Transcript CHAPTER 1 An Overview of Financial Management

Contents - I
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External Environment
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Internal Environment
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Financial System
Financial sector
The mechanics of moving resources
Economic forces
Industry factors
Inputs, Operations, Outputs and supporting activities
The various departments
Corporate governance and agency problems
Company risk and return
The Future
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Forecasted cash flows
Forecasted growth rates
1-1
Contents II
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Types of Financial Analysis
Fundamental Analysis
Profit Maximization.
ROE (Du Pont) Analysis
Factors That Affect Stock Value
Fundamental Valuation Models
Technical Analysis
Use of Exotics in Financial Analysis and valuation
Use of Mathematics in Financial Analysis
Forecasting in financial Analysis
PE and PB Rations in Depth Analysis
1-2
Review -What is Financial
Analysis
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Financial analysis:
To evaluate and valuate.
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Evaluate determinants of financial
performance
Determine and put a value to
performance parameters
Make a decision
1-3
Review of the First Session
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Introduction to the financial system including an
explanation of the financial sector, participants in the
financial system and interest and money as the driver
and lubricants of the economy.
Reviewed the external and internal environment and
their effects as determinants of forecasting and
drivers of value.
Reviewed the basics of financial analysis like its scope
and content and some new trends in financial
analysis that are becoming the new tools that are
increasingly used especially in valuation of financial
derivatives and other structured financial
instruments.
1-4
Manager – Shareholder
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Agents--managers with a fiduciary duty to act in the best interests of owners
Agency problem--managers maximize their own self-interests at the expense
of owners
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High salaries of CEOs
Emphasis on short-term performance at expense of long-term performance
Empire building for status
perquisites
The burden is to align the interests of the manager with those of the
shareholders
This puts a DRAIN on the performance and value of the firm.
Tactics used to align interest:
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Manager part owner
Stock options
Bonuses
Cash dividends
Debt
Monitoring
Corporate control markets
1-5
Shareholder – Debt holder
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The conflict of interest arises here when the firm is
over indebted.
Shareholders will get into high risk – high return
investments, if such investments materialize,
shareholders will reap most of the benefit (debt
holders are paid a fixed percentage and the residual
goes to the shareholders), if not most of the loss will
be on the side of the debt holders.
The solution is covenants
The financial analyst needs to assess such situation
in the process of determining a risk premium among
other things.
1-6
Shareholder - Shareholder
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A rises in companies with subsidiaries and
affiliates
The interests of the subsidiary shareholders
are not in line with those of the shareholders
of the parent companies
Appears in capital budgeting decisions
especially when the parent and the subsidiary
are in two different tax and regulatory
regimes
1-7
Auditors

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Auditors are prone to be lenient in auditing
financial statements and in valuing business
because they are paid by the very same party
they are auditing or do not want to lose
future business opportunities.
Such considerations need to be taken into
account when financially analyzing a firm.
1-8
Regulators

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The regulators interests may be
different from those of the company
being analyzed
The regulator may enact regulations
that hurt the company for the public
good; levying taxes is an example.
1-9
The Market for Corporate Control
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Participants in the financial markets are
monitoring each other to capitalize on
opportunities of buying an undervalued firm.
Firms that have corporate governance
problems are prone to incur higher rate of
return due to the risk premium added from
such problems.
The financial analyst needs to incorporate
such factors in estimating and forecasting
required rates of return and future cash
flows.
1-10
Company Risk and Return
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The analyst needs to incorporate specific analysis of the
riskness of the company to reflect that on the required rate of
return on investing sums of money in such company.
Many measures of risk, the most important ones are the most
simple ones, because they are the ones used most in industry
practice.
Beta
Sigma
VaR
Many more like: down side risk, coefficient of variation,
regressions, time series, FF two factor model, FF multi factor
models, Merton intertemporal model, stochastic models, stress
tests under various distributions …..
1-11
Types of Financial Analysis

