Valuation Part 2 Presented by: Elson ong

1. Valuation Part 2 Presented by: Elson ong • Identifying the Magic Numbers • Income Statement • Balance Sheet • Cash Flow Statement • Valuation Yale-NUS Investment Masterminds

2. Revision Yale-NUS Investment Masterminds

3. Revision Yale-NUS Investment Masterminds

4. Income statement • 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 Yale-NUS Investment Masterminds

5. Income statement • 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 Yale-NUS Investment Masterminds

6. Income statement • Return on Assets (ROA) • ROA = Profit before interest and tax/ Total Assets • Measures operating profitability of the business that is independent of: • How the company’s assets were financed (through debt or capital financing) • Tax policies • Compared with ROA of similar companies in the same industry Yale-NUS Investment Masterminds

7. Income statement • 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 Yale-NUS Investment Masterminds

8. Balance sheet • 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 Yale-NUS Investment Masterminds

9. Balance sheet • 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) Yale-NUS Investment Masterminds

10. Balance sheet • 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 Yale-NUS Investment Masterminds

11. Balance sheet • 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 Yale-NUS Investment Masterminds

12. Balance sheet • 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 Yale-NUS Investment Masterminds

13. Balance sheet Gearing (Debt/Equity Ratio) Limitations to the Firms Capacity to Push Leverage Too High: Higher Borrowing Cost Cost of Equity Rises Difficulty maintaining ROA Yale-NUS Investment Masterminds

14. valuation • 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” Yale-NUS Investment Masterminds

15. Valuation • 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 Yale-NUS Investment Masterminds

16. Valuation • Important things to take note: • No one indicators is perfect • Should look at all the magic number before making decisions Yale-NUS Investment Masterminds

17. Valuation • Considerations for investors when evaluating potential company • Existing Debt Level • Purpose of taking more Debt • Refinance old debts • Can Company Afford New Debt • Provisions in New Debt to force immediate payback Yale-NUS Investment Masterminds

18. Valuation Part 2 Presented by: Elson ong Any Questions?