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FTX 3044 : Guide by Pradeep BrijlalDear Students, I trust that you are all keeping well and taking all precautions to avoid being infected.
I have presented four topics, namely, Value Drivers; Macroeconomic Analyses; Equity Valuation, and
Financial Statement analyses. Below is a brief description of the outcomes and scope for Quiz 1.
1) Value Drivers
What are the drivers of business value?;
Factors that increase the value of business in the event of sale opportunity
Buyers will look for risk vs reward hence value= benefit/risk
Key business value drivers
Market
Investment
Profitability
Employees
Strategy
Brand
explain the different value drivers, using examples;
Economies of scale
Costs per unit goes down with increase in production
Technology
Development can lead to new product or better production
Product and service offering
Companies should strive to develop a mix of offerings
Focus on a niche can lead to risk due to little diversification
Access to capital
Smaller companies have it more difficult to get capital
Financial Performance
- Through financial analysis, a company can measure trends, identify its liabilities and assets,
and compare its condition and financial performance with similar companies.
Skilled employees
Level of high skilled workers in company
Increases productivity in company
Solid customer base
Manage distribution of customers to minimize risk
Market environment
Influenced by development and economic trends in the industries they operate in
, Branding and marketing strategy
Increase sales through an increase in market recognition
Strategic vision
Strategy for future growth and how to achieve it not just projections
explain 5 key equity market drivers;
Inflation - It is the general rate at which the prices of goods and services rise in a country
Interest rates - lower interest rates fuel spending and encourage businesses to invest more,
which increases the credit growth in a financial system. High interest rates does the opposite
Credit growth - represents the demand for loans from the public and private sector and
individuals. When credit growth is on the rise, it indicates that businesses are borrowing more
and expanding which, in turn, creates jobs and increases revenue and profits
Corporate profits - Business can make use of the easy and cheap availability of credit by
aggressively investing in their infrastructure and/or upgrading their services causes EBITA
margins to grow
Valuations (increase in EBITA means brither future usually)
ways to measure stock market value – with pros and cons for each and discuss the key business
value drivers.
Forward P/E: divide a stock market’s value or price by the aggregate earnings per share of all
the companies over the next 12 months. A low number represents better value.
Pro:
Con: obvious drawback is that no one knows what companies will earn in future
Trailing P/E: It works similarly to forward P/E but takes the past 12 months’ earnings instead
Pro: involves no forecasting
Con: past 12 months may also give a misleading picture.
Price to book: Compares the price with the book value or net asset value of the stock
market. A high value means a company is expensive relative to the value of assets expressed in
its accounts. This could be because higher growth is expected in future.
Pro: link to the underlying assets giving a greater indication of the firms value through the
physical assets its got
Con: for technology companies or companies in the services sector, which have little in the
way of physical assets, it is largely meaningless
- Dividend yield: the income paid to investors as a percentage of the price, has been a useful
tool to predict future returns.
Pro: easy to predict future returns and shows how much the company pays its investors.
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