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Fundamental: use of all relevant information
and to predict value – assumes markets
efficiency.
Technical: use of past price, trading volume
and people behavior to predict value –
assumes market inefficiency.
Naïve: Financial ratios and some calculated
indicators – limited usefulness.
1-12
Fundamental Analysis
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The value of an asset is equal to the present
value of all of its future net cash flow.
Need to take previous factors into account
when forecasting cash flows, growth rates
and required rates of return.
Depends on all relevant information
Believes in Semi strong form market
efficiency.
1-13
Is stock price maximization the same as profit
maximization?
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No, despite a generally high correlation
amongst stock price, EPS, and cash flow.
Current stock price relies upon current
earnings, as well as future earnings and
cash flow.
Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).
1-14
Profit Maximization
Example:
Equity = 10 million shares @ DHS1 a share book
value, no RE, no PIC and no reserves.
Profits = DHS10 million
CEO and CFO claim that they can maximize
profits by increasing them to DHS10.5 million if
they company would issue 1 million new
shares.
In this case profits are maximized however
profitability is lowered
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1-15
Profit Maximization
# shares Value per share Profits
Case 1
10
10
10
Case 2
11
11 10.5
Profits are maximized (a handsome increase of 0.5 million)

Well, what happened to profitability?
# shares Value per share Profits EPS
Case 1
10
10
10
1
Case 2
11
11 10.5 0.955
Profits are maximized (a handsom increase of 0.5 million)
However, profitability declined!
1-16
Profit and Profitability Maximization
Example:
Equity = 1 million shares @ DHS1 a share book
value, no RE, no PIC and no reserves.
Profits = DHS1 million
CEO and CFO claim that they can maximize
profits by increasing them to DHS1.5 million if
they company would retain all of last year’s
earnings, i.e. DHS1 million .
In this case profits and profitability are
maximized
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1-17
Profit and Profitability Maximization
# shares Value per share RE Profits EPS
Case 1
1
1
0
1
1
Case 2
1
1
1
1.5
1.5
Profits are maximized (a handsom increase of 0.5 million)
EPS maximized (from 1 to 1.5 per share)

How would this affect return on equity?
# shares Value per shareRE Value of equityProfitsEPS
ROE
Case 1
1
1
0
1
1
1 100%
Case 2
1
1
1
2
1.5
1.5 75%
Profits are maximized (a handsom increase of 0.5 million)
EPS maximized (from 1 to 1.5 per share)
However, return on equity is lowered from 100% to 75%
1-18
Maximizing Profits, Profitability
and Return on Equity!
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Use leverage to increase the return on equity
However this will increase the riskness of the firm
Increasing risk lowers the price.
Furthermore, the return on total assets will decline
1-19
Maximizing Profits, Profitability
and Return on Equity!
Example
same as last example, but instead of
retaining earnings, finance growth
operations and profits by borrowing
from the bank at 10%.
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1-20
Maximizing Profits, Profitability
and Return on Equity!
# shares Value per share Value of equity Debt Profits EPS
ROE
Case 1
1
1
1
0
1
1 100%
Case 2
1
1
1
1
1.4
1.4 140%
Cost of debt is 10% (i.e. 0.1 million)
Profits = 1.5 - 0.1 = 1.4)
Profits , EPS and ROE are all maximized
What would happen to the Return on total assets?
# shares Value per share Value of equity Debt Total Assets ProfitsEPS ROE ROA
Case 1
1
1
1
0
1
1
1 100% 100%
Case 2
1
1
1
1
2
1.4 1.4 140% 70%
Cost of debt is 10% (i.e. 0.1 million)
Profits = 1.5 - 0.1 = 1.4)
Profits , EPS and ROE are all maximized
Return on assets is minimized + you have increased the riskness of the firm
1-21
ROE Analysis
Net Income
ROA 
Total Assets
Net Income
Profit Margin 
Sales
Sales
Total Asset Turnover 
Total Assets
1-22
ROE Analysis
Net Income
Sales
ROA 

Sales
Total Assets
ROA  Profit Margin  Total Asset Turnover
1-23
ROE Analysis
Net Income
ROE 
T otalCommonEquity
ROE
Net Income
Total Assets


Total Assets Common Equity
 ROA  Equity Multiplier
1-24
ROE Analysis
Net Income
Sales
Total Assets
ROE 


