Equity Investments 2025 V3 PDF

2025 Equity V3 FinTree © 2025 2024 FinTree Education Private Ltd FinTree Equity LM Name of Readin...

2025 Equity V3 FinTree © 2025 2024 FinTree Education Private Ltd FinTree Equity LM Name of Reading P.g. 1 Market Organization & Structure 1 2 Security Market Indexes 8 3 Market Efficiency 11 4 Overview of Equity Securities 13 5 Company Analysis: Past and Present 17 6 Industry and Competitive Analysis 22 7 Company Analysis: Forecasting 26 8 Equity Valuation: Concepts and Basic Tools 29 FinTree © 2025 2024 FinTree Education Private Ltd Market Organization and Structure FinTree Fruit 1 : The Functions of the Financial System FinTree Fruit 2 : Classifications FinTree of Assets and Markets FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 3 : Major types of assets FinTree FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 4 : Financial Intermediaries FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 5 : Positions and Short Positions FinTree FinTree Fruit 6 : Leveraged Positions FinTree Fruit 7 : Execution, Validity, Clearing Instructions FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 8 : Primary & Secondary Market FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 9 : Quote, Order & Brokered Markets FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 10 : Well-functioning Financial Systems FinTree Fruit 11 : Market Regulation FinTree © 2025 2024 FinTree Education Private Ltd Security Market Indexes FinTree Fruit 1 : Index Definition FinTree Fruit 2 : Price FinTree and Total Return FinTree Fruit 3 : Choices and Issues FinTree Fruit 4 : Index Construction FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 5 : Index Weighting - Price and Total Return FinTree FinTree Fruit 6 : Index Management: Rebalancing and Reconstitution FinTree Fruit 7 : Uses of Market Indexes FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 8 : Equity indexes FinTree FinTree Fruit 9 : Fixed-income indexes FinTree Fruit 10 : Indexes for Alternative Investments FinTree Fruit 11 : Types of security market indices FinTree © 2025 2024 FinTree Education Private Ltd Market Efficiency FinTree Fruit 1 : The Concept of Market Efficiency FinTree FinTree Fruit 2 : Market Value versus Intrinsic Value FinTree Fruit 3 : Factors Affecting Market Efficiency Including Trading Costs FinTree Fruit 4 : Forms of Market Efficiency FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 5 : Market & Other Pricing Anomalies FinTree FinTree Fruit 6 : Behavioral Finance FinTree © 2025 2024 FinTree Education Private Ltd Overview of Equity Securities FinTree Fruit 1 : Characteristics of Equity Securities FinTree FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 2 : Ownership Characteristics among different equity classes FinTree Fruit 3 : Private Versus FinTree Public Equity Securities FinTree Fruit 4 : Non-Domestic Equity Securities FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 5 : Risk and Return Characteristics FinTree Fruit 6 : Role FinTree Fruit 7 : Equity and Company Value FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 8 : Accounting of ROE and Cost of Equity FinTree FinTree © 2025 2024 FinTree Education Private Ltd Company Analysis: Past and Present FinTree Fruit 1 : Company and Industry Analysis Framework FinTree 3. Forecasting 2. Industry and Competitive Analysis 1. Past and Present Company Analysis FinTree Fruit 2 : Key elements of the Initial Company Research Report Section Content Front Matter - Issuer name, symbols, analyst recommendation, target prices Recommendation - Analysts’ recommendation, key supporting reasons Company Description - Business model, strategy, charts (e.g., revenue breakdown) Industry & Positioning - Industry size, growth, key drivers, market share trends - Competitive analysis (Porter’s Five Forces), PESTLE analysis - Evaluation of company’s industry position and strategy Financial Analysis - Key drivers evaluation, forecasts, historical and future statements Valuation - Company and security value estimates, target price - Relative and present value approaches, sensitivity analyses ESG Considerations - Evaluation of ESG indicators, ownership structure, compensation Risks - Assessment of material risks, impact on financial analysis FinTree Fruit 3 : Determining the Business Model Determining Business Components Models Information Sources - Products/Services - Common Models - Issuer - Customers - Analyst Focus - Public - Sales Channels - Proprietary (Third-party) - Pricing - Proprietary - Resources (Primary Research) 17 FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 