EQUITY VALUATION

METHODS OF ANALYZING INVESTMENTS

FUNDAMENTAL ANALYSIS – involves the use of traditional economic and business concepts in the examination of economic and company variables that leads to an estimation of the value of an investment
- the analysis of the determinants of value such
as price earnings ( the analysis of these variables is called the valuation process )

TECHNICAL ANALYSIS – is a method of evaluating securities by analyzing statistics generated by market activity, past prices and volume.




Two approaches to the valuation process

TOP-DOWN APPROACH – begins with an assessment of the economy and the financial markets. This is followed by an analysis of different industries and how they are affected (favorably or adversely) by prevailing economic and market conditions. Finally individual companies within each industry are identified and analyzed.

BOTTOM-UP APPROACH – is more concerned with the analysis, selection, and pricing of securities. This entails a detailed examination of companies and an appraisal value of their securities (whether they are underpriced, overpriced or fairly priced). Industry and economic factors are mere secondary considerations


THE TOP DOWN APPROACH

----------------------Macro economic analysis

Global Economy
--------export prospects
--------price competition
--------profits on overseas investments
--------political risks
Broad economic environment
--------Gross Domestic Product (GDP)
--------Unemployment rate
--------Inflation.
--------Deflation
--------Interest Rates.
--------Budget
--------Sentiment

Government macro economic policy
--------Fiscal Policy
--------Monetary Policy
--------Supply Side Policies

Business cycles

----------------------Industry Analysis

Life Industry Cycles

Start-up stage
Consolidation Stage
Maturity Stage
Relative Decline

Industry Structure and Performance

Rivalry Between Existing Competitors
Pressure from Substitute Products
Bargaining Power of Buyers
Bargaining Power of Suppliers

-----------------------Firm specific analysis

FINANCIAL RATIOS
FINANCIAL STATEMENT ANALYSIS