Sales
Total Assets Common Equity
ROE  Profit Margin  Total Asset Turnover  Equity Multiplier
1-25
Factors that affect stock price
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Projected cash flows to shareholders
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Timing of the cash flow stream
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Riskiness of the cash flows
1-26
Basic Valuation Model
CF1
CF2
CFn
Value 


1
2
(1 k) (1 k)
(1 k)n
n
CFt

.
t
t 1 (1  k)

To estimate an asset’s value, one estimates the
cash flow for each period t (CFt), the life of the
asset (n), and the appropriate discount rate (k)
1-27
Dividend Discount Models
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Constant growth
Two growth
Multi growth
Stochastic
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Additive w and w/o bankruptcy
Geometric w and w/o bankruptcy
1-28
Residual Income Valuation
BV0 * ( ROE  g )
Value 
kg
1-29
Multipliers
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PE
PB
V/EBIT
P/S
P/CF
1-30
Technical analysis
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Depends on past prices and trading
volumes to predict price and
performance
Markets are inefficient
Prices are trendy
Can be very mathematical
1-31
Technical Charts
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Point and figure
Candlesticks
OHLC
Price lines
Moving averages
……
1-32
Technical Indicators
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Candlesticks: hammer, bullish engulfing,
morning star, bearish engulfing, hanging
man, harami, Marubozu, three white soldiers,
…. Many more.
Technical indicators: moving averages,
exponential moving averages, Bollinger
bands, slow stochastic, fast stochastic, Trin,
Trix, Money flow index, RSI, Average
directional index, Williams %R, Price rate of
change, Oscillators, …. Many more.
1-33
Exotic Financial Analysis
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Stochastic models in forecasting items
and future interest rates and discount
rates, and the previously mentioned
stochastic dividend discount models.
Real Options
Abandonment Options
1-34
Use of Mathematics

Towards the end of this program and as
an introduction to future programs we
will look into the mathematics of
financial analysis and their numerical
solutions especially for derivatives and
their use in equity and other securities
financial analyses.
1-35
Forecasting Example
Balance sheet, in millions of dollars
Cash & sec.
Accounts rec.
Inventories
Total CA
Net fixed
assets
Total assets
$
20 Accts. pay. &
accruals
240 Notes payable
240
Total CL
$ 500 L-T debt
Common stock
Retained
500 earnings
$1,000
Total claims
$ 100
100
$ 200
100
500
200
$1,000
1-36
Forecasting Example
Income statement, in millions of dollars
Sales
Less:
Var. costs (60%)
Fixed costs
EBIT
Interest
EBT
Taxes (40%)
Net income
Dividends (30%)
Add’n to RE
$2,000.00
1,200.00
700.00
$ 100.00
16.00
$
84.00
33.60
$
50.40
$15.12
$35.28
1-37
Key assumptions
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Operating at full capacity in 2006.
Each type of asset grows proportionally with
sales.
Payables and accruals grow proportionally
with sales.
2006 profit margin (2.52%) and payout
(30%) will be maintained.
Sales are expected to increase by $500
million. (%GS = 25%)
1-38
Determining additional funds needed AFN
AFN = (A*/S0)ΔS – (L*/S0) ΔS – M(S1)(RR)
= ($1,000/$2,000)($500)
– ($100/$2,000)($500)
– 0.0252($2,500)(0.7)
= $180.9 million.
1-39
How shall AFN be raised?
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The payout ratio will remain at 30 percent
(d = 30%; RR = 70%).
No new common stock will be issued.
Any external funds needed will be raised as
debt, 50% notes payable and 50% L-T
debt.
1-40
Forecasted Income Statement
Sales
Less: VC
FC
EBIT
Interest
EBT
Taxes (40%)
Net income
Div. (30%)
Add’n to RE
2006
$2,000
1,200
700
$ 100
16
$
84
34
$
50
$15
$35
Forecast
Basis
1.25
0.60
0.35
2007
Forecast
$2,500
1,500
875
$ 125
16
$ 109
44
$
65
$19
$46
1-41
Forecasted Balance Sheet (2007) - Assets
2006
Cash
Accts. rec.
Inventories
Total CA
Net FA
Total assets
$
20
240
240
$ 500
500
$1,000
Forecast
Basis
0.01
0.12
0.12
0.25
2007
1st Pass
$
25
300
300
$ 625
625
$1,250
1-42
Forecasted Balance Sheet (2007) Liabilities and Equity
2006
AP/accruals
Notes payable
Total CL
L-T debt
Common stk.
Ret.earnings
Total claims
$ 100
100
$ 200
100
500
200
$1,000
Forecast
Basis
2007
1st Pass
0.05
$ 125
100
$ 225
100
500
246
$1,071
+46*
* From income statement.
1-43
What is the additional financing needed
(AFN)?

