Published on November 18, 2012
FUNDAMENTAL ANALYSIS OF A STOCK Presented by Mr Fahim Akhtar, Secretary General Association for investors awareness www.aia.org.pk
SCHEME / SEQUENCE What fundamental is Significance of fundamentals How to analyze a stock Forming a view / strategy www.aia.org.pk
FUNDAMENTALFundamental analysis is performed on historicaland present data, but with the goal of makingfinancial forecast . There are several possibleobjectives:To conduct a company stock valuations and predictits probable price evolution,To make a projection on its business performance,To evaluate its management and make internalbusiness decisions www.aia.org.pk
SIGNIFICANCE OF FUNDAMENTALS Give true picture Emotions can be overcome Growth can be measured Investment strategy can be formed Brings professional approach in trade www.aia.org.pk
HOW TO ANALYZE A STOCK www.aia.org.pk
DATA REQUIRED Financial reports both current and historical All current information about company Plans of company currently in implementation Impact of rules or taxation www.aia.org.pk
WHERE DATA IS AVAILABLE Company websites KSE website Few forums ( discussion forums) aia websites www.aia.org.pk
WHAT IS IMPORTANT TO SEE Balance sheet Income statement Cash Flow statement www.aia.org.pk
BALANCE SHEET A summary of a firm’s financial position ona given date that shows total assets = totalliabilities + owners’ equity. www.aia.org.pk
INCOME STATEMENT A summary of a firm’s revenues andexpenses over a specified period, ending with netincome or loss for the period www.aia.org.pk
CASH FLOW Provides information what actually happeningin business beyond that either contained in balancesheet or income statement www.aia.org.pk
BALANCE SHEET www.aia.org.pk
ALI FERT – ASSET SIDE ALI Fert Balance Sheet (thousands) Dec. 31, 20011aCash $ 90 a. How the firm stands on aAcct. Rec.c 394 specific date.Inventories 696 b. What ALF owned.Prepaid Exp d 5 c. Amounts owed by customers.Accum Tax Prepay 10 d. Future expense items already paid. e. Cash/likely convertible to cash Current Assets $1,195 e within 1 year.Fixed Assets (@Cost) 1030 f f. Original amount paid.Less: Acc. Depr. g (329) g. Acc. deductions for wear and Net Fix. Assets $ 701 tear.Investment, LT 50Other Assets, LT 223 Total Assets b $2,169 www.aia.org.pk
ALI FERT – LIABILITIES SIDEALI fert Balance Sheet (thousands) Dec. 31, 2011 Notes Payable $ 290 a. Note, Assets = Liabilities + Acct. Payablec 94 Equity. b. What ALF owed and Accrued Taxes d 16 ownership position. Other Accrued Liab. d 100 c. Owed to suppliers for goods Current Liab. $ e and services. 500 Long-Term Debt f d. Unpaid wages, salaries, etc. 530 Shareholders’ Equity e. Debts payable < 1 year. Com. Stock ($1 par) g f. Debts payable > 1 year. g. Original investment. 200 Add Pd in Capital g h. Earnings reinvested. 729 Retained Earnings h 210 Total Equity $1,139 a,b
INCOME STAEMENT Statement of Earnings (in thousands) for Year Ending December 31, 2011aNet Sales $ 2,211 a. Measures profitability overCost of Goods Sold b 1,599 a time period. Gross Profit $ 612 b. Received, or receivable,SG&A Expenses c 402 from customers. EBITd $ 210 c. Sales comm., adv.,Interest Expensee 59 officers’ salaries, etc. EBT f $ 151 d. Operating income.Income Taxes 60 e. Cost of borrowed funds. EATg $ 91 f. Taxable income.Cash Dividends 38 g. Amount earned for Increase in RE $ 53 shareholders.
LIQUIDITY RATIOBalance Sheet Ratios Current Current Assets Liquidity Ratios Current LiabilitiesShows a firm’s ability to For ALI Fert cover its current December 31, 2007liabilities with its current $1,195 assets. = 2.39 $500 www.aia.org.pk
LIQUIDITY RATIO COMPARISION Current Ratio Year ALF Industry 2011 2.39 2.15 2010 2.26 2.09 2009 1.91 2.01Ratio is stronger than the industry average. www.aia.org.pk
LIQUIDITY RATIOBalance Sheet Ratios Acid-Test (Quick) Current Assets - Inv Liquidity Ratios Current Liabilities For ALFShows a firm’s ability to December 31, 2007 meet current liabilities with its most liquid $1,195 - $696 = 1.00 assets. $500 www.aia.org.pk
LIQUIDITY RATIO COMPARISION Acid-Test Ratio Year ALF Industry 2007 1.00 1.25 2006 1.04 1.23 2005 1.11 1.25Ratio is weaker than the industry average. www.aia.org.pk
SUMMARY Ratio ALF Industry Current 2.39 2.15 Acid-Test 1.00 1.25• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.• Note that this industry has a relatively high level of inventories. www.aia.org.pk
WHY CASH FLOW IS IMPORTANT• Cash generated by company is sufficient for expansion strategy• Stock holders wants to know if company can pay dividends• Suppliers knows they will get their credit supplies paid• Investors wants to evaluate future growth potentials www.aia.org.pk
FORMAT OF CASH FLOW• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities www.aia.org.pk
FORMING A STRATEGY• Find consistent growth• Watch gain in income• Cash flow is to be seen critically• If all these factors do not support try to find and ascertain reason• www.aia.org.pk
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