Investment and portfolio management MGT 531. Lecture # 19.

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Presentation transcript:

Investment and portfolio management MGT 531

Lecture # 19

 The course assumes little prior applied knowledge in the area of finance.  References  Kristina Levišauskait (2010) ‘Investment Analysis and Portfolio Management’,

 Industry’s analysis. Discussion of different questions with respect to performance of Industry  1. demand  2. pricing

 Industry’s analysis. Discussion of different questions with respect to performance of Industry  Development of Industry’s analysis  3. Costs  4. The influence of the whole economics and financial market to the industry:

 Is where in this industry a high competition in the international environment?  III. Costs:  How is the industry supplied with the implements of production?  Are the tendencies of the prices for raw materials used in this industry substantially influencing the profit?  Are the labor costs the main component?  Is the question of qualification for the human resources in this industry?

 IV. The influence of the whole economics and financial market to the industry:  Is this industry defensive or growing? How it could function in period of economic recession?  How is this industry influenced by interest rates?  Are severe stocks dominated in this industry?  Is this sector global?

 How the fluctuations in currency exchange rate are influencing the sector?  Are these fluctuations of currency exchange rate influencing the amount of profit received from abroad or the competitiveness of the sector?  Is it possibility that political and/ or regulation risk could influence the sector?

 Fundamental analysis  The base for the company analysis is fundamental analyses are the publicly disclosed and audited financial statements of the company:  Balance Sheet Profit/ loss Statement  Cash Flow Statement  Statement of Profit Distribution  Analysis could use the period not less than 3 years.

 Ratio analysis is useful when converting raw financial statement information into a form that makes easy to compare firms of different sizes.  The analysis includes the examination of the main financial ratios:  1. Profitability ratios, which measure the earning power of the firm.  2. Liquidity  3. Debt ratios  4. Asset  5. Market value ratios

 1. Profitability ratios, which measure the earning power of the firm.  2. Liquidity ratios, which measure the ability of the firm to pay its immediate liabilities.  3. Debt ratios, which measure the firm’s ability to pay the debt obligations over the time.  4. Asset – utilization ratios, which measure the firm’s ability to use its assets efficiently.  5. Market value ratios are an additional group of ratios which reflect the market value of the stock and the firm.

Ratio Equation Profitability ratios Gross profit marginGross profit/ Sales Operating profit marginOperating profit / Sales Net profit marginNet income/ Sales Return on assets (ROA)Net income / Total assets Return on equity (ROE)Net income / Stockholders’ equity Liquidity ratios Current ratioCurrent assets / Current liabilities

RatioEquation Liquidity ratios Quick ratio(Current assets – Inventory) / Current liabilities Net working capitalCurrent assets - Current liabilities Debt ratios Debt to assetsTotal liabilities/ Total assets Debt to equityTotal Debt / Equity Times interest earnedIncome before interest and taxes / Interest