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Required increase in assets
Spontaneous increase in liab.
Increase in retained earnings
Total AFN
= $ 250
= $ 25
= $ 46
= $ 179
The company must have the assets to generate
forecasted sales. The balance sheet must balance,
so we must raise $179 million externally.
1-44
How will the AFN be financed?
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Additional N/P
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Additional L-T debt
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0.5 ($179) = $89.50
0.5 ($179) = $89.50
But this financing will add to interest
expense, which will lower NI and retained
earnings. This will lower equity financing and
increase debt financing, and so on. We will
generally ignore financing feedbacks.
1-45
Forecasted Balance Sheet (2007) - Assets
2007
1st Pass
Cash
Accts. rec.
Inventories
Total CA
Net FA
Total assets
$
25
300
300
$ 625
625
$1,250
AFN
-
2007
2nd Pass
$
25
300
300
$ 625
625
$1,250
1-46
Forecasted Balance Sheet (2007) - Liabilities
and Equity
2007
1st Pass
AP/accruals
Notes payable
Total CL
L-T debt
Common stk.
Ret.earnings
Total claims
$ 125
100
$ 225
100
500
246
$1,071
AFN
+89.5
+89.5
-
2007
2nd Pass
$ 125
190
$ 315
189
500
246
$1,250
1-47
Advanced Forecasting
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Use of regressions for each item
Use of iterations in finding interest
income and expense
Forecasting with stock dividends, stock
repurchase, stock issuance, stock splits,
….
1-48
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case I‬‬
‫التسعير في حال‪:‬‬
‫عدم وجود نمو‬
‫تدفع كافة األرباح على شكل توزرعات نقدية‬
‫وجود ارباح غير اعتيادية أو عدمه (وجود قيمة اقتصادية مضافة أو عدم وجودها)‬
‫أي ان العائد المتحقق يساوي العائد المطلوب أو أكبر منه‬
‫سوق منافسة أو احتكار أو أي سوق‬
‫السعر = ربحية السهم‪/‬معدل العائد المطلوب‬
‫‪1-49‬‬
‫‪0%‬‬
‫النمو=‬
‫‪100%‬‬
‫التوزيع=‬
‫العائد المطلوب= ‪10%‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case I‬‬
‫أحتكار‬
‫منافسة‬
‫‪10‬‬
‫‪10‬‬
‫‪10‬‬
‫القيمة الدفترية‬
‫‪10% 10% 10%‬‬
‫العائد المطلوب‬
‫‪3‬‬
‫‪2‬‬
‫‪1‬‬
‫الربح الكلي‬
‫‪1‬‬
‫‪1‬‬
‫‪1‬‬
‫الربح العادي‬
‫‪2‬‬
‫‪1‬‬
‫‪0‬‬
‫الربح الغير عادي‬
‫‪30% 20% 10%‬‬
‫العائد المتحقق‬
‫‪3‬‬
‫‪2‬‬
‫‪1‬‬
‫التوزيع‬
‫‪10‬‬
‫‪10‬‬
‫‪10‬‬
‫القيمة الدفترية‬
‫‪30‬‬
‫‪20‬‬
‫‪10‬‬
‫السعر السوقي‬
‫‪3‬‬
‫‪2‬‬
‫‪1‬‬
‫القيمة السوقية الى القيمة الدفترية مضاعف القيمة الدفترية‬
‫‪10‬‬
‫‪10‬‬
‫‪10‬‬
