2. Steps of Company Analysis
Measuring Earnings
Forecasting Earnings
Applied Valuations
3. Measuring Earnings
Measurement of earnings is based on two types of
information:
1) Internal Information consists of data and events
made public by firms concerning their operations.
2) External sources of information are those generated
independently outside the company. They provide
supplement to internal sources .
4. Backbone of Internal information
Income Statement
Balance sheet
Statement of Cash flows
6. Depreciation Accounting
It recognizes that an asset will be exhausted at some
reasonable point of time. So we need to deduct their
cost .
In the same firm all assets are not depreciated on the
same basis ,and shifts in the rate of charge –off takes
place over time.
Commonly used methods for writing of depreciation :
1. Straight Line method
2. Written down value
7. Notes to the Financial Statements
Footnotes to the balance sheet often show many of the
following items of importance to the analyst:-
1) Contingent liabilities for taxes ,dividends, and pending
lawsuits.
2) Particulars on options outstanding ,leases , loans and
other financing arrangements.
3) Changes in accounting principles and
techniques,including bases of valuation, and the
currency effect on income.
4) Facts of importance occurring between the balance-sheet
data and date of submissions of statements that might
have a material effect on the statements.
8. The Cash Flow Statement
The statement of cash flow discloses clearly and
individually the significant operating , financing and
investing activities of the company during an
accounting period, giving the analyst an overall view of
the financial management of company and its policies
.
10. Asset productivity and earnings
Firm invests capital in assets.
And these assets are used by management to generate
revenue or income.
Firms strive in such a way so as to provide shareholders
best possible return per rupee invested.
11. EBIT= Earning before interest and taxes.
EBT= Earning before taxes
EAT= Earnings after tax
EPS= Earnings per share
DPS= Dividend per share
Return on assets
=ebit/assets
• Greater return on assets higher the market value of firm….
12. Debt financing and earning
Productivity of fund is called return on assets.
Cost of borrowed capital fund is called effective rate of
interest.
Effective interest rate=interest expense/total liabilities.
Benefits of borrowed money=R-I
R= Return on assets
I= effective interest rate
13. • Forecast not only the Expected Return but also the
Expected Risk of 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 Model
Applied Valuations
15. • Trend Analysis of a Time Series utilizes regression analysis.
• Differentiation between Trend Analysis & Regression Analysis
TREND ANALYSIS
• Examine behavior of economic series over a period of time i.e.
one real´ variable which is being regressed over a period of
years
