CHAPTER 2.

INVESTMENT ANALYSIS
METHODS IN FINANCIAL MARKET
INVESTMENT ANALYSIS METHODS

Fundamental analysis: manipulate Answer the question why?

economic information, business Good stock or bad stock?
information and interest

Technical analysis: manipulation on price How to answer the question?

and trading volume and care about Stocks that go up and stocks that go down
FUNDAMENTAL ANALYSIS MODELS

Top-Down Model Bottom-Up Model

 TOP-DOWN MODEL

 Apply: when analysts focus on the economy and industry group

 How to analyze?
Economy

Industry
group
Analysis
direction
Company
 BOTTOM-UP MODEL

 Apply: focus on undervalued stocks

 How to analyze?
Economy

Industry
group
Analysis
direction
Company
ECONOMIC ANALYSIS

 Objectives of economic analysis

 Investment environment
 Analysis of macro factors
 Analysis and forecasting facilities
OBJECTIVES OF ECONOMIC ANALYSIS

Identify the
Help investors make Distribution of the
advantages and
capital allocation share of investment
disadvantages of the
decisions between instruments in each
investment
countries country
environment

Find industries that

Determine the impact
benefit with the
of macroeconomic
current
policy on the stock
macroeconomic
market
situation
THE INVESTMENT ENVIRONMENT

 Investment environment is the total of

economic, social, cultural chemical,
legal, financial, or financial, directly or
indirectly affecting the investor's
operations.
  Analyzing trends in the past and present, there are forecasts for
the future of the following macro requirements:
 Macro-indicators, including: GDP, inflation, unemployment,
ANALYSIS OF exchange rate, interest rate, public debt, debt, investment
(FDI, ODA, Government investment, private sector
IMPORTANT investment), consumption, budget, import, export
MACROECONOMIC  Policies and laws: monetary policy, fiscal policy, investment
FACTORS attraction policy, new legal documents
 Lifestyles: way of life, way of working, consumption,
education, entertainment, etc.
 Trends in technology
 Economic policy
 Fiscal policy:
 Tax increases or decreases taxes will have the effect of encouraging/restricting spending.
 Government spending: spending on defense, unemployment insurance, roads...
 Monetary Policy:
 Impact on the money supply to affect the operation of the economy
 Increase money supply, lower interest rates to stimulate the economy
 Monetary policy tools include open market operations, discount rates, and reserve requirements.
 Business cycle
 The point of transition between business cycles is called a peak and a trough
 The peak is the transition point from the end of the expansion to the beginning of the contraction.
 The bottom is the last point of the crisis before the economy enters the recovery phase
INDUSTRY ANALYSIS

 Why you need an industry analysis?

 Industry analysis goals
 Industry classification criteria
 Industry analysis models
WHY YOU NEED AN INDUSTRY
ANALYSIS?
Different industries will respond to economic changes at different points in the business
cycle.

Different industries have different life cycles.

The industry's outlook in the global business environment will determine how the
industry's company benefits or loses.

Industry analysis will be analyzed before the company analysis.

Industry analysis is also considered important for the bottom-up model.

INDUSTRY ANALYSIS GOALS

Analysis goal:

• 1. Choose a good industry to invest in

• 2. Know the situation of the industry and report the development of these
industries in the future.

Steps taken to achieve the goal:

• 1. Select industries to invest in:

• The average growth rate of the industry compared to the growth rate of GDP:
• Industry classification
• Statistics on industry growth (at least 5 years) and weighted average.
• Compare the average growth rate with the forecasted GDP growth rate and
select sectors with higher growth rate.
• Adaptation of the industry to the current period of the economy: select
industries that are able to adapt and develop in the current economic period
 2. Know the situation of the industry and report the development of these
industries in the future.
 Using Michael Porter model to analyze the situation of the industry
 Based on the results of the analysis to forecast the growth rate of the industry
in the future
INDUSTRY CLASSIFICATION CRITERIA

Based on the major industry

subsystems include: ISIC (UN), Based on the main business
NAICS (USA), UK SIC (UK), ICB activities of the company. The
(Dow Jones and FTSE), GICS main business activity is the
(Morgan Stanley and one that brings only revenue for
Standard&Poor's), VSIC the company in a long time.
(Vietnam)
INDUSTRY ANALYSIS MODELS