‫القيمة السوقية الى الربحية (مضاعف الربحية)‬
‫يتغير مضاعف القيمة الدفترية ويبقى مضاعف الربحية ثابتا بغض النظر عن وجود قيمة مضافة أم ال‬
‫‪1-50‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case II‬‬
‫التسعير في حال‪:‬‬
‫وجود نمو‬
‫لتمويل النمو يدفع نصف األرباح على شكل توزيعات نقدية ويحجز نصفها اآلخر‬
‫عدم وجود ارباح غير اعتيادية (عدم وجود قيمة اقتصادية مضافة)‬
‫أي ان العائد المتحقق يساوي العائد المطلوب فقط وليس أكثر مما هو متوقع‬
‫سوق منافسة واستثمار لزيادة حجم الشركة‬
‫السعر = التوزيعات*(‪+1‬معدل النمو)‪(/‬معدل العائد المطلوب‪-‬معدل النمو)‬
‫‪1-51‬‬
‫‪0.05‬‬
‫النمو=‬
‫‪0.5‬‬
‫التوزيع=‬
‫العائد المطلوب= ‪0.1‬‬
‫العائد المتحقق= ‪0.1‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case II‬‬
‫السنة‬
‫‪1‬‬
‫‪10‬‬
‫‪10%‬‬
‫‪1‬‬
‫‪1‬‬
‫‪0‬‬
‫‪10%‬‬
‫‪0.5‬‬
‫‪10.5‬‬
‫‪10.5‬‬
‫‪1‬‬
‫‪10.5‬‬
‫‪3‬‬
‫‪2‬‬
‫‪11.03 10.5‬‬
‫‪10% 10%‬‬
‫‪1.103 1.05‬‬
‫‪1.103 1.05‬‬
‫‪0‬‬
‫‪0‬‬
‫‪10% 10%‬‬
‫‪0.551 0.525‬‬
‫‪11.58 11.03‬‬
‫‪11.58 11.03‬‬
‫‪1‬‬
‫‪1‬‬
‫‪10.5 10.5‬‬
‫‪4‬‬
‫‪11.58‬‬
‫‪10%‬‬
‫‪1.158‬‬
‫‪1.158‬‬
‫‪0‬‬
‫‪10%‬‬
‫‪0.579‬‬
‫‪12.16‬‬
‫‪12.16‬‬
‫‪1‬‬
‫‪10.5‬‬
‫القيمة الدفترية‬
‫العائد المطلوب‬
‫الربح الكلي‬
‫الربح العادي‬
‫الربح الغير عادي‬
‫العائد المتحقق‬
‫التوزيع‬
‫القيمة الدفترية‬
‫السعر السوقي‬
‫القيمة السوقية الى القيمة الدفترية مضاعف القيمة الدفترية‬
‫القيمة السوقية الى الربحية (مضاعف الربحية)‬
‫زاد مضاعف الربحية بسبب النمو ولكنه استمر ثابتا‬
‫بالرغم من النمو في الشركة إال أن مضاعف القيمة الدفترية بقي ثابتا ألنه ال يوجد نمو أكبر من المتوقع‬
‫بالرغم من النمو في الشركة إال أن مضاعف الربحية بقي ثابتا ألنه ال يوجد نمو أكبر من المتوقع‬
‫‪1-52‬‬
‫‪5‬‬
‫‪12.16‬‬
‫‪10%‬‬
‫‪1.216‬‬
‫‪1.216‬‬
‫‪0‬‬
‫‪10%‬‬
‫‪0.608‬‬
‫‪12.76‬‬
‫‪12.76‬‬
‫‪1‬‬
‫‪10.5‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case III‬‬
‫التسعير في حال‪:‬‬
‫وجود نمو‬
‫لتمويل النمو يدفع نصف األرباح على شكل توزيعات نقدية ويحجز نصفها اآلخر‬
‫وجود ارباح غير اعتيادية (وجود قيمة اقتصادية مضافة)‬
‫أي ان العائد المتحقق أكبر من العائد المطلوب‬
‫سوق منافسة واستثمار لزيادة حجم الشركة‬
‫السعر = القيمة الدفترية ‪ +‬األرباح غير االعتيادية‪(/‬معدل العائد المطلوب‪-‬معدل النمو)‬
‫‪1-53‬‬
‫النمو=‬
‫التوزيع=‬
‫العائد المطلوب=‬
‫العائد المتحقق=‬
‫‪0.05‬‬
‫‪0.5‬‬
‫‪0.1‬‬
‫‪0.2‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case III‬‬
‫السنة‬
‫القيمة الدفترية‬
‫العائد المطلوب‬
‫الربح الكلي‬
‫الربح العادي‬
‫الربح الغير عادي‬
‫العائد المتحقق‬
‫التوزيع‬
‫األرباح المحجوزة‬
‫القيمة الدفترية‬
‫السعر السوقي‬
‫القيمة السوقية الى القيمة الدفترية مضاعف القيمة الدفترية‬
