INTRODUCTION TO STOCK INVESTING
Corporate Analysis
◚⯎
KEY MEASURES
TABLE OF CONTENTS 1. Revenue
Revenue is the income generated from normal business operations and includes discounts
and deductions for returned merchandise. It is the top line or gross income figure from which
Key measures 3 costs are subtracted to determine net income.
Market value measures 6 Revenue is money brought into a company by its business activities. Revenue is also known as sales, as in the
price-to-sales ratio - an alternative to the price-to-earnings ratio that uses revenue in the denominator.
Profitability measures 10
PERIOD ENDING: TREND 31/12/2018 31/12/2017 31/12/2016 31/12/2015
Liquidity measures 12
Total Revenue USD 232'887'000 USD 177'866'000 USD 35'987'000 USD 107'006'000
Solvency measures 14 Cost of Revenue USD 139'156'000 USD 111'934'000 USD 88'265'000 USD 71'651'000
Gross Profit USD 93'731'000 USD 65'932'000 USD 47'722'000 USD 35'355'000
Next steps – Start trading with Swissquote 15
Operating Expenses
Amazon Income Statement (Values in 000’s)
2. Net income
Net income - NI is equal to net earnings (profit) calculated as sales less cost of goods sold,
selling, general and administrative expenses, operating expenses, depreciation, interest,
taxes and other expenses.
This number appears on a company’s income statement and is an important measure of how profitable the
company is. Businesses use net income to calculate their earnings per share.
PERIOD ENDING: TREND 31/12/2018 31/12/2017 31/12/2016 31/12/2015
Net Income USD 10'073'000 USD 3'033'000 USD 2'371'000 USD 596'000
Net lncome Applicable to
USD 10'073'000 USD 3'033'000 USD 2'371'000 USD 596'000
Common Shareholders
Amazon Income Statement (Values in 000’s)
2 3
3. EBITDA Free cash flow represents the cash a company generates after cash outflows to support operations and
maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that
excludes the non-cash expenses of the income statement and includes spending on equipment and assets as
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a well as changes in working capital.
company’s overall financial performance and is used as an alternative to simple earnings or
net income in some circumstances. 2014 2015 2016 2017 2018 5-YEAR TREND
EBITDA can be used to compare companies against each other and industry averages. Also, EBITDA is a good Free Cash Flow 1.95B 7.33B 9.71B 6.41B 17.3B
measure of core profit trends because it eliminates some extraneous factors and allows a more «apples-to- F
ree Cash Flow
- 276.14% 32.40% -33.96% 169.83%
apples» comparisons. This measure can be used as a shortcut to estimate the cash flow available to pay the Growth
debt of long-term assets. Amazon FCF trend
EBITDA is calculated in a straightforward manner, with information that is easily found on a company’s income
Interest payments are excluded from the generally accepted definition of free cash flow. Investment bankers
statement and balance sheet:
and analysts who need to evaluate a company’s expected performance with different capital structures will
use variations of free cash flow like free cash flow for the firm and free cash flow to equity, which are adjusted
EBITDA = Net Income + Interest + Taxes + D&A for interest payments and borrowings.
Where D = Depreciation & A = Amortization
FCF = Operating Cash Flow − Capital Expenditures
4. EBIT Free cash flow is an important measurement since it shows how efficient a company is at generating cash.
Investors use free cash flow to measure whether a company might have enough cash, after funding operations
Earnings before interest and taxes is an indicator of a company’s profitability. One can
and capital expenditures, to pay investors through dividends and share buybacks.
calculate it as revenue minus expenses, excluding tax and interest. EBIT is also referred to as
operating earnings, operating profit, and profit before interest and taxes.
