security analysis jason botzler and graham holding

Security AnalysisSecurity Analysis

Jason Botzler Jason Botzler

AndAnd

Graham HoldingGraham Holding

Quick Notes:Quick Notes:

The Premise of the Top Down The Premise of the Top Down Investment approach claims that we Investment approach claims that we have already allocated our assets in have already allocated our assets in high growth areas. high growth areas.

In our Security analysis we are In our Security analysis we are primarily concerned with finding:primarily concerned with finding: Financially secure companies within these Financially secure companies within these

industriesindustries Under Valued Securities within these Under Valued Securities within these

industries.industries.

Todays ObjectivesTodays Objectives

How to attain proper How to attain proper InformationInformation to to perform security analysis.perform security analysis.

Learn to use the Learn to use the ToolsTools available to available to us.us.

AnalyzeAnalyze the Outputs of Financial the Outputs of Financial Ratio Analysis.Ratio Analysis.

Information RetrievalInformation Retrieval

Performing Security Analysis requires both Performing Security Analysis requires both cross sectional data, as well as, time series.cross sectional data, as well as, time series.

The raw data for all of our Security Analysis The raw data for all of our Security Analysis will come from the companies Financial will come from the companies Financial Statements. Statements. This data is available on Wrds, Bloomberg, and This data is available on Wrds, Bloomberg, and

Reuters.Reuters. Suggestions: 3-5yrs of dataSuggestions: 3-5yrs of data Industry Data can also be found on Reuters.Industry Data can also be found on Reuters.

Once this information is retrieved we can Once this information is retrieved we can begin ratio analysis.begin ratio analysis.

Tools AvailableTools Available

On Reuters we can compile the financial statements using Fundamentals.

Tools available Tools available

We can find Financial Ratio analysis We can find Financial Ratio analysis on Reuters, and it compares it to the on Reuters, and it compares it to the Industry for us. Industry for us.

5 Categories of Financial 5 Categories of Financial RatiosRatios

1.1. Common size statements Common size statements

2.2. Internal liquidity (solvency)Internal liquidity (solvency)

3.3. Operating performanceOperating performancea.a. Operating efficiencyOperating efficiency

b.b. Operating profitabilityOperating profitability

4.4. Risk AnalysisRisk Analysis

5.5. Growth AnalysisGrowth Analysis

Internal Liquidity RatiosInternal Liquidity Ratios

Current ratio=Current Assets/Current Current ratio=Current Assets/Current LiabilitiesLiabilities

Quick Ratio= (Cash+Marketable Quick Ratio= (Cash+Marketable Securites+Receivables)/Current Liabilities Securites+Receivables)/Current Liabilities

Inventory Turnover=CGS/((Beg Inv+End Inv)/2)Inventory Turnover=CGS/((Beg Inv+End Inv)/2)

Inventory Processing Period=365/Inventory Inventory Processing Period=365/Inventory Turnover Turnover

The DuPont RatioThe DuPont Ratio

The DuPont Analysis breaks down The DuPont Analysis breaks down the components of ROE the components of ROE

The DuPont Ratio offers investors a The DuPont Ratio offers investors a quick way to analyze the quick way to analyze the Performance, Liquidity and Risk.Performance, Liquidity and Risk.

ROE=(NI/S)*(S/A)*(A/E)ROE=(NI/S)*(S/A)*(A/E) NI=Net IncomeNI=Net Income S = SalesS = Sales A=Average AssetsA=Average Assets E= Average EquityE= Average Equity

Reuters DuPont OutputReuters DuPont Output

PerformanceEfficiency

LeverageReturns on StockholdersCapital

Du Pont analysis (cont.)Du Pont analysis (cont.)

The time series data, from Reuters, The time series data, from Reuters, offers a look at the trends in these offers a look at the trends in these ratios and could help us get an ratios and could help us get an inside look on company goals.inside look on company goals.

Looking at the DuPont analysis of Looking at the DuPont analysis of say IBM’s Competitor we can find say IBM’s Competitor we can find out more information.out more information.

ValuationValuation

Current Event StudiesCurrent Event Studies

Don’t ignore the news!Don’t ignore the news! Current event studies often times Current event studies often times

can give signals of the financial can give signals of the financial strength of a company.strength of a company.

It is also important to not over It is also important to not over emphasize the news, these are emphasize the news, these are Billion dollar companies we are Billion dollar companies we are looking at, we must keep the news in looking at, we must keep the news in perspective to what drives ROE.perspective to what drives ROE.