‫القيمة السوقية الى الربحية (مضاعف الربحية)‬
‫زاد مضاعف الربحية بسبب النمو ولكنه استمر ثابتا‬
‫يبقى مضاعف القيمة الدفترية ثابتا‬
‫بالرغم من النمو في الشركة إال أن مضاعف الربحية بقي ثابتا‬
‫‪1-54‬‬
‫‪4‬‬
‫‪3‬‬
‫‪2‬‬
‫‪1‬‬
‫‪13.31‬‬
‫‪12.1‬‬
‫‪11‬‬
‫‪10‬‬
‫‪10% 10% 10% 10%‬‬
‫‪2.662‬‬
‫‪2.42‬‬
‫‪2.2‬‬
‫‪2‬‬
‫‪1.331‬‬
‫‪1.21‬‬
‫‪1.1‬‬
‫‪1‬‬
‫‪1.331‬‬
‫‪1.21‬‬
‫‪1.1‬‬
‫‪1‬‬
‫‪20% 20% 20% 20%‬‬
‫‪1.331‬‬
‫‪1.21‬‬
‫‪1.1‬‬
‫‪1‬‬
‫‪1.331‬‬
‫‪1.21‬‬
‫‪1.1‬‬
‫‪1‬‬
‫‪14.64 13.31‬‬
‫‪12.1‬‬
‫‪11‬‬
‫‪41.26 37.51‬‬
‫‪34.1‬‬
‫‪31‬‬
‫‪2.818 2.818 2.818 2.818‬‬
‫‪15.5‬‬
‫‪15.5‬‬
‫‪15.5‬‬
‫‪15.5‬‬
‫‪5‬‬
‫‪14.64‬‬
‫‪10%‬‬
‫‪2.928‬‬
‫‪1.464‬‬
‫‪1.464‬‬
‫‪20%‬‬
‫‪1.464‬‬
‫‪1.464‬‬
‫‪16.11‬‬
‫‪45.39‬‬
‫‪2.818‬‬
‫‪15.5‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case IV‬‬
‫التسعير في حال‪:‬‬
‫وجود نمو‬
‫لتمويل النمو يدفع نصف األرباح على شكل توزيعات نقدية ويحجز نصفها اآلخر‬
‫وجود ارباح غير اعتيادية (وجود قيمة اقتصادية مضافة)‬
‫أي ان العائد المتحقق أكبر من العائد المطلوب‬
‫نمو في األرباح غير االعتيادية‬
‫سوق منافسة واستثمار لزيادة حجم الشركة‬
‫السعر = القيمة الدفترية ‪ +‬األرباح غير االعتيادية‪(/‬معدل العائد المطلوب‪-‬معدل النمو)‬
‫‪1-55‬‬
‫‪0.05‬‬
‫النمو=‬
‫‪0.5‬‬
‫التوزيع=‬
‫العائد المطلوب= ‪0.1‬‬
‫العائد المتحقق= ‪0.2‬‬
‫نمو األرباح غير العتيادية = ‪0.05‬‬
‫‪Analyzing PE and PB and its Usages‬‬
‫‪Case IV‬‬
‫السنة‬
‫‪1‬‬
‫‪2‬‬
‫القيمة الدفترية‬
‫‪10‬‬
‫‪11‬‬
‫العائد المطلوب‬
‫‪10% 10%‬‬
‫الربح الكلي‬
‫‪2‬‬
‫‪2.31‬‬
‫الربح العادي‬
‫‪1‬‬
‫‪1.1‬‬
‫الربح الغير عادي‬
‫‪1‬‬
‫‪1.271‬‬
‫العائد المتحقق‬
‫‪21% 20%‬‬
‫التوزيع‬
‫‪1‬‬
‫‪1.155‬‬
‫األرباح المحجوزة‬
‫‪1‬‬
‫‪1.155‬‬
‫القيمة الدفترية‬
‫‪11‬‬
‫‪12.16‬‬
‫السعر السوقي‬
‫‪31‬‬
‫‪37.68‬‬
‫القيمة السوقية الى القيمة الدفترية مضاعف القيمة الدفترية‬
‫‪3.1 2.818‬‬
‫القيمة السوقية الى الربحية (مضاعف الربحية)‬
‫‪16.31 15.5‬‬
‫زاد مضاعف الربحية بسبب النمو وبزيادة مطردة مع النمو في األرباح غير االعتيادية‬
‫زاد مضاعف القيمة الدفترية بسبب النمو وبزيادة مطردة مع النمو في األرباح غير االعتيادية‬
‫يزداد المضاعفين مع النمو في االرباح غير االعتيادية‬
‫‪1-56‬‬
‫‪3‬‬
‫‪12.16‬‬
‫‪10%‬‬
‫‪2.68‬‬
‫‪1.216‬‬
‫‪1.538‬‬
‫‪22%‬‬
‫‪1.34‬‬
‫‪1.34‬‬
‫‪13.5‬‬
‫‪44.45‬‬
‫‪3.294‬‬
‫‪16.59‬‬
‫‪4‬‬
‫‪13.5‬‬
‫‪10%‬‬
‫‪3.124‬‬
‫‪1.35‬‬
‫‪1.864‬‬
‫‪23%‬‬
‫‪1.562‬‬
‫‪1.562‬‬
‫‪15.06‬‬
‫‪52.63‬‬
‫‪3.495‬‬
‫‪16.85‬‬
‫‪5‬‬
‫‪15.06‬‬
‫‪10%‬‬
‫‪3.66‬‬
‫‪1.506‬‬
‫‪2.262‬‬
‫‪24%‬‬
‫‪1.83‬‬
‫‪1.83‬‬
‫‪16.89‬‬
‫‪62.57‬‬
‫‪3.705‬‬
‫‪17.09‬‬
Analyzing PE and PB and its Usages
Conclusions




