COMPANY SHARE
ANALYSIS
A procedure for appreciating
whether to buy shares in a given
company
by Roy
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Unit 6.2 - Investment Management - Lecture - Share Analysis, Lecture notes of Economics
This document about COMPANY SHARE ANALYSIS, RECENT PERFORMANCE AND BACKGROUND, CLASSIC RATIOS: QUICK RATIO, CLASSIC MEASURES: FREE CASH FLOW, , .
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2010/2011
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COMPANY SHARE
ANALYSIS
A procedure for appreciating
whether to buy shares in a given
company
by Roy
RECENT PERFORMANCE
AND BACKGROUND
- (^) Book value, market capitalisation
- (^) Ownership
- (^) Sometimes a company has few traded shares and single dominant owner
- (^) Historical series of sales and profits
- (^) Historical series of EPS, and share price
- (^) Some understanding of company’s activity
CLASSIC RATIOS: QUICK RATIO
CLASSIC RATIOS: CURRENT RATIO
- (^) measures the liquidity of a company the ratio of all current assets to all current liabilities
- (^) an indicator of a company's ability to pay short- term obligations This ratio is also known as the working capital ratio and real ratio
- (^) the standard measure of a business' financial health - (^) tells whether a business is able to meet its current obligations by. Has it enough assets to cover its liabilities?
- (^) For most industrial companies, 1.5 is acceptable but close to 2 is desirable
CLASSIC MEASURES: FREE CASH FLOW
- (^) an important measure to shareholders
- (^) cash that is left over after the payment of all cash expenses and operating investment required by the firm, with depreciation added back as source of cash
- (^) it is the hard cash that is available to pay the company's various claim holders, in particular the shareholders
CLASSIC MEASURES: FREE CASH FLOW
The best way to understand free cash flow is apply the concept the three pillars of cash flow described in my finance notes:
- (^) Take the operating cash flow
- (^) Add the investment cash flow
- (^) If the result is positive, there is a free cash flow for debt and shareholders A negative free cash flow is not necessarily bad if the company is expanding
- (^) A company may have a positive profit but a negative cash flow
- (^) Even negative profit and negative cash flow my be justified if future profits look likely
AND THAT WAS ONLY THE START! A full analysis would go even further:
- (^) Calculate the effects of dilution
- (^) See what is in the pipeline for new products
- (^) Make a forecast of future EPS
- (^) Consider competitive and technological threats Let me stress that share analysis is complicated and long, and is the domain of full-time professionals