Company Analysis

1. COMPANY
ANALYSIS: APPLIED
VALUATION
Group 2

2. Techniques Of Analysis
• There are 3 modern techniques of Analysis:
– Regression Analysis
– Trend Analysis
– Decision Tree Analysis

3. Regression & Correlation Analysis in
Forecasting Revenues & Expenses
Regression Analysis
Linear Regression- Relationship between two variables
Multiple Linear Regression- Relationship of Several
Variables
Correlation analysis- Goodness of fit between these
variables

4. Regression equations are built upon the relationships such as:
• Relationship between external economic variables & company
analysis (e.g. Sales), internal company variables & external
industry variables.
• Relationship among: industry (e.g. Benchmark EPS) , economic
(e.g. GNP), firm variables (e.g. Cost of funds) & company
expenses.
• Correlation acts as a specific measure of the explanatory power
of a regression equation.

5. Trend Analysis
• Tries to predict the future movement of a stock based on past
data.
Decision Trees
• A decision tree is a graph that uses a branching method to
illustrate every possible outcome of a decision

6. Problem Areas In Implementation Of Newer
Techniques
Regression Analysis
• Need to develop plausible economic relationships between
variables.
• Isolating key explanatory variables - time consuming process.
• Requires understanding of the firm’s mode of operation and
structure & performance of industry.

7. Alternative Stock-Selection Techniques
Active Equity Management
• Growth Stock Approach- a company whose earnings are
expected to grow at an above-average rate compared to its
industry or the overall market.
• Undervalued Stock Approach- companies that have either
high dividend yields, and low price earnings ratio.
• Small Capitalization Approach- investment in smaller
companies that have potential to grow.

8. • Market Timer Approach- it varies the proportion
of certain types of stock in portfolio depending
on where he views the stock market to be at
particular time.
Passive Equity Management
• Buy And Hold Approach To Stock- an investor
buys stocks and holds them for a long period of
time, regardless of fluctuations in the market.

9. Price-Earning Ratio
• Defined as a closing price of the stock divided by
reported earnings.
• P/E ratio is primarily determined by the riskiness of
the firm and the rate of growth in its earnings.
• Low P/E ratio is associated with low earnings and
cyclical businesses and vice-versa.

10. Projecting Dividends
• The projected earning per share is multiplied by the
payout ratio to arrive at projected dividends.
• Payout Ratio = Dividends per Share (DPS) / Earnings
per Share (EPS)
• Also known as dividend payout ratio.