financial ratios ppt final - nus investment societystudy carried out by teh hooi ling, ed of...

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Financial Ratios

4 February 2016

Han Song | Qian Shu NanFA Department



EQUITY RESEARCH

FINANCIAL RATIOSCHIN ZHIREN | CRYSTAL ZHUANG HUIJIN

Financial Ratios2 February 2017

Chin Zhiren | Crystal Zhuang HuijinEquity Research Department



Financial Ratios

4 February 2016


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©2015 NUS Invest



4 February 2016


DISCLAIMER





Financial Ratios

4 February 2016


Economy level

Industry & Sub Industry

Financial Ratios Screening

Business Model & Management Analysis

Valuation



4 February 2016


FUNDAMENTAL ANALYSIS (FA) FRAMEWORK



Timing



Financial Ratios

4 February 2016


PRICE RATIOS



PRICE-TO-EARNINGS RATIO (P/E)

Price per share

Earnings per share(Latest figure)

EARNINGS PER SHARE (EPS)(Earning attributable to SH –preference share dividend)

Weighted avg no. of shares

• Historical P/E shows us that assuming latest earning continues, how many years it takes the business to earn back our initial investment amount.

• Comparing to industry peers, higher P/E = Higher Future Earning Expectation

• High P/E companies’ stock price may face ‘Double Whammy’ when bad news surface

• EARNINGS DROP

• P/E RATIO DROP

• SUBSTANTIAL DECREASE IN STOCK PRICE



Financial Ratios

4 February 2016


PRICE RATIOS



PRICE-TO-BOOK RATIO (P/B)

Price per share

Net asset per share

Indicates how much we are paying for per dollar worth of asset after deducting all liabilities

To use P/B ratio for decision making, it is crucial to ascertain the fairness of the company’s asset valuation:

• Check PPE useful life assumption against industry peers

• Check whether there is adequate impairment when company’s revenue is dropping as well as fair value valuation hierarchy used.

• One can use P/tangible BV –eliminates intangible assets

• P/B < 1 when its peers are above indicates further impairment of assets will occur, lower expectionon future earnings.



Financial Ratios

4 February 2016


PRICE RATIOS



DIVIDEND PAYOUT RATIO Dividend per share

Earnings per share

• Measures proportion of earnings distributed to shareholders

• Comparing historical payout ratio is useful in determining the dividend policy of the company if it is not explicitly stated in the AR

• Although theoretically speaking it does not matter whether the company pays out dividends

• Some prefer dividend paying companies à decreases risk of management investing excess cash in non-related businesses

Can also calculate Dividend Yield, which is dividend per share / share price

• Many REITs on SGX have high dividend yield & payout ratio, BUT

• Most of them take back what they distribute to shareholders through frequent rights issues.

IS IT ALWAYS RELIABLE?



Financial Ratios

4 February 2016


PROFITABILITY RATIOS



RETURN ON ASSETS (ROA)

Net Income

Average Total asset

Efficiency of company in using its asset to generate earnings

RETURN ON EQUITY (ROE)

Net Income

Average Stockholder Equity

Efficiency of company in using money

invested to generate earnings

PROFIT MARGIN

Net Income

Sales

Amount of revenue to be kept as profits



Financial Ratios

4 February 2016


LIQUIDITY RATIOS



CURRENT RATIO

Current Asset

Current Liability

QUICK RATIO

(Current Asset – Inventory)

Current Liability

• Ability to pay back short term debt

• Varies with industries

• Higher CA ratio does not necessarily means better liquidity

More conservative measure compared to current ratio



Financial Ratios

4 February 2016


DEBT RATIOS



DEBT TO EQUITY RATIO (GEARING)

Total Liability

Total Shareholder Equity

• Shows the financing structure• Measures how much debt the company raised per

dollar of shareholder’s equity

• Generally lower geared companies have lower solvency risk but this does not mean they will have higher performance

INTEREST COVERAGE RATIO

Earnings before interest and tax

Interest Expense

• Measures company’s ability to pay interests using its profits

• Operating cashflow / Finance cost to measure liquidity risk if earning quality is low

• For companies with large financial leases, Fix Charge Coverage ratio (EBIT, Finance cost, Finance lease obligation / finance cost & lease obligation) is more suitable



Financial Ratios

4 February 2016


PORTFOLIO STRATEGY BASED ON FIN RATIOS

!nitial invested amount at 1990

Nominal amount at

2012

Compound Avg Gr Rate

(CAGR)Buying lowest P/E 10% $10,000 $199,847 14.6%

Buying highest P/E 10% $10,000 $16,766 2.4%

Straits Times Index $10,000 $44,300 7.0%

Buying lowest P/B 10% $10,000 $355,135 17.6%



CAN WE RELY ON ONLY PRICE RATIOS?

