1. Valuation Part 2 Presented by: Elson ong Yale-NUS Investment Masterminds Identifying the Magic Numbers -Income Statement -Balance Sheet -Cash Flow Statement -Valuation

2. Revision Yale-NUS Investment Masterminds 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 Cash Flow Statement Balance Sheet

3. Revision Yale-NUS Investment Masterminds Gross Profit Cost of Goods Sold Current Assets Cash and Cash Equivalent Trade Payables Long Term Loans Reserves/Retained Earnings Profit and Loss Statement Balance Sheet

4. Income statement Yale-NUS Investment Masterminds 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

5. Income statement Yale-NUS Investment Masterminds 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

6. Income statement Yale-NUS Investment Masterminds 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

7. Income statement Yale-NUS Investment Masterminds 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

8. Balance sheet Yale-NUS Investment Masterminds 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

9. Balance sheet Yale-NUS Investment Masterminds 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)

10. Balance sheet Yale-NUS Investment Masterminds 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

11. Balance sheet Yale-NUS Investment Masterminds 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

12. Balance sheet Yale-NUS Investment Masterminds 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

13. Balance sheet Yale-NUS Investment Masterminds Gearing (Debt/Equity Ratio) Limitations to the Firms Capacity to Push Leverage Too High: 1)Higher Borrowing Cost 2)Cost of Equity Rises 3)Difficulty maintaining ROA

14. valuation Yale-NUS Investment Masterminds 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”

15. Valuation Yale-NUS Investment Masterminds 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

16. Valuation Yale-NUS Investment Masterminds Important things to take note: -No one indicators is perfect -Should look at all the magic number before making decisions

17. Valuation Yale-NUS Investment Masterminds Considerations for investors when evaluating potential company 1)Existing Debt Level 2)Purpose of taking more Debt 3)Refinance old debts 4)Can Company Afford New Debt 5)Provisions in New Debt to force immediate payback

18. Any Questions? Valuation Part 2 Presented by: Elson ong