Michael SWOT
Porter model model
MICHAEL PORTER MODEL
  New entrants in an industry bring new capacity and the
desire to gain market share. The seriousness of the threat
depends on the barriers to enter a certain industry. The
THREAT OF higher these barriers to entry, the smaller the threat for
existing players. Examples of barriers to entry are the need
NEW for economies of scale, high customer loyalty for existing
ENTRANTS brands, large capital requirements (large investments in
marketing or R&D), the need for cumulative experience,
government policies, and limited access to distribution
channels.
  This force analyzes how much power and control a
company’s supplier (also known as the market of
inputs) has over the potential to raise its prices or to
reduce the quality of purchased goods or services,
which in turn would lower an industry’s profitability
BARGAINING potential. The concentration of suppliers and the
availability of substitute suppliers are important
POWER OF factors in determining supplier power. The fewer
SUPPLIERS there are, the more power they have. Businesses are
in a better position when there are a multitude of
suppliers. Sources of supplier power also include the
switching costs of companies in the industry, the
presence of available substitutes, the strength of their
distribution channels and the uniqueness or level
of differentiation in the product or service the
supplier is delivering.
 BARGAINING POWER OF BUYERS

 The bargaining power of buyers is also described as the market of

outputs. This force analyzes to what extent the customers are able
to put the company under pressure, which also affects the
customer’s sensitivity to price changes. The customers have a lot
of power when there aren’t many of them and when the
customers have many alternatives to buy from. Moreover, it should
be easy for them to switch from one company to another. Buying
power is low however when customers purchase products in small
amounts, act independently and when the seller’s product is very
different from any of its competitors. The internet has allowed
customers to become more informed and therefore more
empowered. Customers can easily compare prices online, get
information about a wide variety of products and get access to
offers from other companies instantly. Companies can take
measures to reduce buyer power by for example implementing
loyalty programs or by differentiating their products and services.
RIVALRY AMONG EXISTING COMPETITORS

 This last force of the Porter’s Five Forces examines how intense the current
competition is in the marketplace, which is determined by the number of existing
competitors and what each competitor is capable of doing. Rivalry is high when
there are a lot of competitors that are roughly equal in size and power, when the
industry is growing slowly and when consumers can easily switch to a competitors
offering for little cost. A good indicator of competitive rivalry is the concentration
ratio of an industry. The lower this ration, the more intense rivalry will probably be.
When rivalry is high, competitors are likely to actively engage in advertising and
price wars, which can hurt a business’s bottom line. In addition, rivalry will be
more intense when barriers to exit are high, forcing companies to remain in the
industry even though profit margins are declining. These barriers to exit can for
example be long-term loan agreements and high fixed costs.
SWOT
 THREAT OF SUBSTITUTE PRODUCTS

 The existence of products outside of the realm of the common product

boundaries increases the propensity of customers to switch to
alternatives. In order to discover these alternatives one should look
beyond similar products that are branded differently by competitors.
Instead, every product that serves a similar need for customers should
be taken into account. Energy drink like Redbull for instance is
usually not considered a competitor of coffee brands such as
Nespresso or Starbucks. However, since both coffee and energy drink
fulfill a similar need (i.e. staying awake/getting energy), customers
might be willing to switch from one to another if they feel that prices
increase too much in either coffee or energy drinks. This will
ultimately affect an industry’s profitability and should therefore also
be taken into account when evaluating the industry’s attractiveness.
  The first element of a SWOT analysis is Strengths.
 Things your company does well
 Qualities that separate you from your competitors
STRENGTHS  Internal resources such as skilled, knowledgeable
staff
 Tangible assets such as intellectual property,
capital, proprietary technologies, etc.
WEAKNESSES

 Once you’ve figured out your strengths, it’s time to

turn that critical self-awareness on your weaknesses.
 Things your company lacks
 Things your competitors do better than you
 Resource limitations
 Unclear unique selling proposition
  Next up is Opportunities.
 Underserved markets for specific products
OPPORTUNITIES  Few competitors in your area
 Emerging needs for your products or services
 Press/media coverage of your company
  The final element of a SWOT analysis is Threats –
everything that poses a risk to either your company
itself or its likelihood of success or growth.
THREATS  Emerging competitors
 Changing regulatory environment
 Negative press/media coverage
 Changing customer attitudes toward your company
  The four elements above are common to all SWOT analyses.
However, many companies further compartmentalize these
elements into two distinct subgroups: Internal and External.
 Internal factors: Typically, Strengths and Weaknesses are
SWOT considered internal factors, in that they are the result of
organizational decisions under the control of your company or
ANALYSIS team. A high churn rate, for example, would be categorized as a
weakness, but improving a high churn rate is still within your
INTERNAL control, making it an internal factor.
AND  External factors: Similarly, emerging competitors would be
categorized as a threat in a SWOT analysis, but since there’s very
EXTERNAL little you can do about this, this makes it an external factor. This
FACTORS is why you may have seen SWOT analyses referred to as
Internal-External Analyses or IE matrices.
 COMPANY ANALYSIS

Non-financial analysis Financial analysis

NON-  What is a good company?
FINANCIAL  Good product or service
 Good business system
ANALYSIS
 Good product or service
 There is a difference in the product
 High competitiveness with companies in the same
industry
 Potential market is not narrowed
 Good business system
 Reflected through comparison of past and present
financial ratios
 Compare financial ratios between the company and
other companies in the same industry
 Reflected through research and development
 Adapt to the actual situation
 The ability to achieve the goals set by the management
 Management loyalty
FINANCIAL ANALYSIS