Study carried out by Teh Hooi Ling, ED of Aggregate AM to find out what if investors buy 10% of all stocks listed on SGX with the lowest P/E or P/B ratio. • Portfolio is rebalanced at end of each year with stocks of lowest P/E or P/B at POT• Time period of study is from 1990 to 2012

Result?• Buying purely on low P/B resulted in

selecting companies with significant solvency risks

• However, as study was carried out on 10% of all SGX stocks with lowest P/E or P/B, this diversified the risks away.

Nonetheless, low P/B companies are usually small caps and it is always better to filter the companies rather than relying solely on price ratios.



Financial Ratios

4 February 2016


EFFICIENCY RATIOS



ASSET TURNOVER RATIO

Sales

Average Total Asset

INVENTORY TURNOVER RATIOCOGS

Average Inventory

• Measures efficiency in using asset to generate revenue

Low è Poor salesHigh è Do not have an efficiency inventory planning plan



Financial Ratios

4 February 2016


INDUSTRY SPECIFIC RATIOS/KPIS

INDUSTRY RELEVANT RATIOS

Pharmaceuticals/healthcare servicesPipeline duration, R&D as % of Sales

Average Revenue /patient, Operating Expense/ Net Operating Income per Adjusted Discharge

Utilities Power & Energy Purchase Agreements

IT/Tech Burn Rate (for startups), user base, R&D ratio

Airlines Revenue / available seat mile





Financial Ratios

4 February 2016


INDUSTRY SPECIFIC RATIOS/KPIS (CONT.)

INDUSTRY RELEVANT RATIOS

Telecommunications Average Revenue Per User (ARPU),Minute Of Usage (MOU), Churn Rate

Oil & Gas

Production to Reserves ratioReserve Replacement Ratio (RRR)

Finding Cost RatioRefinery Utilization Rate

Banking

Capital Adequacy RatioLoan/Deposit Ratio

Deposit Growth RateCredit Quality

Retail Sales by store, Inventory per retail square foot, No. of stores





Financial Ratios

4 February 2016


STOCK SCREENING



FINDING THE PERFECT MATCH

• INVESTING METHODOLOGY

• IDEAL STOCK PROFILE & TRADING OFFS

IDEALLY: CHARACTERISTICS:

Cheap Low P/E

High EarningsHigh EPS

High Asset Turnover ratioHigh Gross Margin

Low debt Low Debt/Equity

Good liquidity High interest coverage

Dividends High Dividends



Financial Ratios

4 February 2016


CASE: YUEXIU TRANSPORT (1052:HK)

Source: NUS Investment Society



(RMB mil) FY14A FY15A FY16E FY17E

Revenue 1858 2226 2507 3007

Growth Rate (%) - 19% 8% 2%

EBITDA 1,669 1864 2290 9.9

Operating Margin (%) 92% 90% 91% 94%

Net Income 777 653 1032 922

Margin (%) 43% 32% 35% 25%

ROA (%) 4% 3% 5% 4%

ROE (%) 7% 6% 9% 8%

EV/EBITDA 8.71 10.98 9.14 9.41

P/E Ratio 9.56 10.40 9.82 9.71

D/E Ratio 46.83 85.84 83.91 82.02

RATIOS AT A GLANCE:



Financial Ratios

4 February 2016




CASE: YUEXIU TRANSPORT (1052:HK)

Source: Yahoo Finance



Financial Ratios

4 February 2016


RELATIVE VALUATIONDETERMINES THE VALUE OF A STOCK BY COMPARING IT TO SIMILAR ENTITIES

(WITHIN THE SAME INDUSTRY OR SECTOR) ON THE BASIS OF SEVERAL RELATIVE RATIOS THAT COMPARE ITS STOCK PRICE TO RELEVANT VARIABLES THAT AFFECT

