CHAPTER TWENTYTWO

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CHAPTER TWENTY-TWO

• FINANCIAL ANALYSIS

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FINANCIAL ANALYSIS

• WHAT IS FINANCIAL ANALYSIS?
• DEFINITION the activity of providing inputs to
  the portfolio management process

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FINANCIAL ANALYSIS

• PROFESSIONAL FINANCIAL ANALYSIS ORGANIZATIONS
• THE ASSOCIATION OF INVESTMENT MANAGEMENT AND
  RESEARCH (AIMR)
• acts as an advocate for the financial analyst
  profession
• it host conferencing and workshops
• designed to enhance the knowledge base of the
  memberships
• it also publishes the Financial Analysts Journal

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FINANCIAL ANALYSIS

• PROFESSIONAL FINANCIAL ANALYSIS ORGANIZATIONS
• THE ASSOCIATION OF INVESTMENT MANAGEMENT AND
  RESEARCH (AIMR)
• Chartered Financial Analysts
• a subdivision of AIMR
• is a program to establish a hurdle that creates a
  common set of investment knowledge for a select
  membership
• it also promotes an ethical standard for the
  various types of investment professionals

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FINANCIAL ANALYSIS

• REASONS FOR FINANCIAL ANALYSIS
• TWO PRIMARY REASONS
• to determine certain securities characteristics
• to attempt to identify mispriced securities

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FINANCIAL ANALYSIS

• REASON 1 DETERMNING SECURITY CHARACTERISTICS
• estimate future sensitivity to major factors
• estimate dividend yield

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FINANCIAL ANALYSIS

• REASON 2 ATTEMPTING TO IDENTIFY MISPRICED
  SECURITIES
• use fundamental analysis
• approaches
• valuation determines the intrinsic value compared
  to the current market value
• estimate key financial variables such as
• EPS next year
• income growth next year

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TECHNICAL ANAYSIS

• DEFINITION a form of security analysis that
  attempts to forecast price changes based on
  historical price and volume trends

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TECHNICAL ANAYSIS

• Two Groups of Strategies Used
• 1. Momentum and Contrarian Strategies
• 2. Moving Average and Trading Range Breakout
• Strategies

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TECHNICAL ANAYSIS

• 1. Momentum and Contrarian Strategies
• METHDOLOGY
• examine the returns over a time period just ended
  to identify
• momentum investors who seek out stocks recently
  rising in price for purchase falling for sale
• contrarians who follow the opposite strategy of
  most investors
• contrarians base their strategy on the
  overreation theory

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TECHNICAL ANAYSIS

• 2. Moving Average and Trading Range Breakout
  Strategies
• MOVING AVERAGE STRATEGY
• calculate a moving average over the last 200 days
  of closing prices
• divdied todays closing price into the moving
  average (SHORT-TO-LONG RATIO)
• if short-to-long ratio is greater than 1, buy
• if ratio is less than 1, sell

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TECHNICAL ANAYSIS

• 2. Moving Average and Trading Range Breakout
  Strategies
• TRADING RANGE BREAKOUT STRATEGY
• high and low prices for past 200 trading days are
  identified
• if todays close is greater than the high buy!
• if todays close is less than the low sell!

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FUNDAMENTAL ANALYSIS

• TOP-DOWN V. BOTTOM UP
• TOP-DOWN APPROACH
• attempts to forecast in the following order
• 1. economic activity
• 2. industry performance
• 3. firms performance

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FUNDAMENTAL ANALYSIS

• TOP-DOWN V. BOTTOM UP
• BOTTOM-UP APPROACH
• attempts to estimate prospects in the following
  order
• 1. The firm
• 2. The Industry
• 3. The economy

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FUNDAMENTAL ANALYSIS

• FINANCIAL STATMENT ANALYSIS
• INTEGRAL PART OF FUNDAMENTAL ANALYSIS
• it helps the analyst understand a firms current
  condition
• where it is headed
• what factors affect it
• how the factors affect it

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FUNDAMENTAL ANALYSIS

• FINANCIAL STATMENT ANALYSIS
• Review of Accounting Statements
• includes a study of the three major statements
  prepared monthly by most accountants
• the balance sheet
• the income statement
• the statment of cash flows

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FUNDAMENTAL ANALYSIS

• FINANCIAL STATMENT ANALYSIS
• RATIO ANALYSIS
• DEFINITION a technique used to examine a
  companys financial statements
• Use of Ratios
• as an absolute standard
• as a comparative indicator
• as a trend over time
• in combination with technical analysis

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FUNDAMENTAL ANALYSIS

• FINANCIAL STATMENT ANALYSIS
• RATIO ANALYSIS
• Types of Ratios
• internal liquidity
• operating performance
• risk analysis
• growth analysis

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FUNDAMENTAL ANALYSIS

• internal liquidity ratios
• indicate the ability of the firm to meet future
  short-term financial obligations
• some liquidity ratios
• current ratio
• quick ratio
• cash ratio
• receivables turnover

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FUNDAMENTAL ANALYSIS

• operating performance ratios
• indicate how well the management is operating the
  business
• some examples
• total asset turnover
• net fixed asset turnover
• equity turnover

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FUNDAMENTAL ANALYSIS

• risk analysis ratios
• indicates the uncertainty of income flows for the
  total firm and for the individual sources of
  capital (debt and stock)
• some examples
• debt to equity ratio
• long-term debt/total capital ratio

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FUNDAMENTAL ANALYSIS

• growth analysis ratios
• indicate how fast a firm should grow
• it involves analysis using several other ratios
• net profit margin
• total asset turnover
• total assets/equity

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• END OF CHAPTER 22