EBIT measures the profit a company generates from its operations, making it synonymous with operating 6. Dividend
profit. By ignoring taxes and interest expense, EBIT focuses solely on a company’s ability to generate earnings
from operations, ignoring variables such as the tax burden and capital structure. A dividend is the distribution of reward from a portion of the company‘s earnings and is paid to a class of
its shareholders. Dividends are decided and managed by the company’s board of directors, though they must
EBIT is an especially useful metric because it helps to identify a company’s ability to generate enough be approved by the shareholders through their voting rights.
earnings to be profitable, pay down debt, and fund ongoing operations.
EBITDA is calculated in a straightforward manner, with information that is easily found on a company’s income Dividends can be issued as cash payments, as shares of stock, or other property, though cash dividends are
statement and balance sheet: the most common. Along with companies, various mutual funds and exchange traded funds (ETF) also pay
dividends.
EBIT = Revenue − COGS − Operating Expenses Or EBIT = Net Income + Interest + Taxes
DECLARED RECORD PAYABLE AMOUNT TYPE
5. FCF (Free Cash Flow) 30 July, 2019 12 August, 2019 15 August, 2019 USD 77 Regular cash
30 April, 2019 13 May, 2019 16 May, 2019 USD 77 Regular cash
Free cash flow is the cash a company produces through its operations, less the cost of
29 Janary, 2019 11 February, 2019 14 February, 2019 USD 73 Regular cash
expenditures on assets. In other words, free cash flow (FCF) is the cash left over after a
company pays for its operating expenses and capital expenditures, also known as CAPEX. Apple dividend history (2019)
4 5
MARKET VALUE MEASURES 2. EPS (Earnings Per Share)
The EPS shows the portion of a company’s profit that is allocated to each outstanding share of
Market value measures indicate how the market (investors) view the company’s financial common stock.
prospects (based on market price of the stock). These ratios can only be computed for
publicly-traded companies. Investors usually compare the EPS of several companies within the same industry to get a better
understanding of how the company is performing relative to its peers.
1. Market capitalization EPS =
Net income
Average outstanding common shares
Market capitalization refers to the total dollar market value of a company’s outstanding shares. It is
calculated by multiplying a company’s shares outstanding by the current market price of one share.
Apple Amazon Facebook Netflix Google Telsa Ford
Microsoft Bank of America
Large Cap Market cap higher than USD 10 billion
USD 40
Mid Cap Market cap between USD 2 billion and USD 10 billion
USD 20
Small Cap Market cap between USD 300 million and USD 2 billion
USD 0
2013 2014 2015 2016 2017 2018
Using market capitalization is critical because company size is a basic element of your analysis,
mainly for assessing risk (the smallest companies being the riskiest) Source: Macrotrends
1.00T
897.66B
3. P/E Ratio (Price-Earnings ratio)
750.00B
P/E ratios are used by investors and analysts to determine the relative value of a company’s shares against
its peers. It can also be used to compare a company against its own historical record.
500.00B
Price per share
P/E Ratio =
EPS
250.00B
2017 2018 2019
Amazon Market Cap T (for trilliion) M (pour milliard)
6 7
A stock’s P/E tells us how much investors are willing to pay per dollar of earnings.
5. Alpha
Generally, a high P/E ratio means that investors are anticipating higher growth in the future. The current
Alpha (the Greek letter α) is a term used in investing to describe a strategy’s ability to beat the market, or
average market P/E ratio is roughly 20x to 25x.
it’s «edge». It is thus also often referred to as «excess return» or «abnormal rate of return».
Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager
100.00 92.38
has managed to beat the market return over some period.
80.00 Mathematically speaking, Alpha is the rate of return that exceeds a financial expectation. We will use the
70.08
CAPM formula as an example to illustrate how Alpha works exactly:
60.00
48.49
40.00 34.49 R = Rf + beta * (Rm – Rf) + Alpha ➔ Alpha = R- Rf – Beta * (Rm – Rf)
20.00
Where:
0.00
2018 2018 2020 2021
Actual Estimates Estimates Estimates • R = the security’s or portfolio’s return
Amazon P/E Ratio. Sources: NASDAQ
• Rf = the risk-free rate of return
• beta = systemic risk of a portfolio
• Rm = the market return
4. Beta
A beta (the Greek letter β) coefficient is a measure of the volatility of an individual stock in comparison
with its market. It is used as the most common measure of risk.
