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Topic 5 - Topic5: TechnicalAnalysis Fundamental Analysis...

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Topic 5: Fundamental Analysis vs.  Technical Analysis Fundamental Analysis Accounting aspects EPS, ROA, ROE, PE, Growth rate, Dividend Yield Technical Analysis Dow Theory Moving Average, Relative strength, Advance-Decline line
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Accounting Aspects How is EPS derived and what does  EPS represent? Financial statements provide majority of  financial information about firms Analysis implies comparison over time  or with other firms in the same industry Focus on how statements used, not  made
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Financial statements Profit & Loss Balance Sheet Cash Flows Statement
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The Financial Statements Earnings per share EPS =Net Inc./average number of shares                          outstanding Net Inc. before adjustments in accounting  treatment or one-time events Certifying statements Auditors do not guarantee the accuracy of  earnings but only that statements are fair  financial representation
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Problems with Reported Earnings EPS for a company is not a precise  figure that is readily comparable over  time or between companies Alternative accounting treatments used to  prepare statements Difficult to gauge the ‘true’ performance of  a company with any one method Investors must be aware of these problems
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Analyzing a Company’s Profitability Important to determine whether a  company’s profitability is increasing or  decreasing and why Return on equity (ROE) emphasized  because is key component in finding  earnings and dividend growth EPS =ROE  ×  Book value per share
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Du Pont Analysis ROE depends on the product of: 1) Profit margin on sales: EBIT/Sales 2) Total asset turnover: Sales/Total Assets 3) Interest burden: Pre-tax Income/EBIT 4) Tax burden: Net Income/Pre-tax Income 5) Financial leverage: Total Assets/Equity ROE =EBIT efficiency  ×  Asset turnover  ×   Interest burden  ×  Tax burden  ×  leverage
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