Definition

1. Definition:
   Study companies from:
   • Quality of management
   • Labor relations
   • Inventory control
   • PE ratio and EPS growth rate(P/E: price to earning ratio; EPS: Earnings per share 关注市盈率与每股利润的比率 )
   • Return on equity and assets
   • Supply and Demand
   • Macroeconomica Factors
2. Limits(unable to):
   • Measure timing of investment
   • Making the selling decision
   • Quantifying the rish & reward

Availability of information

1. Company reported Financial statements:
   • The balcance sheet(负债表):
     assets: anything of value that can be converted into cash or used to generate cash
     1. components:
        $$ Assets = -Liabilities + Shareholderequity$$
        • Liability(债务): Debt the company has including Bonds(债券), Equity and Taxes
        • Shareholder Equity: How much the Shareholder have
     2. Types:
        • Intangible
        • Tangible
     3. Common ratios:
        • Quick Ratio: Liquid Assets/ Current Liabilities
        • Cuurent Ratio: Current Assets/ Current Liabilities
        • Debt to Equlity: Total Liabilities/ Share Holder Equity
   • The income statement:
     • Top line: gross income before any consideration of cost(总收入)
     • Operating Income: Gross income - operating expense(营业收入)
     • Bottom line:Net income after all cost considerations
   • Cash Flow:
     • Receivables: Amount a company is owed, but not yet paid
     • Payables: Amount a company is required to pay, but no tyet fulfilled
     • Depreciation(折旧费用): allocate the cost of a tangible asset over its useful life(衡量有使用年限的资产的价值)
     • Amortization: similar to depreciation but applied to intangible assets, spread the cost of the intangible asset over its expected useful life.
     • Common ratios:
       $$\text{current liabilities coverage} = \frac{\text{operating cash flow}}{\text{current liabilities}}$$
2. Macroeconomic data

Fundamental analysis

Macroeconomics Analysis

1. Global Economy Analysis:
   • affects exports, price competition and profits
   • exchange(汇率): purchasing power and earnings
2. Domestic Economy:
   • Gross Domestic Product(GDP): measures the economy’s total outputs of goods and services
   • Employment rate: measures the extent that the economy is operating at full capacity
   • Inflation: measures the general level of prices increase Phillip’s curve
   • Interest Rate: high interest rate reduces liquidity of cash
   • Budget Deficit(预算赤字):large deficit means more borrowing, which implies higher interest rate
   • Sentiment: consumers and producers confidence
   • Business cycle terms:
     peak: the end of expansion and start of recession
     trough: the bottom of the recession
     defensive industries: little sensitive to business cycles

Industry Analysis

1. Two factors that determine the sensitivity of a firm’s earning to business conditions: business risks and financial risks
2. Business risks:
   • Sales sensitivity to business condition
     The degree to which the sales of a product or service are affected by changes in a particular factor(产品或服务是否易受外界条件影响)
   • Operating leverage: the division between the fixed and variable cost
     The firms with greater amounts of variables cost are subject less to business fluctuations, thus more stable
3. Financial risks:
   • the degree in using financial leverage
   • leverage firm is more sensitive to business cycles(easily to be influenced by financial market)
4. Industry cycles:
   1. General stages: start-up, consolidation, maturity, decline

Equity Valuation Model

Equity Valuation Model(股权估值模型):
- Dividend Discount Model(DDM，股权折现模型):
1. idea: the stock is worth the sum of all its future dividend payments
2. Equation:
$$ V = \sum{\frac{D_t}{(1+r)^t}}$$
r: the discount rate(回报率)
$D_t$:第t年每股分红(dividend)
- constant growth model:
1. idea: 认为dividend成指数增长
2. Equation:
$$V = \sum{\frac{D_0 * (1+g)^t}{(1+r)^t}}$$
- derivation of expected return: r
1. Expected return = dividend yield(股息收益率) + capital gain(资本收益)
2. Equation:
$$ r = \frac{D_1}{P_0}+\frac{P_1-P_0}{P_0}$$
rearrange->
$$ P_0 = \frac{D_1}{1+r}+\frac{P_1}{1+r}$$
同理，我们有
$$ P_1 = \frac{D_2 + P_2}{1+r}\ \ \text{and} \ \ P_2 = \frac{D_3 + P_3}{1+r}$$
则可推出
$$P_0 = \sum{\frac{D_i}{(1+r)^i}}$$
- PVGO: present value of growth opportunities
1.Idea: evaluate the captical gain g
$r = \frac{D_i}{P_0} + g$ , $g = plowback rate * ROE$
2. Explanation:
- ROE:
$$\text{Return on Equity} = \frac{\text{Earnings per share}}{\text{Equity Per Share}}$$
- Plowback rate = 1 - Payoutrate

Financial Statement Analysis

1. Use/source of Fund Statement:
   • sources of fund: where is the money come from
   • use of fund: how is the money being spent
2. Ratio Analysis:
   • Assets - Sales - Profit
   • Liquidity Ratio
   • Risk Ratio
   • Du Pond Analysis