Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the components of a company analysis report? How do analysts.

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Presentation transcript:

Contemporary Investments: Chapter 12 Chapter 12 COMPANY ANALYSIS: THE HISTORICAL RECORD What are the components of a company analysis report? How do analysts evaluate the quality of a company’s management? How is the competitive position of a company within its industry evaluated? What is financial statement analysis?

Contemporary Investments: Chapter 12 Overview of company analysis Overall objective of company analysis Typical report according to Graham and Dodd –Description of company’s business –Financial material –Past stock price history –Prospects for the company

Contemporary Investments: Chapter 12 Assessing the quality of management Stock price reactions to management changes The nature of management –A definition of management –Organizational performance

Contemporary Investments: Chapter 12 Figure 12.1 – Sunbeam’s Stock Price and Volume (6/3/96 – 8/31/96)

Contemporary Investments: Chapter 12 Figure 12.2 – Management Process

Contemporary Investments: Chapter 12 Four functions of management –Planning function –Organizing function –Leading function –Controlling function

Contemporary Investments: Chapter 12 Evaluating management –Age and experience of management –Effectiveness of strategic planning –Sound marketing strategy –Adaptation to changes in the external environment

Contemporary Investments: Chapter 12 Competitive position within the industry –Past growth –Adequate and appropriate financing –Good relations with employees –Positive public image –Effectiveness of company’s board of directors

Contemporary Investments: Chapter 12 Competitive position of a company Why important –Leading companies produce higher and more consistent earnings –Everything else being equal, leading companies offer lower-risk investment prospects

Contemporary Investments: Chapter 12 Evaluating a company’s competitive position Classifying companies within industry groups –Items to examine Revenues or sales Profitability Product line New products and product innovation Operating efficiency Pricing Patents and technology

Contemporary Investments: Chapter 12 Analyzing financial statements Types of financial statements –Income statement –Balance sheet –Statement of cash flows –Market values (cash flows) versus accounting numbers

Contemporary Investments: Chapter 12 Reliability of accounting numbers and financial statements Financial ratios –Liquidity ratios –Activity ratios –Leverage and coverage ratios –Profitability ratios –Ratios based on market values

Contemporary Investments: Chapter 12 Interrelationship among ratios Breaking down ROE (DuPont formula) Interpreting financial ratios Trend analysis –Kohl’s –Johnson & Johnson –Sunbeam

Contemporary Investments: Chapter 12 Industry comparisons Some issues Different industries have very different ratios Many industries are far from homogeneous Many companies operate in several different industries –Kohl’s versus Target –Merck versus Pfizer

Contemporary Investments: Chapter 12 Figure Quarterly Receivables and Inventory Turnover for Sunbeam