Valuation Part 2 Presented by: Elson ong Yale-NUS Investment Masterminds Identifying the Magic...

Valuation Part 2Presented by: Elson ong

Yale-NUS Investment Masterminds

Identifying the Magic Numbers- Income Statement

- Balance Sheet- Cash Flow Statement

- Valuation

Revision


Revenue

Stocks/Inventory

Current Liabilities

Trade Receivables/Debtors

Short Term Borrowings

Shareholders’ Equity

Net cash flows from operating activities

Fixed Assets

Profit and Loss Statement

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Cash Flow Statement

Balance Sheet

Revision


Gross Profit

Cost of Goods Sold

Current Assets

Cash and Cash Equivalent

Trade Payables

Long Term Loans

Reserves/Retained Earnings



Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Income statement


Earnings Per Share (EPS)

EPS = Net Profit After Tax – Dividends on Preferred Stock/ Total Number of Common Shares Issued

- Portion of a company’s profit allocated to each outstanding share of common stock

- Serves as an indicator of a company’s profitability

- Important to be aware of earnings manipulation

- Compare with past years EPS- Compare with other companies of the same

industry

Income statement


Return on Equity (ROE)

ROE = Net Profit after tax / Shareholders’ Equity

- Measures profitability of the business attributable to shareholders

- Measure of profitability for shareholders and reflects a combination of the company’s efficiency in generating profits from a) normal operations b) financing decisions c) tax policies

Income statement


Return on Assets (ROA)

ROA = Profit before interest and tax/ Total Assets

- Measures operating profitability of the business that is independent of:a) How the company’s assets were financed

(through debt or capital financing)b) Tax policies

- Compared with ROA of similar companies in the same industry

Income statement


Net Profit Margin/Gross Profit Margin

Net Profit Margin = (Net Profit/Revenue)*100%

Gross Profit Margin = [(Revenue - COGS)/Revenue]*100%

- Calculates the profit margins for company’s products or services

- Compare against industry peers- High gross profit margin indicate strong demand- Consistently High Net Profit Margins indicate

possible competitive advantage/monopoly

Balance sheet


Current Ratio/Cash Ratio

Current Ratio = Current Assets/Current Liabilities

Cash Ratio = Cash & Cash Equivalent/Current Liabilities

- Calculates how liquid the company is and measures a company’s ability to meet its short term obligation

- High current ratio (Eg: 2) indicate that a company is very liquid and has 2 times of current assets against current liabilities

- High cash ratio means that the company has enough cash to pay off all their current liabilities

Balance sheet


Inventory Turnover

Inventory Turnover (days) = (Inventory*365 Days)/COGS

Inventory Turnover= COGS/Inventory OR Sales/Inventory

- Not applicable to all companies- The lower the inventory turnover the better because

it means that the company takes lower/less time to sell their goods and get a replenishment (liquidity)

Balance sheet


Debtor and Creditor Days

Debtor (Trade Receivables) Days = (Trade Debtors*365 Days)/Revenue

Creditor (Trade Payables) Days = (Trade Creditors*365 Days)/COGS

- Compare the Debtor Days to the Creditor Days- If Creditor Days > Debtor Days, it means that the

suppliers are funding the company rather than their customers

Balance sheet


Debt to Income Ratio (DTI)

DTI = Net Borrowings/Net Profits

DTI = Net Borrowings/Operating Cash Flow

- Might use Operating Cash Flow to see if the company’s cash flow is able to cover the company’s borrowings

- High DTI means that there is more burden for the company to make payments to their debts

Balance sheet


Gearing (Debt/Equity Ratio)

Gearing = [(Total Borrowings – Cash)*100]/Shareholder’s Equity

OR

Gearing = (Total Liabilities*100)/Shareholder’s Equity

- Ratio of other people’s money to your own money- Ratio of liabilities to shareholder’s money- If investing in highly geared companies, make sure

that the cash flow is steady and consistent, such as power stations or telcos

Balance sheet


Gearing (Debt/Equity Ratio)

Limitations to the Firms Capacity to Push Leverage Too High:

1) Higher Borrowing Cost2) Cost of Equity Rises3) Difficulty maintaining ROA

valuation


Market Capitalisation

Market Capitalisation = Share Price*Number of Shares Outstanding

- This means a low share price doesn’t mean that a company is “small” or “cheap” or a high share price doesn’t mean that a company is “big” or “expensive”

Valuation


Dividend Yield/Dividends Per Share (DPS)

DPS = Dividend per share/Price per share

- How much a company pays out in dividends each year relative to its share price

- Measure of return for investors in terms of dividends

Valuation


Important things to take note:

- No one indicators is perfect- Should look at all the magic number before

making decisions

Valuation


Considerations for investors when evaluating potential company

1) Existing Debt Level2)Purpose of taking more Debt3)Refinance old debts4)Can Company Afford New Debt5)Provisions in New Debt to force

immediate payback

Any Questions?

Valuation Part 2Presented by: Elson ong

Valuation Part 2 Presented by: Elson ong Yale-NUS Investment Masterminds Identifying the Magic...

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