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Week 1: Equity Analysis I (Overview of Equity Analysis (types of analysts,…
Week 1: Equity Analysis I
Overview of Equity Analysis
Step 2: inferring market expectations
Step 3: developing the analyst's expectations
Step 1: selection of candidates for analysis
Step 4: documenting final products of security analysis
key objective: identification of mispriced shares
types of analysts
sell- side analysts
work for brokerage house
buy- side analysts
work for investment funds
Preparing the Financial Statements
steps in preparing the financial statements (p.12)
Financial Statement Analysis
Ratio analysis
growth and profitability
product market strategies
investment management: managing working capital and fixed assets
operating management: managing revenue and expenses
financial market policies
financing decisions: managing liabilities and equities
dividend policy: managing payout
Overall profitability
ROE = Net income to common/ Average common shareholder's equity
Net income to common = Net income - Preferred dividends
Decomposing ROE - Modified DuPont Approach
ROE = ROA x Financial Leverage Measures
ROE = ROA x Common Earnings Leverage x Capital Structure Leverage
After- tax profits generated by total assets
= Net income + (1- tax rate)*Interest expense + Minority Interest
Problems (p.28)
ROA = Profit margin x Asset turnover
Decomposing ROE - Alternative Approach (p29-31)
Assessing operating management: income statement ratios
gross profit margin = (sales - COGS)/ sales
Assessing investment management: decomposing asset turnover
Working capital management (current assets - current liabilities)
Long term asset management
Assessing financial activities
liquidity analysis: evaluates current liabilities, measures the ability of the firm to pay its current obligations
solvency analysis: relates to long term liabilities, specifically assessing the ability to pay debt
Sustainable growth rate
g = ROE x retention rate = ROE x (1- dividend payout ratio)
dividend payout ratio = cash dividend paid/ net income
measures the ability of the firm to maintain its profitability and financial policies