Fundamental Analysis Workshop Series Session Seven – Bottom Up Analysis

Fundamental Analysis Workshop Series

Session Seven – Bottom Up Analysis

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Metrics Q & AIntroduction

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Agenda

• Introduction to Bottom Up Analysis• Profits• Net Tangible Assets Per Share• Earnings per Share• PE Ratio• Return on Equity• Leverage Ratios• Case Study


INTRODUCTION


PROFILE

• NUS Invest Research Analyst

• Year 2 BBA

• Pure Fundamental Analysis


Introduction to Bottom Up

• Basically Ratio Analysis


Liquidity Solvency

Profitability Efficiency

Introduction to Bottom Up

• 4 types of ratios

• To an investor, arguably the more important

ratios are Profitability, Efficiency and

Solvency


Profits

• Net Income

• EBIT

• EBITDA


Where to find? Basic Decrypting

Applying the Information

Q & AIntroduction

Net Income

• Accounting Revenue – Accounting Cost

• Intuitive and easy to understand

• However, NI takes into account non cash items

• Not usually examined on its own but is

subsequently used to generate other indicators.

EBIT

• Earnings Before Interest and Taxes

• Adds Interest and Tax Expense to NI

• Gives a clearer picture of company’s ability to

generate profits

• By taking away distortions from financing cost

and tax structure


EBITDA

• Earnings Before Interest Tax Depreciation

Amortization

• A PROXY of Operating cash Flow

• Important in determining firm’s ability to

generate cash


Market to Book Ratio

• Tells us the market value of a share

compared to historical book value

• If value is less than 1, means the value of

the underlying asset is actually more than

the price you can buy it at


Earnings per Share

• The only financial indicator companies are mandated

to provide in their annual report

• One of the most important indicators of profitability

• Shows the ability of each share in generating

accounting profits

• Trend is important in analyzing EPS


Price Earning Ratio

• Price of Share divided by EPS

• Values the share based on earnings

• The lower the PE compared to similar companies the

better the value

• However, more research the reason behind low

valuations


Debt to Equity

• Most common leverage ratio

• Shows us the capital structure of the firm

• Can indicate financing expenditure, solvency of the

firm

• More than 2 is generally high but depends on industry

• If firm goes bankrupt, what happens?


Other Leverage Ratios

• Current Ratio

• Current Assets / Current Liabilities

• Not as important compared to debt to equity since

current ratio only measures short term liquidity status


Profit margin

• Net Profits/Net Sales

• Shows efficiency of revenue in generating

profits

• Important in evaluating efficiency within the

industry


Return on Equity

• Net Income / Total Equity

• Shows how much of income is attributable

to equity holders

• Also shows how efficient company is

generating profits with given capital


Return on Equity

• King of all ratios

• Du Pont identity

• Combines Profit Margin, Equity Multiplier,

Total Asset Turnover


Other Profitability Ratios

• Return on Assets

• Shows how efficient assets are in generating

profits

• We are more concerned with ROE


Case Study: GE


Passing Criteria 3-Year Change Grade

Revenue growth > 30% (4.6%) Fail

Improving profit margin 35.7% Pass

Improving EPS 27.7% Pass


Passing Criteria 3-Year* Change Grade

Improving return on equity 22% Pass

Declining debt to equity (13.4%) Pass

Dividend growth > 25% 90% Pass

Other Related News


• Pole position in renewable energy market• Buying up French Wind Farms to bolster

market shares• New traditional energy deals being signed too• Good business prospects for the company

Case Study Conclusion

• Never look at only one indicator

• Look at trends instead of snapshots in time

• Best to complement bottom up analysis

with other related company news such as

corporate governance


Avenues of Information

• Bloomberg Terminal

• Bloomberg Website

• Yahoo Finance

• Equity Research Reports


Q & A


THANK YOU!


Documents

Fundamental Analysis Workshop Series Session Seven – Bottom Up Analysis