Financial indicators Caculating method

Solvency ratio
Net working capital(NWC) Current assets – current liabilities
Net working capital/Total assets Net working capital / Total assets
Current ratio Current assets / current liabilities
Quick ratio Quick assets / current liabilities
 Solvency ratio
 A solvency ratio is one of many metrics used to determine whether a
company can stay solvent in the long term. A solvency ratio is a
comprehensive measure of solvency, as it measures a firm's actual cash
flow, rather than net income, by adding back depreciation and other non-
cash expenses to assess a company’s capacity to stay afloat.
 It measures this cash flow capacity versus all liabilities, rather than only
short-term debt. This way, a solvency ratio assesses a company's long-
term health by evaluating its repayment ability for its long-term debt and
the interest on that debt.
 Solvency ratios vary from industry to industry. A company’s solvency
ratio should, therefore, be compared with its competitors in the same
industry rather than viewed in isolation.
 NWC
 Current assets are those that a business can convert to cash over a period of 1 year such as cash,
inventory, etc.
 Short-term debts are debts with a payment term of less than 12 months such as employee salaries,
taxes, etc.
 There are 3 possible cases with net working capital:
 Case 1: Positive net working capital (Current assets are larger than current liabilities)
 When the business operations of the enterprise are stable, the financial obligations of the company have
been met and investments can be made in other activities.
 Case 2: Negative net working capital (Current assets are smaller than current liabilities)
 This is a sign of the wrong use of capital, the balance of payments is definitely out of balance, leading to
the debt solvency ratio < 1, the business may be in trouble.
 For businesses with slow capital turnover (industry, construction,...) it is a worrying sign. But for
businesses in the commercial industry with fast capital turnover, this type of financing can still happen
often.
 Case 3: Net working capital is zero (Current assets equal current liabilities)
 When the balance of payments is in balance, long-term assets and short-term assets are
financed in proportion to its capital. However, this case is very unlikely because business
leaders cannot accurately balance each currency in current assets to match the amount of
short-term debt.
 The current ratio measures a company’s ability to pay current, or short-term,
liabilities (debts and payables) with its current, or short-term, assets, such as cash,
inventory, and receivables.
 current ratio > 1,5: Level of safety
 Quick ratio: The higher the quick ratio, the better a company's liquidity and
financial health
 Quick ratio > 1: Level of safety
 Revenue growth rate: Revenue Growth Rate is an indicator of how well a company
is able to grow its sales revenue over a given time period.
 Profit growth rate: In most cases, an ideal growth rate will be around 15 and 25%
annually.
 Book value: Book value meaning refers to a measure of a company’s basic net
worth. Value investors use this metric to check if a stock is undervalued or
overvalued. This metric has certain limitations. For example, it does not consider a
company’s intangible assets.
 Earnings per share (EPS) is calculated as a company's profit divided by the
outstanding shares of its common stock. The resulting number serves as an
indicator of a company's profitability.
 The term return on assets (ROA) refers to a financial ratio that indicates how profitable a
company is in relation to its total assets. Corporate management, analysts, and investors
can use ROA to determine how efficiently a company uses its assets to generate a profit.
 A ROA of over 5% is generally considered good and over 20% excellent. However, ROAs
should always be compared amongst firms in the same sector.
 Return on equity (ROE) is a measure of financial performance calculated by dividing net
income by shareholders' equity. Because shareholders' equity is equal to a company’s
assets minus its debt, ROE is considered the return on net assets.
 ROE is considered a gauge of a corporation's profitability and how efficient it is in generating
profits. The higher the ROE, the more efficient a company's management is at generating
income and growth from its equity financing.
 ROE of at least 15% is one of the criteria to evaluate the company's financial capacity
according to international standards. This is a very important criterion used by Warren Buffett -
a famous investor when choosing a business
 Return on sales (ROS) is a ratio used to evaluate a company's operational efficiency. This measure
provides insight into how much profit is being produced per dollar of sales. An increasing ROS indicates
that a company is improving efficiency, while a decreasing ROS could signal impending financial troubles.
ROS is closely related to a firm's operating profit margin.
 The price-to-earnings ratio(P/E) is the ratio for valuing a company that measures its current share price
relative to its earnings per share (EPS).
 Many investors use the price-to-book ratio (P/B ratio) to compare a firm's market capitalization to its book
value and locate undervalued companies. This ratio is calculated by dividing the company's current stock
price per share by its book value per share (BVPS).
 According to the assessment, the higher the P/B ratio, the higher the risk, the lower the P/B, the safer the
investment. A P/B ratio of 0.7 - 1.5 is considered normal