THE STOCK'S VALUE

• Shows the financing structure• Measures how much debt the company raised per dollar of shareholder’s

equity• Generally lower geared companies have lower solvency risk but this does not

mean they will have higher performance

DERIVE INDUSTRY MEAN AS A COMPARISON

MULTIPLES CAN BE MISLEADING, FUNDAMENTALS

DECIDE MULTIPLE



Financial Ratios

4 February 2016


FOR INSTANCE…



SUPPOSE A COMPARABLE HOT DOG STAND, JOE’S DOGS, WAS PURCHASED FOR $1 MILLION SEVERAL MONTHS AGO…

IF WE KNOW THAT JOE’S DOGS GENERATED EBITDA OF $100,000 IN THE LAST TWELVE MONTHS (LTM) PRIOR TO ACQUISITION (THAT’S AN ENTERPRISE VALUE

/ EBITDA MULTIPLE OF 10.0X)…

AND WE KNOW THAT OUR HOT DOG STAND GENERATED LTM EBITDA OF $400,000, WE CAN APPLY THE RECENTLY ACQUIRED EV/EBITDA MULTIPLE TO OUR COMPANY…

AND ESTIMATE THAT WE SHOULD EXPECT A VALUE OF SOMEWHERE AROUND $4.0M FOR OUR HOT DOG STAND TODAY.



Financial Ratios

4 February 2016


RELATIVE VALUATION

BMW M6 CONVERTIBLE

0 to 60 mph in 3.7600 hpTorque 700

Price: $130,413

MERCEDES-BENZ AMG ROADSTER0 to 60 mph in 3.9621 hpTorque 738Price: $132,900





Financial Ratios

4 February 2016


RATIOS & TRENDS

RELATIVITY AGAINST COMPANY ITSELF AND AGAINST INDUSTRY COMPETITORS

ANALYZING RATIOS OVER TIME WILL OFTEN GIVE A MUCH CLEARER PICTURE ABOUT A COMPANY’S POSITION AND TRAJECTORY

RATIOS HELPS TO RAISE IMPORTANT QUESTIONS AND HELPS IN UNDERSTANDING THE STORY OF THE STOCK





Financial Ratios

4 February 2016


CASE STUDY





Financial Ratios

4 February 2016


RELATIVE VALUATION

O&G INDUSTRYCHINA AVIATION OIL [SGX: G92]





Financial Ratios

4 February 2016


RELATIVE VALUATION

CHINA AVIATION OIL [SGX: G92]

