Valuation Part 2Presented by: Elson ong
Yale-NUS Investment Masterminds
Identifying the Magic Numbers- Income Statement
- Balance Sheet- Cash Flow Statement
- Valuation
Revision
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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
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Cash Flow Statement
Balance Sheet
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
Profit and Loss Statement
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Income statement
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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
Income statement
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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
Income statement
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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
Income statement
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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
Balance sheet
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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
Balance sheet
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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)
Balance sheet
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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
Balance sheet
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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
Balance sheet
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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
Balance sheet
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Gearing (Debt/Equity Ratio)
Limitations to the Firms Capacity to Push Leverage Too High:
1) Higher Borrowing Cost2) Cost of Equity Rises3) Difficulty maintaining ROA
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”
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
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
Valuation
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Considerations for investors when evaluating potential company
1) Existing Debt Level2)Purpose of taking more Debt3)Refinance old debts4)Can Company Afford New Debt5)Provisions in New Debt to force
immediate payback
Any Questions?
Valuation Part 2Presented by: Elson ong