4 : Revenue Analysis FinTree Pricing Power and Revenue Drivers: Importance: Prices impact revenue; pricing power crucial for setting prices without sales impact. Market Types: Competitive: Price-takers, returns align with cost of capital. Less Competitive: Power from differentiation, barriers, common in branded goods. Evaluation: Analysts compare prices; rising profitability signals pricing power. Substitutes: Lack of pricing power leads to substitutes, easy customer switching. Profitability: Rising profitability signals sustained pricing power and investor value. Signs of Power: Ability to increase prices despite cost rise. Long-term profitability growth. Competitors, substitutes don't drive prices down faster than costs. FinTree Fruit 5 : Top-Down Revenue Analysis Step 1: Market Identification Step 2: Segmentation and Substitutes Step 3: Calculate Market Share Step 4: Trend Analysis Step 5: Compare Competitors Step 6: Insight Generation Step 7: Strategic Considerations Step 8: Anomaly Investigation Step 9: Valuation Integration FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 6 : Operating Profitability and Working Capital Analysis FinTree Nature of Costs: Costs related to goods/services, business management, compliance. Investing Costs: Linked to long-term assets (tangible/intangible). Financing Costs: Include returns to debt and equity investors. Cost Significance: Operating costs dominate, shaped by business model and size. Cost Categorization: Classified by behavior, nature, or function. FinTree Fruit 7 : Behavior with Output: Fixed and Variable Costs Pricing Power and Revenue Drivers: Profitability Factors: Proportion of fixed to variable costs affects operating profit stability. Components Defined: Q: Units of outputs sold., P: Price per unit., VC: Variable operating costs per unit., FC: Fixed operating costs. Profit Equation: Contribution margin (P - VC) must be positive for profit. Q must exceed FC for profitability. Operating Leverage: High fixed costs with positive contribution margin yield rapid profit growth. Operating profit falls with declining Q due to fixed costs. Degree of Operating Leverage (DOL): Measures impact of sales change on operating profit change. Adjusting Leverage: Firms increase DOL by raising fixed costs and reducing variable costs FinTree Fruit 8 : Natural and Functional Operating Cost Classifications and Measures of Operating Profitability Cost Classification - Operating costs: natural or functional based on historical, industry, and entity-specific factors. Profitability Measures - Gross Profit, EBITDA, and EBIT capture different functional costs. Variable and Fixed Costs - Cost of sales mainly variable; other expenses (sales, admin, R&D) tend to be fixed. - Depreciation may be fixed or variable. - Financial notes offer insights; empirical analysis validates claims (e.g., assessing economies of Empirical Analysis scale). Long-Term Cost Drivers - Output growth impacts long-term costs: assets, human capital, and purchased goods. Cost-to-Revenue Ratio - Expressing operating costs as a percentage aids in industry profitability analysis. Industry Profitability - Competitive forces and market structure influence industry profitability. - Lower unit costs with output growth (spreading fixed costs) or more products (leveraging shared Economies of Scale and Scope costs). FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 9 : Working Capital FinTree Working Capital Management: Involves activity ratios - cash conversion cycle and net working capital to sales ratio. Cash Conversion Cycle: Short cycle means less external financing, covering inventory, sales, and payables time frames. Net Working Capital to Sales Ratio: Measures necessary capital relative to sales revenue. Minimum Investment: Net working capital is vital for operations, separate from capital investments. Negative Net Working Capital: Indicates suppliers fund operations, potentially advantageous. FinTree Fruit 10 : Sources and Uses of Capital Sources of Capital Uses of Capital Cash and investments on hand working capital (if negative) Debt issuance Net working capital (if positive) Equity issuance Capital expenditures and additions to intangibles Asset disposals Acquisitions Debt paydown Dividends and share repurchases FinTree Fruit 11 : Degree of financial leverage FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree © 2025 2024 FinTree Education Private Ltd Industry and Competitive Analysis FinTree Fruit 1 : Uses of Industry Analysis FinTree FinTree Fruit 2 : Industry Classification FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 