Investment and portfolio management MGT 531 Lecture 19

Investment and portfolio management MGT 531

Lecture # 19

References � The course assumes little prior applied knowledge in the area of finance. � References � Kristina Levišauskait (2010) ‘Investment Analysis and Portfolio Management’,

SUMMARY OF LAST LECTURE � Industry’s analysis. Discussion of different questions with respect to performance of Industry � 1. demand � 2. pricing

Contents of todays lecture � Industry’s analysis. Discussion of different questions with respect to performance of Industry � Development � 3. � 4. of Industry’s analysis Costs The influence of the whole economics and financial market to the industry:

Stock analysis � • Is where in this industry a high competition in the international environment? � III. Costs: • How is the industry supplied with the implements of production? � � • Are the tendencies of the prices for raw materials used in this industry substantially influencing the profit? � • Are the labor costs the main component? � • Is the question of qualification for the human resources in this industry?

Stock analysis � IV. The influence of the whole economics and financial market to the industry: � • Is this industry defensive or growing? How it could function in period of economic recession? � • How is this industry influenced by interest rates? Are severe stocks dominated in this industry? � • Is this sector global?

Stock analysis � • How the fluctuations in currency exchange rate are influencing the sector? � Are these fluctuations of currency exchange rate influencing the amount of profit received from abroad or the competitiveness of the sector? � • Is it possibility that political and/ or regulation risk could influence the sector?

Stock analysis � � � • � � � Fundamental analysis The base for the company analysis is fundamental analyses are the publicly disclosed and audited financial statements of the company: • Balance Sheet Profit/ loss Statement • Cash Flow Statement • Statement of Profit Distribution Analysis could use the period not less than 3 years.

Stock analysis � Ratio analysis is useful when converting raw financial statement information into a form that makes easy to compare firms of different sizes. � The analysis includes the examination of the main financial ratios: � 1. Profitability ratios, which measure the earning power of the firm. 2. Liquidity 3. Debt ratios � � � 4. Asset � 5. Market value ratios

Stock analysis � 1. Profitability ratios, which measure the earning power of the firm. � 2. Liquidity ratios, which measure the ability of the firm to pay its immediate liabilities. � 3. Debt ratios, which measure the firm’s ability to pay the debt obligations over the time. � 4. Asset – utilization ratios, which measure the firm’s ability to use its assets efficiently. � 5. Market value ratios are an additional group of ratios which reflect the market value of the stock and the firm.

Financial ratios by category Ratio Equation Profitability ratios Gross profit margin Gross profit/ Sales Operating profit margin Operating profit / Sales Net profit margin Net income/ Sales Return on assets (ROA) Net income / Total assets Return on equity (ROE) Net income / Stockholders’ equity Liquidity ratios Current ratio Current assets / Current liabilities

Financial ratios by category Ratio Liquidity ratios Equation Quick ratio (Current assets – Inventory) / Current liabilities Net working capital Current assets - Current liabilities Debt ratios Debt to assets Total liabilities/ Total assets Debt to equity Total Debt / Equity Times interest earned Income before interest and taxes / Interest