Company Analysis - Applied Valuation by Rajat Jhingan

COMPANY ANALYSIS: APPLIED COMPANY ANALYSIS: APPLIED VALUATIONVALUATION

SAPMSAPMSecurity Analysis & Portfolio ManagementSecurity Analysis & Portfolio Management

PGDM FTPGDM FT(2008 - 2010)(2008 - 2010)

By: Rajat JhinganBy: Rajat Jhingan

Forecast not only the Forecast not only the Expected ReturnExpected Return but also the but also the Expected Expected

Risk Risk of an investmentof an investment.

There are 3 modern techniques of Analysis:

Regression Analysis

Trend Analysis

Decision Tree Analysis

Approaches to Stock Valuation

P/E ratio models

Dividend Discount Model2


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My Agenda:My Agenda:

Regression & Correlation Analysis

Trend Analysis

Decision Trees

Problem Areas in Implementing Newer Techniques

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Regression Equations are built upon the relationships such as: Relationship between External Economic VariablesExternal Economic Variables &

Company Analysis Company Analysis (e.g. sales)

Relationship between Internal Company Variables Internal Company Variables & External Industry Variables.External Industry Variables.

Relationship Among Relationship Among : Industry (e.g. benchmark EPS), Economic(e.g. GNP) , Firm Variables (e.g. Cost of Funds) & Company Expenses.

Used for end – use analysis. Use of Statistical & Economic foundation. Able to link internal & external variables , revenue &

expenses & other complex interrelationships. 5


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Correlation acts as a specific measure of the explanatory power of a regression equation.

Correlation explains : How well the Independent Variable “explains”

the Dependent Variables in the Regression Equation.

Regression helps to establish functional relationship between two variables.

Regression Equation of Y on X Y = a + bX

X- X = rσy (Y – Y) σy

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r = r = cov (X,Y)cov (X,Y) σ σ x x σ σ yy

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TREND ANALYSISTREND ANALYSIS Trend Analysis of a Time Series utilizes regression

analysis. Differentiation between Trend Analysis & Regression

Analysis.

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Equation of a fitted straight line – use for forecasting Y = a + bx

Y = Dependent Variable a = Constant (Y – intercept) b = Constant (Slope of a line) X = Time Period (Independent Variable)

Example : Using Method of Least Squares for Trend Analysis.

Formulas: Y = a+bX a = ∑Y/N , b = ∑XY/ ∑X2 8


Calculated from regression analysis.

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Make an estimate of profit for the year 1997?

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Y = a+bX a = ∑Y/N , b = ∑XY/ ∑X2

a = 76

b = 4.68

Y = 76 + 4.68 X

Estimated Profit For

1997, (replace X by +4)

Y = 76 +(4.86 * 4)

= 95.44 Thousand

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TREND LINETREND LINE

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Decision Trees Technique aimed to formalize & simplify the procedure

involved in the solution of a problem. It overcomes the criticism of traditional approaches:

Based on subjective analysis & resulted in a point estimate. Did not carry, formal measurement of probability. Lacked objective measurement of quality.

It assesses the alternative actions & probabilities existing in an investment environment.

It multiples various independent outcomes & their probabilities w.r.t. the desired sequence of occurring. 11


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Problem areas in implementation of newer techniquesProblem areas in implementation of newer techniques

Regression AnalysisRegression Analysis To develop plausible economic relationships between variables.

(Analysts Job) Relationship develops after Examination of past data Economical rational to explain logical relationship Application & Testing of Variables

Isolating key explanatory variables - time consuming process Requires understanding of: (both Analyst & Investor)

Firm’s mode of operation Structure & Performance of Industry

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Problem areas in implementation of newer techniquesProblem areas in implementation of newer techniques

Decision TreesDecision Trees

Generating the necessary Input

Becomes a matter of simulation but not unrealistic

Insight to understand the working of firm & industry

Knowledge of historical salves volume, revenue, costs to determine the

probability of happening of event.

Continued watch on market, industry, firm & economy

Otherwise take help of Institutional Analysts:

E.g. - S&P, Crisil, Moodys, Vaule Line,Brokerage firm’s reports, Wall

Street Transcripts. 13


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Company Analysis - Applied Valuation by Rajat Jhingan

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