3 : GICS, ICB, and TRBC Structures FinTree GICS by S&P DJI and MSCI ICB by FTSE Russell TRBC by Refinitiv 11 Sectors 11 Industries 14 Economic Sectors 25 Industry Groups 20 Supersectors 33 Business Sectors 74 Industries 45 Sectors 62 Industry Groups 163 Sub-Industries 173 Subsectors 154 Industries 898 Activities FinTree Fruit 4 : Limitations of Third-Party Industry Classification Schemes 1. Groupings of companies with business model variations or that sell substitute products 2. The classification of multi-product companies 3. Geographical considerations 4. Changes in groupings over time that affect prior-period comparability of industry statistics FinTree Fruit 5 : Alternative Methods of Grouping Companies FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 6 : Industry Survey FinTree Industry Survey Steps: Estimate Size and Growth: Measure industry size using total annual sales from product/customer perspective. Calculate Growth Rate: Calculate YoY growth or compounded annual growth rate. Consider Volume and Price/Mix: Break down growth contributions from volume and price/mix drivers. Handling Private Companies: Industry size may include private companies; estimate using economic indicators, surveys, issuer data. Corroborate estimates for reasonableness. Characterizing Industry Growth: Style Box Approach: Characterize growth using a style box (Exhibit 5). Compare to Broader Economic Growth: Compare historical industry growth with overall economic growth during recessions and expansions. Industry Concentration: Measure with Herfindahl-Hirschman Index (HHI). High HHI = less competition, potential regulatory challenges. FinTree Fruit 7 : Porter’s Five Forces FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 8 : External Influences on Industry Growth FinTree Political Economic Fiscal policies, regulatory GDP, inflation, interest changes, geopolitical rates, exchange rates. conditions. Environmental Social Transition to a lower-carbon PESTLE Cultural trends, demographics, economy, waste and land use Framework social media impact, regulations. Sustainability focus. Legal Technological Changes in laws and Sustaining and disruptive regulations, business innovations, industry practice influence. impact. FinTree Fruit 9 : Competitive Positioning Intentional vs. Unintentional Strategy: Intentional: Planned, measured, and aligned company-wide. Unintentional: Driven by individual incentives, historical practices, or industry norms. Effectiveness and Value Added: Effective strategy seen in value added and economic profits. Evaluation is retrospective. Forward-Looking Evaluation: Assess against industry forces, PESTLE influences, and resource capabilities. Industry and Company Specificity: Evaluation is unique to each company and industry. Three Competitive Strategies: Cost Leadership. Differentiation. Focus. Avoiding "Stuck in the Middle": Undesirable situation for a company; clarity in strategy is crucial. FinTree © 2025 2024 FinTree Education Private Ltd Company Analysis Forecasting FinTree Fruit 1 : Forecast Objects, Principles, and Approaches FinTree Objects 1. Drivers: Analyze key factors for accurate financial forecasts. 2. Lines: Directly forecast specific financial items. 3. Measures: Efficient but less transparent summary metrics. 4. Ad Hoc: Forecast unreported events affecting securities. Principles 1. Regular Disclosure: Prefer regularly disclosed objects. 2. Simplicity: Avoid overly complex models; focus on vital drivers. Approaches 1. Historical Results: Simple use of past values; limited for changes. 2. Base Rates: Use industry averages for stable conditions. 3. Guidance: Rely on reliable management-provided targets. 4. Discretionary: Use various approaches for unique situations. Horizon 1. Align with strategy, industry cycles, and company changes. 2. Consider acquisitions and employer's preferences. FinTree Fruit 2 : Forecasting Revenues Aspect Summary Top-Down: Compare growth to GDP or forecast product market growth and share. Forecasting Approaches Bottom-Up Drivers: Use volumes, prices, product/segment revenues, capacity, or return/yield. Management-Disclosed: Exclude effects like exchange rates, acquisitions. Handling Non-Recurring Items Analyst-Judged: Assess unique events (e.g., COVID-19) and uncertain technological shifts. Forecast Methods Historical, Base Rates, Guidance, Discretionary: Tailor to business model and risks. Considerations: Address competition, business cycle changes, inflation/deflation, and tech shifts. Risk Factors Integration Integration: Include risk views in profitability, working