Investment Analysis Group Analyst Workshop I. Hosted by: Chris Lau Sushil Bathija

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1 Investment Analysis Group Analyst Workshop I Hosted by: Chris Lau Sushil Bathija

2 Overview 1 Introduction to stocks and the market 2 Big picture: Analyzing a company 3 Financial Statements and Ratios 4 Foundations of a Valuation

3 Introduction What are (financial) securities? Debt: bonds, loans Equity: stocks, shares Derivatives: options, swaps, futures Debt versus equity What are stocks/shares? Investments/Ownership What is the role of the stock market?

4 Banking Net saver of funds i.e. mom dad & us Net user of funds i.e. companies & us Savings and Checking Accounts, Certificates of Deposits (CDs), Money Market Accounts, (Mutual Funds, Pension Funds) Commercial Bank Personal Loans, Student Loans, Mortgages, Lines of Credit, Credit Card Loans, Collateralized Loans i.e. Individual & Institutional Investors Stocks, Bonds, Securitized Loans, Treasuries Investment Bank i.e. Companies, REITs, Governments Equity, Debt They act as the PRIMARY market for capital raising The stock market is a SECONDARY market

5 Risk & Return Why are there so many different types of securities? Concept of a risk averse investor More risk, more return REQUIRED The concept of beta (correlation & volatility) Importance of time horizon When is the money needed?

6 Required Return Risk Free Return + Premium for Risk Required Return

7 The Market: Easy Way Out Definition of market Mirror the economy Concept of an efficient market Information

8 Analyzing Investments What is there to know? The big picture Company profile, history, management Research, research, and more research Where to begin? What is financial analysis?

9 Ingredients of Analysis Company overview History, management Products Industry analysis Competitor analysis Ratio analysis Valuation

10 Company Analysis Qualitative factors Quantitative factors Analysis Predictions/Projections Evaluation

11 Fundamental Analysis Research Qualitative Factors & Quantitative Factors Analysis Valuation Top-down vs. Bottom-up? Recommendation

12 Qualitative Factors News reports Press releases S&P reports Other sources Determine quality of the business operation, future prospects, past performance Based on common sense and intuition therefore highly subjective but very important

13 Quantitative Factors GDP Overall economic indicators Census bureau Department of commerce Financial statements

14 Financial Statements Why are they important? How are they used? Who uses them? How do we get them? What are they like?

15 Importance Of F/S In order to make informed prudent decisions, we need: Information Transparency Accountability

16 Usage Of F/S Analytical tool Management report card Early warning signal Basis of prediction Measure of accountability

17 Users Of F/S Shareholders and investors Managers and employees Lenders and suppliers Customers Government and regulatory agencies

18 Obtaining F/S All listed (public) companies are required to submit: Audited annual reports (10-K) Unaudited quarterly reports (10-Q) Importance of the Securities and Exchange Commission (SEC)

19 Sources Obtaining F/S EDGAR (Electronic Data Gather & Retrieval) Other web sites cbs.marketwatch.com Bloomberg

20 Structure Of F/S Balance sheet Income statement Cash flow statement

21 Analysis Tool: Ratios Quantitative Good for comparisons (relative analysis) Can combine components from different statements Reflect quality of management team Warning: Garbage In, Garbage Out (GIGO)

22 Ratio Analysis Can be separated into 5 types: Liquidity (current, quick) Asset management (inventory, asset TO) Debt (debt or gearing, debt-equity) Profitability (ROA, ROE, margins) Market (P/E, P/B, BVPS)

23 Current Ratio Example Cash + A/R + Inventories A/P + Accruals + N/P + ST Debt or simply... Current Assets Current Liabilities

24 First Look At Valuation Importance of cash flows Idea of discounting Relative valuation

25 Cash Flows Why is it so important? Cash flows to investors = dividends Value of any investment is the sum of the present values of all expected cash flows Time value of money

26 Time Value Of Money Giving up a dollar today means giving up the opportunity to earn interest on the dollar FV = PV(1+i) n FV = future value PV = present value i = interest n = number of periods

27 Constant Growth DDM Dividend Discount Model PV = FV/(1+i) n V 0 = D 1 /(1+k) n V 0 = Value today D 1 = dividend next year

28 Required Returns Revisited Required return (k) = risk free return + premium for risk k = return on risk free investment + (market premium) * beta k = k rf + (k m - k rf )*b

29 Next Workshop More depth, more coverage, more detail More on dividend discount model Free cash flow (to equity) model Relative valuation (or comparables)

30 Next Steps Best way to improve: JUST DO IT!

Georgia Banking School Financial Statement Analysis. Dr. Christopher R Pope Terry College of Business University of Georgia

Georgia Banking School Financial Statement Analysis Dr. Christopher R Pope Terry College of Business University of Georgia Introduction Objective My objective is to introduce you to the analysis of financial