Fundamental Analysis Workshop Series Session Seven – Bottom Up Analysis

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Agenda Introduction to Bottom Up Analysis Profits Net Tangible Assets Per Share Earnings per Share PE Ratio Return on Equity Leverage Ratios Case Study Metrics Q & A Introduction

INTRODUCTION Metrics Q & A Introduction

PROFILE NUS Invest Research Analyst Year 2 BBA Pure Fundamental Analysis Metrics Q & A Introduction

Introduction to Bottom Up Basically Ratio Analysis Metrics Q & A Introduction LiquiditySolvency ProfitabilityEfficiency

Introduction to Bottom Up 4 types of ratios To an investor, arguably the more important ratios are Profitability, Efficiency and Solvency Metrics Q & A Introduction

Profits Net Income EBIT EBITDA Metrics Q & A Introduction

Where to find? Basic Decrypting Applying the Information Q & A Introduction Net Income Accounting Revenue – Accounting Cost Intuitive and easy to understand However, NI takes into account non cash items Not usually examined on its own but is subsequently used to generate other indicators.

EBIT Earnings Before Interest and Taxes Adds Interest and Tax Expense to NI Gives a clearer picture of company’s ability to generate profits By taking away distortions from financing cost and tax structure Metrics Q & A Introduction

EBITDA Earnings Before Interest Tax Depreciation Amortization A PROXY of Operating cash Flow Important in determining firm’s ability to generate cash Metrics Q & A Introduction

Market to Book Ratio Tells us the market value of a share compared to historical book value If value is less than 1, means the value of the underlying asset is actually more than the price you can buy it at Metrics Q & A Introduction

Earnings per Share The only financial indicator companies are mandated to provide in their annual report One of the most important indicators of profitability Shows the ability of each share in generating accounting profits Trend is important in analyzing EPS Metrics Q & A Introduction

Price Earning Ratio Price of Share divided by EPS Values the share based on earnings The lower the PE compared to similar companies the better the value However, more research the reason behind low valuations Metrics Q & A Introduction

Debt to Equity Most common leverage ratio Shows us the capital structure of the firm Can indicate financing expenditure, solvency of the firm More than 2 is generally high but depends on industry If firm goes bankrupt, what happens? Metrics Q & A Introduction

Other Leverage Ratios Current Ratio Current Assets / Current Liabilities Not as important compared to debt to equity since current ratio only measures short term liquidity status Metrics Q & A Introduction

Profit margin Net Profits/Net Sales Shows efficiency of revenue in generating profits Important in evaluating efficiency within the industry Metrics Q & A Introduction

Return on Equity Net Income / Total Equity Shows how much of income is attributable to equity holders Also shows how efficient company is generating profits with given capital Metrics Q & A Introduction

Return on Equity King of all ratios Du Pont identity Combines Profit Margin, Equity Multiplier, Total Asset Turnover Metrics Q & A Introduction

Other Profitability Ratios Return on Assets Shows how efficient assets are in generating profits We are more concerned with ROE Metrics Q & A Introduction

Case Study: GE Metrics Q & A Introduction Passing Criteria3-Year Change Grade Revenue growth > 30%(4.6%)Fail Improving profit margin35.7%Pass Improving EPS27.7%Pass

Metrics Q & A Introduction Passing Criteria 3-Year* Change Grade Improving return on equity22%Pass Declining debt to equity(13.4%)Pass Dividend growth > 25%90%Pass

Other Related News Metrics Q & A Introduction Pole position in renewable energy market Buying up French Wind Farms to bolster market shares New traditional energy deals being signed too Good business prospects for the company

Case Study Conclusion Never look at only one indicator Look at trends instead of snapshots in time Best to complement bottom up analysis with other related company news such as corporate governance Metrics Q & A Introduction

Avenues of Information Bloomberg Terminal Bloomberg Website Yahoo Finance Equity Research Reports Metrics Q & A Introduction

Q & A Metrics Q & A Introduction

THANK YOU! Metrics Q & A Introduction