capital, and capital structure forecasts. Scenario Analysis: Explore outcomes for various risk factor scenarios. FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 3 : Forecasting Operating Expenses and Working Capital FinTree Forecasting Operating Expenses Challenges in Forecasting - Limited issuer disclosures force analysts to use aggregated forecast objects. - Revenues and costs must align coherently; e.g., if a low-margin segment grows Coherent Revenue and Cost Forecasts faster, overall profit margin deterioration should be forecast. - Forecast COGS as a percentage of sales or gross margin, considering market share Cost of Sales and Gross Margins changes and introducing differentiated products. - Explore detailed cost analysis (by segment, input, or product line) for better Detailed Analysis of Costs justification. Fluctuating input costs can impact operating profit significantly. - Incorporate a company's hedging strategy into forecasts, especially for Hedging Strategy Consideration commodity-driven firms. Gradual sales price increases can offset rising costs. - Use competitors' gross margins as a cross-check, but be mindful of differing Cross-Checking with Competitors business models impacting gross margins and operating costs. Forecasting SG&A Expenses - SG&A expenses have a less direct relationship with revenues; consider flexibility, as Direct Relationship with Revenues seen in the case of Siam Cement Group. - Model selling and distribution expenses as a percentage of sales; consider a fixed Variable and Fixed Components in SG&A growth rate for more fixed general corporate costs. - For segment models, use summary measures as detailed cost items are often not Segment-Based Modeling disclosed by segment. Forecasting Working Capital - Utilize efficiency ratios combined with sales and cost forecasts for working capital Using Efficiency Ratios projections. - While historical results are common, choose forecast approaches based on specific Historical Results Approach company characteristics and needs. FinTree Fruit 4 : Forecasting Capital Investments and Capital Structure Capital Expenditure Capital Structure Forecasting Forecasting Types:Maintenance CapEx sustains the Leverage Ratios: Debt to Capital, Debt to business, Growth CapEx expands it. Equity, Debt to EBITDA are common. Maintenance CapEx: Based on historical Considerations: Historical practices, man- depreciation, adjusted for inflation. agement's strategy, guidance on target struc- ture, and covenants Growth CapEx: Discretionary, tied to management's plans and revenue growth. Note: Examples excluded for brevity. Depreciation Forecast: Based on net PP&E and intangibles, considering useful life assumptions FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 5 : Scenario Analysis FinTree Scenario Analysis in Forecasting 1. Identify Risks: Recognize critical risk factors. 2. Assess Likelihood: Judge probability of outcomes. 3. Generate Scenarios: Develop varied forecasts. 4. Compare Forecasts: Evaluate against market views. 5. Assess Valuations: Align with market valuations. 6. Decision-Making: Inform investment decisions. Purpose 1. Risk Mitigation: Anticipate and mitigate impact. 2. Decision Support: Structured decision-making. 3. Investor Perspective: Assess potential outcomes. FinTree © 2025 2024 FinTree Education Private Ltd Equity Valuation: Concepts and Basic Tools FinTree Fruit 1 : Overvalued, undervalued or fairly valued FinTree FinTree Fruit 2 : Categories of Equity Valuation Models FinTree Fruit 3 : Background for the Dividend Discount Model FinTree © 2025 2024 FinTree Education Private Ltd FinTree Fruit 4 : Dividend FinTree payment chronology FinTree Fruit 5 : Dividend Discount Model (DDM) and Free-Cash-Flow-to-Equity Model (FCFE) FinTree © 2025 2024 FinTree Education Private Ltd FinTree FinTree Fruit 6 : Preferred Stock Valuation FinTree Fruit 7 : The Gordon Growth Model FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 8 : Multistage Dividend Discount Models FinTree Fruit 9 : Multipler FinTree Models FinTree Fruit 10 : Enterprise Value FinTree © 2024 2025 FinTree Education Private Ltd FinTree Fruit 11 : Asset-Based Valuation FinTree Fruit 12 : Advantages FinTree and disadvantages CFA® Level I JuiceNotes 2025 © 2025 FinTree Education Pvt. Ltd., All rights reserved. Disclaimer: CFA Institute does not endorse, promote, review, or warrant the accuracy or quality of the products or services offered by FinTree Education Pvt. Ltd. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. For more information related to FinTree, kindly scan the QR code. Follow Us On