A company with a higher beta has greater risk and also greater expected returns.
A company with a β that’s greater than 1 is more volatile than the market.
High β (> 1) For example, a high-risk technology company with a β of 1.75 would have returned
175% of what the market return in a given period.
A company with a β that’s lower than 1 is less volatile than the market.
Low β (< 1) For example, consider an electric utility company with a β of 0.45 would have returned
only 45% of what the market returned in a given period.
A company with a negative β is negatively correlated to the returns of the market.
Negative β (< 0) For example, a gold company with a β of -0.2 would have returned -2% when the market
was up 10%.
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PROFITABILITY MEASURES 2. ROE (Return on Equity)
ROE is considered a measure of how effectively management is using a company’s assets to create profits.
Profitability measures show how well the firm uses its assets and manages its operations.
Profitability ratios are used to assess a business’s ability to generate earnings relative to its ROE should be compared using similar companies or using its previous performance.
revenue, operating costs, balance sheet assets, and shareholders’ equity over time.
Net Income
ROE =
Total Equity
1. ROA (Return on Assets)
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. [Link] Inc., profitability ratios, return on investment
25
ROA should be compared using similar companies or using its previous performance. ROA takes into
account a company’s debt, while ROE does not.
20
Net Income
ROA = 15
Total Assets
% 10
8.06%
5.00%
5
2.50%
0
0.00%
2014 2015 2016 2017 2018 -5
2014 2015 2016 2017 2018
Amazon ROA
ROE ROA
10 11
LIQUIDITY MEASURES 2. Quick Ratio
Similarly to the current ratio, the quick ratio is an indicator of a company’s short-term
«Liquidity» refers to the ease and quickness with which assets can be converted to cash— liquidity position and measures a company’s ability to meet its short-term obligations with
without a significant loss in value. The more liquid a firm’s assets, the less likely the firm is to its most liquid assets.
experience problems meeting short-term obligations.
The reason why we subtract inventory is that inventory’s liquidity can sometimes be a problem
(not easily sellable).
1. Current Ratio
Current Assets - Inventory
The current ratio measures a company’s ability to pay short-term obligations or those due within one year. Quick Ratio =
A company’s current ratio should be compared with its peers and the industry average. Current Liabilities
Current Assets
Current Ratio = 1.2
Current Liabilities
Quick Ratio
1.0
0.8
0.6
0.4
Current ratio > industry avg Management may not be using their assets efficiently. 2006 2008 2010 2012 2014 2016 2018
Amazon quick ratio history
Current ratio = industry avg Generally considered acceptable
Current ratio < industry avg May indicate a higher risk of distress or default
1.6
Current Ratio
1.4
1.2
1.0
0.8
2006 2008 2010 2012 2014 2016 2018
Amazon current ratio history
12 13
SOLVENCY MEASURES NEXT STEPS – START TRADING WITH
SWISSQUOTE
Solvency is the ability of a company to meet its long-term debts and financial obligations.
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Total Debt Ratio • Access to 3 million products on major
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The higher the debt ratio, the more leveraged a company is, implying greater financial risk.
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Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines the market
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Total Debt Ratio =
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Debt to Equity Ratio SIX Swiss Exchange (SIX:SQN)
The Debt/Equity ratio is a measure of the degree to which a company is financing its operations through
debt versus wholly owned funds.
Total Debt
Swissquote is regularly quoted and consulted
Debt/Equity =
Total Equity by global financial media.
2. Coverage Ratios
Times Interest Earned
The Time Interest Earned ratio indicates how many times a company can cover its interest charges on a
pretax earnings basis.
EBIT
Times Interest Earned =
Interest
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