Financial Analysis and Valuation: Introduction
AFC 3230 – Financial Analysis and Valuation
Lecture 1 – Introduction (6 marks – Theory)
Investment Styles:
Intuitive Investing * Investor who relies on intuition and hunches – there is no analysis involved
Problems: * Self-deception, ignores ability to check intuition
Passive Investing * Investor who accepts the market price as value – there is no analysis involved – this is the “efficient market approach”
Problems: * It is risky that you may be paying too much for an investment which is overpriced
Fundamental Investing: Challenge Market Prices
Active Investing * An opportunity to find mispriced investments
Problems: * Requires proper analysis
Defensive Investing * A defence against paying for/ selling for the wrong price
Problems: * Prudence requires analysis
Users of Accounting Information: * Equity Investors * Debt Investors * Managements * Employees * Litigants * Customers * Governments * Competitors
Capital Markets and Accounting Information: * Fundamental analysts believe that the markets may misprice securities in the short run although the correct price will be reached over a long period of time * Profits can be made by buying/selling undervalued/overvalued securities * Once the markets realizes its mistakes and re-prices securities accordingly, the trading strategy will earn sizable gains.
Example – Newcrest Mining * On February 8, goldminer Newcrest Mining reported a 48 per cent fall in first-half net profit after tax * Interim net profit after tax for the six months to the end of December was $320 m, down from $645 m at the same time last year * Sales revenue was down 23 per cent to $1.805 b
BUT * Newcrest Mining's shares rose 5.01 per cent to $24.52
WHY?
* The market interpreted this half year report as good news * Analysts and management both forecast a more dire outcome for the 6 months period. *
Lecture 1 – Introduction (6 marks – Theory)
Investment Styles:
Intuitive Investing * Investor who relies on intuition and hunches – there is no analysis involved
Problems: * Self-deception, ignores ability to check intuition
Passive Investing * Investor who accepts the market price as value – there is no analysis involved – this is the “efficient market approach”
Problems: * It is risky that you may be paying too much for an investment which is overpriced
Fundamental Investing: Challenge Market Prices
Active Investing * An opportunity to find mispriced investments
Problems: * Requires proper analysis
Defensive Investing * A defence against paying for/ selling for the wrong price
Problems: * Prudence requires analysis
Users of Accounting Information: * Equity Investors * Debt Investors * Managements * Employees * Litigants * Customers * Governments * Competitors
Capital Markets and Accounting Information: * Fundamental analysts believe that the markets may misprice securities in the short run although the correct price will be reached over a long period of time * Profits can be made by buying/selling undervalued/overvalued securities * Once the markets realizes its mistakes and re-prices securities accordingly, the trading strategy will earn sizable gains.
Example – Newcrest Mining * On February 8, goldminer Newcrest Mining reported a 48 per cent fall in first-half net profit after tax * Interim net profit after tax for the six months to the end of December was $320 m, down from $645 m at the same time last year * Sales revenue was down 23 per cent to $1.805 b
BUT * Newcrest Mining's shares rose 5.01 per cent to $24.52
WHY?
* The market interpreted this half year report as good news * Analysts and management both forecast a more dire outcome for the 6 months period. *