2006

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Fundamental Analysis
- Quantitative Analysis
- Qualitative Analysis

- Discounted Cash Flow Projections
- Multiples
P/E Multiples
Price / Book Multiples
Price / Cashflow Multiples
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 Fundamental Analysis

 FUNDAMENTAL ANALYSIS
QUANTITATIVE ANALYSIS
: UNDERSTANDING FINANCIAL STATEMENTS
.1 Principal Financial Statements
. Income Statements
. Balance Sheet
Assets

Liabilities
. Cash Flows
From Operations From Investment From Financing : INTRODUCTION TO RATIO ANALYSIS
.1 Introduction
.2 ?What are the right Questions
.3 Comparisons
.4 Industry Patterns
: USE OF FINANCIAL RATIOS
-1 Liquidity Ratios
-2 Leverage Ratios
-3 Activity Ratios
-4 Profitability Ratios
-5

QUALITATIVE ANALYSIS

10

Fundamental

Analysis

:
:

:
: .

ASSESSING

STRATEGIC

DIRECTION

STOCK
MARKET

ASSESSMENT

FINANCIAL

STATEMENT
ANALYSIS

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QUANTITATIVE ANALYSIS

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-1

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QUANTITATIVE ANALYSIS

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Income Statement

Revenues
Cost of Goods Sold
Gross Profit

Depreciation
Selling Expenses
Administrative Expenses

=
-

Earning before interest & taxes (EBIT)

Interest Expenses

=
-

Earning before taxes

Taxes

Net Income

before extraordinary items

+
+
+

Gains (Losses) from discontinued operations

Extraordinary Gains (Losses)

Net Income Changes caused by changes in accounting methods

Net Income after extraordinary items

15

Income Statement

1
2

--
8

4
5
6

16

Balance Sheet

= + Assets = Liabilities + Shareholders Equity

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1

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2

3


4

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18

6
7

8
9

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3

2
19

0
0

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Statement of Cashflows

Cash Provided From Operations

Net Earnings
Reconciling Net Earnings to Net Operating Cash
Plus : Depreciation and Amortization
Deferred Income Tax Expense
Less : Increase in Receivables
Increase in Inventory
Plus : Increase in Accounts Payable and Accrued Expenses
Increase in Income Taxes Payable

:

:

Net Cash Provided by Operations

Cash Flows From Investing

Deduct : Increase in Expenditure

Add :
Proceeds from Sales of Property & Equipment
Sale of short term investments
Deduct : Purchase of Long term investments
Add :
Proceeds from sale of long term investments

:
:

Net Cash Used in Investing Activities

Cash Flows From Financing

Add : Proceeds from Long Term Borrowing

Deduct: Principal Repayments of Long Term Debt
Add : Proceeds from Sale of Common Stock

:
:

Net Cash Provided by Financing Activities

Increase (Decrease) in Cash and Equivalents
Cash and Equivalents at the beginning of year
Cash and Equivalents at end of the year

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Trend Analysis
19X2

19X1

19X0

+10%

+20%

-10%

ROI

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?What are the Right Questions

:
Liquidity Leverage Activity Profitability

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:
.1
.2
.3
.4

25

Liquidity Ratios

Leverage Ratios

Activity Ratios

Profitability Ratios

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: Liquidity Ratios

-:

-1 ) Current Ratio / (
-2 ) Quick Ratio / (.
-3 ) Quick Acid Ratio/ ( .

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3
2
1

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: Leverage Ratio

-1
-2
-3
-4
-5
-6
-7

: /
) / (
: /
: /
) : / (
) : / + (
) : / (

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4
1

2
3

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: Activity Ratios

.
:

-1
-2
-3
-4
-5

Inventory Turn Over :

) : / (
) : / (
) : / (
) : / (

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3
1

-
-

4



2

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- Profitability Ratios

-1
-2
-3
-4
-5

) : ( /
) : /(
) : / (
) : / (
: /

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1
2

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3


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 Fundamental Analysis
.2

QUALITATIVE ANALYSIS

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.market position

38

 Fundamental Analysis
.2

QUALITATIVE ANALYSIS

39

 Fundamental Analysis

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40

B ro a d co ntext

Past
L
E
V
E
L
S

O
F

A
N
A
L
Y
S
I
S

Ide ntify a nd as se ss ke y
ch ange facto rs:
P po litical
E e co no m ic
S so cial
T te ch no lo gical

Fut ure

Ind ustry /sec to r

Past

Ide ntify Ke y Industry

D riv e rs
E v aluate co m pe titiv e
Fo rce s and re lativ e
po sitio n and strate gy
o f co m pe tito rs

Fut ure

C o m pa ny

Past

Asse ss
quality
of
m anage m e nt
Ide ntify and e v aluate
pro duct
brands,
re lativ e
po sitio n in
pro duct
m arke ts,
m arke t
sco pe
o pe ratio ns, e tc.

Fut ure

TIM E

41

SUMMARY
It is important to remember that in the final analysis all information on a
company has to be collated and on ov erall assessment reached.
A ssessing Strateg ic
Direc tio n
Co m pany
1. Identify & Assess
Corporate
and
Business
unit
strategies,
management
resource,
product
market position, etc.
Industry / 4.
Ev aluate
Sec to r
competitiv e
forces
and
relativ e
strengths
and
strategies
of
competitors.
Rev iew key industry
driv ers and likely
future patterns of
industry
dev elopment
Bro ad
7. Assess key PEST
Co ntext
change agents, i.e.
P:
Political
E:
Economic
S:
Social
T:
Technological
factors

Financ ial Statem ent

A nalysis
2.
Assessment
of
current and future
outcomes
to
companies
strategies-salesprofitability,
cash
flow , etc.
5. Make comparisons
w ith
other
companies operating
in
the
same
or
similar
product
market.

Sto c k Market
A ssessm ent
3.
Understand
market
assessment
and
rating
of
the
company

8.
Ev aluate
opportunities
for
funding raising (debt
& equity), likely tax
&
interest
rate
changes, etc.

9.
Identify
mov ements
in
ov erall
stock
market,
likely
future
pattern
of share prices

42

6.
Compare
companies rating
to
other
companies in the
same
sector.
Rev iew
performance of
sector
against
ov erall market