What is it?
 Technique of valuing
 Quantitative
 Qualitative
securities
 Typically
used for equities; can
be used for industry, economy
 Seeks to answers questions:
 Is the company’s revenue
growing?
 Is it making a profit?
 Does it have a competitive edge?
 Is it able to repay its debts?
 Is management ethical and
responsible?
Why should you care?
 To value invest in a security
 Warren Buffett - $65.2 B (2016)
“It's far better to buy a wonderful company at a fair price than a
fair company at a wonderful price” - Warren Buffett
Who are its opponents?
 Technical Analysts
 Believers of Efficient
Market Hypothesis
Efficient Market Hypothesis
 Investment
theory impossible to beat the
market
Financial Statements
 Balance Sheet
 Income Statement
 Statement
Flows
of Cash
Balance Sheet
 Statement
of Assets, Liabilities and Capital of a
business at a particular point of time
 Assets = Liabilities + Shareholder’s Equity
Income Statement
 Report
of Revenues, Expenses and Profit over a
period of time
 Also known as Statement of Operations
 EBITDA
Statement of Cash Flows
 Record
of time
of cash inflows and outflows for a period
Projecting revenue growth
 DCF Model
 Gordon Growth
Model
Discounted Cash Flow
 Discounting
value
cash flows back to arrive at a present
Gordon Growth Model
 Uses
the dividends paid
by the company to value
the stock
Margins
 Profit Margin
 Net Income/Revenue
 Gross Profit Margin
 (Revenue - COGS)/Revenue
 Operating Margin
 Operating Income/Net Sales
Financial Ratios
 Earnings per share
 Price/Earnings Ratio
 Return on Equity
 Current Ratio
 Quick Ratio
 Debt/Equity Ratio
Companies for Comparison
No two companies are exactly alike…
 Metrics to use for comparison

 Industry
○ Sub-Industry
 Geography
○ Foreign Exposure
 Market Cap (Asset Management use AUM)
 Revenue
 Debt Load or Leverage

Compare ratios
Management

How do you evaluate?
 Not as easy for retail investors
 Corporate governance
 Historic performance
 Lawsuits or other sporadic behavior
Ownership and insider sales
 Transparency

Legal Vulnerability
Industries with high litigation costs ?
 Estimated at 1/3 of S&P 500 profit
 Poses significant risk to shareholder
value

Interest Rate Change
Susceptibility
Sensitivity depends on industry and a
measure called duration
 What companies are the most sensitive
to IR changes?

 Insurance companies, Banks
 High leveraged companies
 Average leverage by industry
Interest Margins
Let’s do an example..

Airline industry
 Taxes and fuel costs
 Operating margin
 Capacity and excess capacity
 Hedging
 Ratios
Airlines
Operating Margins
Hedging
Airlines hedge the price of oil using
financial instruments
 This gives them the possibility of ‘locking
in’ specific prices
 Hedge for increasing price
 Large hedging losses in past two years
 NYSE:AAL

Ratio Comparison
American
United
Delta
Southwest
Market Cap
20.37 Billion
17.10 Billion
29.05 Billion
24.23 Billion
Quick Ratio
67.00%
57.00%
48.00%
50.00%
Return on
Assets
16.19%
18.77%
9.05%
11.32%
Debt to Equity
5.298x
1.355x
0.6608x
0.4288x
Profit Margin
9.17%
6.26%
14.80%
15.23%


Quite a mixed bag of data
Need to use additional ratios to determine which airline is the
best investment
Additional Ratios
American
United
Delta
Southwest
Return on Equity
150.20%
87.75%
44.47%
33.30%
EBITDA Margin
17.23%
17.45%
24.23%
24.18%
P/E Ratio
3.67
2.96
6.48
10.55
Let’s Guess Some Companies…