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