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COMPANY ANALYSIS
Economic analysis & Industry analysis act as a fore runner to company analysis-Company analysis assumes more importance since investment is done in the company and not in the economy or industry.
Company analysis is a study of all variables that influence the future of a firm quantitatively and qualitatively.
The analyst tries to predict the future profitability and earnings of the firm and arrive at the intrinsic value.
Analyst must do x-ray of the financial statements and look for meaningful relationship between numbers; analyze historical trends to see if they are increasing or decreasing. Look at industry standards and see how the compares to competitors.
ACTIVITY RATIOS
1.Accounts receivable turnover ratio = ANNUAL SALES ACCOUNTS RECEIVABLE In respect of credit sales, how quickly is company is collecting the receivables. [higher ratio better; lower ratio worse] 2.Inventory turnover ratio = ANNUAL SALES INVENTORY Indicates how quickly the company is selling its inventory. [higher ratio better; lower ratio worse] 3.Total assets turnover ratio = ANNUAL SALES TOTAL ASSETS How efficiently company is using its assets to support sales. [higher ratio better; lower ratio worse]
LEVERAGE RATIOS
1.Debt-equity ratio = LONG TERM DEBT
SHARE HOLDERS EQUITY Indicates how much debt company is using to support its business compared to how much equity it is using to support its business. [higher ratio more risk; lower ratio less risk] 2.Time interest earned = EBIT ANNUAL INTEREST It measures the ability of the firm to meet its fixed obligations by way of interest. [higher ratio less risk; lower ratio more risk]
PROFITABILITY RATIOS
1.Net profit margin = NET PROFIT AFTER TAXES
TOTAL REVENUES Indicates the amount of profit earned from sales another operations. [higher ratio better; lower ratio worse]
1.Price-Equity ratio
Price-Equity ratio(P/E)
= MARKET PRICE OF THE SHARE EPS EPS = Net profit after taxes Preference dividend Number of equity shares outstanding
Helps to know how the stock market is pricing the stocks. [higher ratio more expensive is the stock; lower ratio less expensive]
Other income Income from non-operating sources credited to P & L account. In most cases they are not capable of being repeated in future, hence they have to be totally deleted in analyzing present as well as future earnings.
Arrive at the future P/E ratio: P/E ratio is affected by sales growth, earnings growth, dividend payout, leverage deployed, institutional share holding.
MANAGEMENT ANALYSIS
Project conceiving skills. Visionary environment analysis. Project implementation skills. Maintain competitiveness. Identify growth opportunities. Innovate R & D. Cost reduction & cost control measures. Dividend policies. Dynamic capital structure. Corporate governance.
INTRINSIC VALUE
True economic worth of a financial asset. In case, there is less than complete information, the actual price of the stock is away from the intrinsic price.