Lecture20 - Lecture 20 Financial Statement Analysis Today...

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Lecture 20 Financial Statement Analysis
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2 Today • Financial Performance Measures – ROA, ROE – Decomposition of ROE • Relative Valuation Multiples – Price-to-Earnings (P/E) – Price-to-Sales (P/S) – Market-to-Book (MTB) • Discounted Cash Flow (DCF) Analysis – Basically an NPV analysis
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3 Disclaimer • Don not construe today’s lecture as a “license to day trade.” • It just scratches the surface of the area of fundamental analysis • The conclusion of whether a company is performing well (operationally and financially) is separate from the question of whether the company’s stock is undervalued or overvalued • Great analysis and stock picking requires two things: – you must be able to foresee something better than the rest of the market (excluding the use of illegal, inside information) – the rest of the market must eventually realize what you already foresaw
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4 Measures of Financial Performance • Performance from a firm’s perspective (i.e. from all stakeholders’ perspective) – Return on Assets (ROA) • Net Income/Total Assets • Net Income/Average Total Assets – Net Income t /[(Total Assets t +Total Assets t-1 )/2] • Performance from owners’ perspective (i.e. common shareholders) – Return on Equity (ROE) • Net Income / Stockholders’ Equity • Net Income / Average Stockholders’ Equity
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5 Focus on ROE • How can a firm increase ROE? – A couple of ways – To understand how, must decompose ROE into other understandable components: • Net Profit Margin (Net Income/Sales) • Sales Asset Turnover (Sales/Total Assets) • Financial Leverage (Total Assets/Stockholders’ Equity) – ROE = NI/SE = NI/Sales * Sales/TA * TA/SE
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6 Net Margin • Net Margin = Net Income / Sales – How do you increase this ratio? – Obviously,
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This note was uploaded on 06/28/2009 for the course ACCT 101 taught by Professor Armstrong during the Summer '09 term at UPenn.

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Lecture20 - Lecture 20 Financial Statement Analysis Today...

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