Financial Statement Analysis Chapter 10 Investor´s perspective Bonsón, E, Cortijo, V., Flores, F.    Content on this file ...
Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><l...
Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><l...
Introduction <ul><li>Investors buy shares in a company to make a profit. This profit derives from the increase in the  val...
Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><l...
Company valuation <ul><li>The  nominal  value of the share is that price of the shares issued by the company in its day. T...
Company valuation <ul><li>From the point of view of the shareholders  who operate in the market , the main indicator for d...
Company valuation <ul><li>So, two important indicators arise with regard to the analysis from the investor’s position:  </...
Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><l...
Investor’s profitability <ul><li>The profitability of a particular share can refer to  earnings ,  dividends  or market  p...
Investor’s profitability <ul><li>Since not all the profit is distributed, the shareholder is also interested in knowing th...
 
Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><l...
Other relevant indicators for investors <ul><li>The Price to Earnings Ratio is calculated by comparing market price to ear...
Other relevant indicators for investors <ul><li>This ratio can also be calculated from the PER and the ROE. In Chapter 9, ...
Upcoming SlideShare
Loading in …5
×

FSA Chapter 10

772 views

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
772
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

FSA Chapter 10

  1. 1. Financial Statement Analysis Chapter 10 Investor´s perspective Bonsón, E, Cortijo, V., Flores, F.   Content on this file is licensed under a Creative Commons Attribution Non-Commercial No Derivatives Works 3.0
  2. 2. Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><li>Other relevant indicators for investors </li></ul>
  3. 3. Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><li>Other relevant indicators for investors </li></ul>
  4. 4. Introduction <ul><li>Investors buy shares in a company to make a profit. This profit derives from the increase in the value of the share on the stock market and from dividends the company pays out. </li></ul><ul><li>Now we examine the company from the investor’s viewpoint, calculating the return in absolute (profits, dividends, capital gains) and relative terms (comparing one value to another, to the number of shares and to the price at which they are quoted). </li></ul>
  5. 5. Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><li>Other relevant indicators for investors </li></ul>
  6. 6. Company valuation <ul><li>The nominal value of the share is that price of the shares issued by the company in its day. The issued capital is the result of this value set against the number of shares issued. </li></ul><ul><li>  </li></ul><ul><li>Issued Capital = nominal value * nº of shares </li></ul><ul><li>As a consequence of the generated and undistributed profits , in other words, the accumulation of reserves, net assets increase and the share value rises. This value, known as book value , is calculated thus: </li></ul><ul><li>  </li></ul><ul><li>Book value = Equity </li></ul><ul><li> nº of shares </li></ul>
  7. 7. Company valuation <ul><li>From the point of view of the shareholders who operate in the market , the main indicator for determining company worth is market price, which evolves according to demand and supply in each stock market session. This quoted price approximates the updating of profits and dividends, as previously mentioned, but is more complex in its composition as it takes into account the known continuous events and activities of the companies quoted and the evolution of the market. </li></ul><ul><li>The company’s worth would be its market value or capitalisation as an aggregate of the shares in circulation by market price or quoted value: </li></ul><ul><li>Market value of the company = </li></ul><ul><li> market value per share * nº of shares </li></ul>
  8. 8. Company valuation <ul><li>So, two important indicators arise with regard to the analysis from the investor’s position: </li></ul><ul><li>  </li></ul><ul><li>Earnings per share = Profit for the year </li></ul><ul><li> Nº. of shares </li></ul><ul><li>Dividends per share = Dividends paid </li></ul><ul><li> Nº. of shares </li></ul>
  9. 9. Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><li>Other relevant indicators for investors </li></ul>
  10. 10. Investor’s profitability <ul><li>The profitability of a particular share can refer to earnings , dividends or market price gains. </li></ul><ul><li>  </li></ul><ul><li>The earnings per share and dividend per share have been calculated previously. If we compare these two indicators to the closing price we would arrive at investor’s profitability: </li></ul><ul><li>  </li></ul><ul><li>earning yield = earnings per share </li></ul><ul><li> price at the beginning of the year </li></ul><ul><li>dividend yield = dividends per share </li></ul><ul><li> price at the beginning of the year </li></ul>
  11. 11. Investor’s profitability <ul><li>Since not all the profit is distributed, the shareholder is also interested in knowing the payout ratio , or the proportion of profits that the company disburses. This indicator reveals the company’s s elf-finance policy via the reserves generated by the undistributed profit. </li></ul><ul><li>  </li></ul><ul><li>Payout ratio = Dividend per share </li></ul><ul><li>Earnings per share </li></ul><ul><li>Thus, investor’s profitability, according to the market, could be defined as: </li></ul><ul><li>  </li></ul><ul><li>market yield = price change of a share </li></ul><ul><li> price at the beginning of the year </li></ul><ul><li>  </li></ul><ul><li>Evidently, a capital loss would occur with a fall in share price and so profitability would be negative. </li></ul>
  12. 13. Index <ul><li>Introduction </li></ul><ul><li>Company valuation </li></ul><ul><li>Investor’s profitability </li></ul><ul><li>Other relevant indicators for investors </li></ul>
  13. 14. Other relevant indicators for investors <ul><li>The Price to Earnings Ratio is calculated by comparing market price to earnings per share thus obtaining an approximation of the number of times the share price matches the profit, in other words, how many years are needed to hold on to the share before the profit covers the purchase price of the share. </li></ul><ul><li>  </li></ul><ul><li>PER = price </li></ul><ul><li>earning per share </li></ul><ul><li>  </li></ul><ul><li>The Market to Book ratio relates the market value of the company to the value in accounts . </li></ul><ul><li>Market to Book ratio = Market value of the company </li></ul><ul><li>Equity </li></ul>
  14. 15. Other relevant indicators for investors <ul><li>This ratio can also be calculated from the PER and the ROE. In Chapter 9, we calculated financial profitability </li></ul><ul><li>  Market to Book ratio = Market value of the company = </li></ul><ul><li> Equity </li></ul><ul><li>= Market value of the company * Profit for the year = </li></ul><ul><li>Profit for the year Equity </li></ul><ul><li>= Market value of the company * EBT (1-t) = </li></ul><ul><li>Profit for the year Equity </li></ul><ul><li>  </li></ul><ul><li>which, by multiplying and dividing it by the nº of shares, becomes: </li></ul><ul><li>  </li></ul><ul><li>Market to Book ratio = = Market value of the company / nº of shares * EBT (1-t) = </li></ul><ul><li>Profit for the year / nº of shares Equity </li></ul><ul><li>= Price * EBT (1-t) = PER * ROE * (1-t) </li></ul><ul><li> Earnings per share Equity </li></ul>

×