Investment and portfolio management MGT 531. Investment and portfolio management Lecture # 20.

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Presentation transcript:

Investment and portfolio management MGT 531

Investment and portfolio management Lecture # 20

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

SUMMARY OF LAST LECTURE 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:

Contents of today's lecture Financial ratios by category Market value ratios Stock valuation Stock valuation process fundamental and speculative value of stock

Price/Earnings ratio (PER)Market price of the stock/ Earnings per share Book value of the stock(Equity–Preferred stock- Preferred stock dividends) / Number of Common Stock Market price to Book valueMarket price of the stock / Book value of the stock Dividends per share(Dividends - Preferred stock dividends)/ Number of Common Stock Payout RatioDividends per share / Earnings per share Financial ratios by category

Market value ratios provide an investor with a shortest way to understand how attractive the stock in the market is. But looking for long-term investment decisions investor must analyze not only the current market results but to assess the potential of the firm to generate earnings in the future. Thus, only using the other groups of financial ratios investor can receive “a full picture” of the financial condition of the firm and when continue with stock valuation. After calculating the ratios, the investor must compare the ratios of the firm with the ratios of a relevant benchmark. Stock analysis

The selection of the appropriate benchmark is a difficult decision. For this reason firms are frequently benchmarked against other firms with similar size and in the same home country and industry. Stock analysis

However, such comparisons do not always reveal whether the company is buy-worthy, because the whole size category, country or industry may under perform. When using these ratios for analysis of the firm investors compare them also with industry average. Decision making of investment in stocks. Stock valuation Valuation theory is grounded on the assumption that investors are rational, wealth maximizing individuals and that stock market prices reflect the fundamental value. Stock valuation

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