Reinvestment of free cash flow at rates of
return in excess of capital costs creates
growth in abnormal earnings, resulting in
valuation multiple expansion.
The PE is a function of the prospective
growth in future abnormal earnings.
Usages of PE in any other case will result in
mispricing and arbitrage opportunities.
This huge limitation should be considered
among many other ones.
1-57
Analyzing PE and PB and its Usages
Conclusions




Which PE to use the historical average
of the same firm’s PE’s, OR
The PE of similar firms, OR
The PE of the industry
How are PE’s used for companies that
have more than one division
1-58
Analyzing PE and PB and its Usages
Conclusions



PE does take risk into account indirectly (i.e. through
the used pricing model’s discount rate).
PE gives the dollar amount (Price) the investor is
willing to pay for one dollar of continued earnings. PE
is the reciprocal of the required rate if return.
Empirical studies show that the required rate of
return (calculated using other return models like the
market model or CAPM) is usually different from the
one calculated by PE ratios.
Only sustainable earnings are used, transitory or non
recurring earnings must be excluded.
1-59
Analyzing PE and PB and its Usages
Recommendations



Use PE ratios with maximum caution
Know when it is used and what it
means
PB is also problematic some times, it is
used when there are abnormal returns
regardless whether they grow or not.
1-60
Tools of Financial Analysis

See you all in December
1-61