profit XXX
xxx = Operating Profit XXX
xxx = EBIT XXX
Exp xxx
ax xxx Net Income XXX EPS xxx
Includes direct costs which go into products a company sells. Example; COGS for an automaker would include Material costs (stock cost) Labour costs of people on assembly line Excluded would be: Cost of labour to sell the car, admin labour Cost of getting the car to dealerships Stock sold = Beginning Inventory + Purchases – Ending Inventory Above gives the total cost of inventory a company sold for a period
have cash or you don’t!
+ Net Income + Depreciation + Decreases Current Assets + Increases in Current Liabilities
(example: Receivables)
+ Increases in notes payable
+ New equity raised
+ Ending Fixed Assets
+ Depreciation Result = net change in cash figure on the balance sheet
Potential legislation changes requiring employee stock
Microsoft earnings decreasing from $11.1 billion to $7.3 billion!
Bank (B/S and cash-flow) would increase by R120 Stock (B/S) would decrease by R 100 Profit (I/S) would increase by R20
NB! Interpretation of the results of ratios are most important. Consider the following:
Not useful in isolation, only when compared to previous
years data, against a sector average and/or competitors.
Ratio’s do not always answer questions, but sometimes
highlight those which need to be asked.
For example, current retail or automotive sector is in
severe decline; companies may show;
Decreased revenue Reduced profitability Lower dividend payout Reduced liquidity Poor market conditions don’t necessarily mean poor
management skill or ability.
Gross profit margin serves as the source for paying additional expenses and future savings. (P3) For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%. This means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of the day.
Performance Ratio’s Return on Assets (ROA) = Why add interest expense to net income? (P5) To ignore the cost of funding the assets. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. Also important ratio for companies deciding whether or not to initiate a new project. Simply put, if the ROA is above the rate the rate the company can borrow at – it should accept the project.
Net Income + Interest Expenses Total Assets
Performance Ratio’s P/E = The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of
multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number. Derive EPS?
Market Price EPS
High ratio good or bad? Indicates a company has negotiated good terms with suppliers. Be aware of the cash conversion cycle – inventory days + collection ratio = time to cash in bank. This should be lower than the collection ratio. Accounts Payable COGS/365
www.finforum.co.za/absa/publications/structural /financial%20ratios.pdf