Valuation Part 2
Presented by: Elson ong
Identifying the Magic Numbers
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Valuation
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Revision
Revenue
Profit and Loss Statement
Stocks/Inventory
Balance Sheet
Current Liabilities
Balance Sheet
Trade Receivables/Debtors
Balance Sheet
Short Term Borrowings
Balance Sheet
Shareholders’ Equity
Balance Sheet
Net cash flows from operating
activities
Cash Flow Statement
Fixed Assets
Balance Sheet
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Revision
Gross Profit
Profit and Loss Statement
Cost of Goods Sold
Profit and Loss Statement
Current Assets
Balance Sheet
Cash and Cash Equivalent
Balance Sheet
Trade Payables
Balance Sheet
Long Term Loans
Balance Sheet
Reserves/Retained Earnings
Balance Sheet
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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
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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
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Income statement
Return on Assets (ROA)
ROA = Profit before interest and tax/ Total Assets
- Measures operating profitability of the business that
is independent of:
a) How the company’s assets were financed (through debt or
capital financing)
b) Tax policies
- Compared with ROA of similar companies in the
same industry
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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
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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
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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)
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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
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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
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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
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Balance sheet
Gearing (Debt/Equity Ratio)
Limitations to the Firms Capacity to Push Leverage
Too High:
1) Higher Borrowing Cost
2) Cost of Equity Rises
3) Difficulty maintaining ROA
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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
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
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Valuation
Important things to take note:
- No one indicators is perfect
- Should look at all the magic number before making
decisions
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Valuation
Considerations for investors when
evaluating potential company
1) Existing Debt Level
2) Purpose of taking more Debt
3) Refinance old debts
4) Can Company Afford New Debt
5) Provisions in New Debt to force immediate
payback
Yale-NUS Investment Masterminds
Valuation Part 2
Presented by: Elson ong
Any Questions?