Market Cap SGD 1.2bn

Operations Jet Fuel Trading

Key Regions China and APAC

Sole importer of jet fuel to China





Financial Ratios

4 February 2016


CHOOSING COMPARABLES

USD 350bnSGD 1.2bn Operations – Jet fuel trading Operations – Diversified





Financial Ratios

4 February 2016


CHINA AVIATION OIL – FIRST IMPRESSIONS

COMPANY MKT CAP (SGD) P/E EV/EBITDA DVD 12M

YIELD ROE

Average 888.12M 22.42x 12.86x 3.48% 17.88%

CHINA AVIATION OIL SIN 1.23B 10.41x 10.72x 2.11% 13.44%

CROSSAMERICA PARTNER 1.24B 76.91x 23.31x 9.25% 4.40%

SK GAS LTD 1.20B 7.02x 15.23x 1.78% 12.17%

PAKISTAN STATE OIL CO 1.51B 10.86x 8.84x 3.05% 11.82%

ATTOCK PETROLEUM LTD 799.25M 12.52x 16.2x 5.66% 35.84%

STAR GAS PARTNERS L.P 787.61M 18.26x 4.29x 4.07% 11.11%

SHELL OMAN MARKETING 707.87M 12.74x 8.46x 5.41% 40.63%

ESSO STE ANONYME FRAN 703.31M 13.83x 12.28x -- 4.57%

HASCOL PETROLEUM LTD 541.55M 35.18x 16.6x 2.11% 28.16%

NATIONAL PETROLEUM CO 534.52M 24.28x 14.3x 3.63% 11.38%

APPLEGREEN PLC 512.24M 24.6x 11.21x -- 23.14%





Financial Ratios

4 February 2016


CHINA AVIATION OIL – FIRST IMPRESSIONS



COMPANY MKT CAP (SGD) P/E EV/EBITDA DVD 12M

YIELD ROE

Average 888.12M 22.42x 12.86x 3.48% 17.88%

CHINA AVIATION OIL SIN 1.23B 10.41x 10.72x 2.11% 13.44%

CROSSAMERICA PARTNER 1.24B 76.91x 23.31x 9.25% 4.40%

SK GAS LTD 1.20B 7.02x 15.23x 1.78% 12.17%

PAKISTAN STATE OIL CO 1.51B 10.86x 8.84x 3.05% 11.82%

ATTOCK PETROLEUM LTD 799.25M 12.52x 16.2x 5.66% 35.84%

STAR GAS PARTNERS L.P 787.61M 18.26x 4.29x 4.07% 11.11%

SHELL OMAN MARKETING 707.87M 12.74x 8.46x 5.41% 40.63%

ESSO STE ANONYME FRAN 703.31M 13.83x 12.28x -- 4.57%

HASCOL PETROLEUM LTD 541.55M 35.18x 16.6x 2.11% 28.16%

NATIONAL PETROLEUM CO 534.52M 24.28x 14.3x 3.63% 11.38%

APPLEGREEN PLC 512.24M 24.6x 11.21x -- 23.14%



Financial Ratios

4 February 2016


CHINA AVIATION OIL – LIQUIDITY

COMPANY CURRENT RATIO

QUICK RATIO

CASH RATIO

FINANCIAL LEVERAGE

(X)NET DEBT

Average 1.22 0.68 0.3 2.19 315.36M

CHINA AVIATION OIL SIN 2.29 1.06 0.69 0.94 -241.62M

CROSSAMERICA PARTNER 0.74 0.29 0.02 2.17 620.38M

SK GAS LTD 1.9 0.89 0.4 2.1 1.85B

PAKISTAN STATE OIL CO 1.12 0.75 0.02 2.93 1.28B

ATTOCK PETROLEUM LTD 1.67 1.2 0.71 1.17 -142.06M

STAR GAS PARTNERS L.P 1.02 0.75 0.48 1.33 -63.66M

SHELL OMAN MARKETING 1.24 0.82 0.16 1.22 -3.68k

ESSO STE ANONYME FRAN 1.65 0.59 0.1 4.05 104.25M

HASCOL PETROLEUM LTD 0.91 0.52 0.15 4.5 2.03M

NATIONAL PETROLEUM CO 0.19 0.13 0.1 0.81 48.57M

APPLEGREEN PLC 0.74 0.44 0.41 2.9 7.21M

Low liquidity risk

High liquidity risk





Financial Ratios

4 February 2016


CHINA AVIATION OIL – PROFITABILITY

COMPANY EBIT MARGIN (%)

RETURN ON EQUITY (%)

RETURN ON ASSETS (%)

AVERAGE 2.29% 17.88% 6.46%

CHINA AVIATION OIL SIN 0.21% 13.44% 5.76%

CROSSAMERICA PARTNER 1.98% 4.40% 1.60%

SK GAS LTD 3.82% 12.17% 3.97%

PAKISTAN STATE OIL CO 0.64% 11.82% 3.01%

ATTOCK PETROLEUM LTD 4.55% 35.84% 15.65%

STAR GAS PARTNERS L.P 5.96% 11.11% 4.80%

SHELL OMAN MARKETING 4.39% 40.63% 17.97%

ESSO STE ANONYME FRAN -1.25% 4.57% 1.02%

HASCOL PETROLEUM LTD 2.12% 28.16% 5.12%

NATIONAL PETROLEUM CO 1.10% 11.38% 6.28%

APPLEGREEN PLC 1.67% 23.14% 5.93%

Less profitable, perhaps reason for

perceived undervaluation





Financial Ratios

4 February 2016


SGX: G92

FIGURES ARE ACCURATE AS OF DEC 16, SHARE PRICE IS UP 14% SINCE THEN



Source: Bloomberg



Financial Ratios

4 February 2016


PRELIMINARY TAKEAWAYS

China Aviation Oil seems undervalued as compared to industry based on PE and EV/EBITDA ratio

China Aviation Oil is operating at healthy leverage and liquidity levels

Margins set to rebound, net margins have doubled YTD through 3 quarters

Market has priced in – in anticipation of earnings release





Financial Ratios

4 February 2016


LIMITATIONS

No 2 companies are the same – geographies, operations, management etc

Ratios are a snapshot, may not be indicative of future

Forward ratios are based on analyst estimates

Are usually not catalysts for rebounds – e.g. low PE does not mean it will correct





Financial Ratios

4 February 2016


CONCLUSIONS

Financial ratios are useful throughout different stages of fundamental analysis

Ratios should not be taken at face value, further research is needed for investment decision to be made

Nature of industries typically dictate the ratios

Behind every number is a story to be told



KEY LEARNING POINTS



Financial Ratios

4 February 2016


END

THANK YOU



financial ratios ppt final - nus investment societystudy carried out by teh hooi ling, ed of...

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