Seminar 4

Question 1

3 broad main ways to identify similar companies

Answer 1

1) Product/service
2) Biz cycle sensitivities: Cyclical v Non-cyclical
3) Statistical similarities

Question 2

Industry v Sector

Answer 2

1) Industry: companies selling similar G/S

2) Sector: a group of industries

Question 3

Applying product life cycle model (company focus what on each stage?)

Answer 3

1) Introduction: more competitive
2) Growth: new G/S
3) Mature: internal inefficiencies, extending successful product lines

Question 4

Limitations of product life cycle model

Answer 4

1) Disruptions to cycle: technological change, regulatory change, social changes demographic shifts
2) Not all companies in same industry have the same performance

Question 5

Revenue modelling approaches (3)

Answer 5

1) Top down
- Start from economy and narrow down levels
- eg. relate company’s growth rate to GDP growth rate > forecast economy GDP growth rate > forecast company’s revenue
- eg. Forecast growth in market > determine company’s current and anticipated share in market > apply expected market share to company’s forecast > forecast company’s revenue

2) Bottom up
- Segment individual product lines etc > Project demand and revenue for each line to company level > Aggregate to obtain revenue

3) Hybrid: combination of bottom up and top down

Question 6

2 measures to evaluate profitability

Answer 6

1) ROIC = return on invested capital = net profit after tax / (op assets - op liabilities) = (Rev - Cost)/(OA - OL)
- evaluation ROIC against Porter’s 5
- Cost control: bargaining power of suppliers
- Revenue control: everything else

2) ROCE = return on capital invested = operating profit / invested capital

Question 7

Financial analysis methods (4)

Answer 7

1) Common size:
- B/S – Total assets
- Vertical P/L – Revenue
- Remove effects of size, allows for comparison of performance to direct competitor’s performance, and against itself across time

2) Trend analysis:
- Compare across time

3) Ratio analysis
- Ratios depend on important aspects of economics of industry

4) Piotroski F-Score
- identify healthiest companies
- filter top 20% book-market > select companies that have score of 7 and above
- Profitability: NPM > 0, OpCF > 0 ROA > prior yr ROA, OpCF > NI before extraordinary items
- Operating efficiency: gross margin > prior yr, % increase in sales > % increase in total assets
- Leverage, Liquidity: LT debt < prior year LT debt, CR > prior yr CR, did not issue new shares/equity or # shares outstanding is no greater than a year ago