Equities and Valuation

1. EQUITIES
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2. NOW, THAT WE HAVE
THE OVERVIEW OUT OF
THE WAY..
Equities is one of the most accessible type of
investments; you see them mentioned in the
newspapers, in media outlets, books, in
conversations... But do you know that
penetration rate of Equities is still relatively low
globally?
LET’S DIVE INTO EQUITIES, WELCOME!
LETS GET STARTED

3. LIST OF CONTENT
PRESENTATION
What are equities?
OVERVIEW OF EQUITIES
01
Defining the concept..
CAPITAL STRUCTURE
02
Valuing intrinsic worth of a company..
EQUITY VALUATION
03
Assessing how a company performs
against peers..
RELATIVE VALUATION
04
05 Final discussion and next steps..
CONCLUSION

4. OVERVIEW OF EQUITIES
Equities essentially allows one to have a small ownership stake in the company.. You may not get
direct access to the company’s cashflows or have a stake in its assets (unlike bond holders..) but
you participate in the upside of the company; whatever earnings it makes..
Now, you have to differentiate between MARKET VALUE and BOOK VALUE; while Company ABC
may cost $5 a share to buy (for instance if you invested $100, you will get 20 shares excluding
transaction costs.. with $5 being the MARKET PRICE you see on CNBC for instance.. ) it’s BOOK
VALUE PER SHARE may be higher or lower than $5.. What is book value then? Well, Book Value of
the company refers to Value of Total Assets - Total Liabilities.. Why would a company trade below
or above its Book Value Per Share then?
If Company ABC’s Book Value Per Share is $7, why is it trading only at $5? Well, this could be
because market is undervaluing the company or expects its Book Value per share to be revised
downwards in the near future.. According to the Efficient Market Hypothesis, this however, should
not be happening and should be corrected by market forces very soon..
BOOK VALUE VERSUS MARKET VALUE

5. CAPITAL STRUCTURE
Let’s take a short detour to touch briefly on the topic of capital structure.. This is important in
the context of Corporate Finance and boils down to the idea of a misalignment of interests
between debt and equity holders..
Now, debt holders (depending on seniority but assuming Senior Secured and Unsecured) are
ranked higher than equity holders which imply in the event of bankruptcy, bond holders get
paid before equity holders; with Senior Secured holders even having access to specific assets
of the company..
Therefore when a company is facing a distressed situation, Equity Holders are incentivized to
encourage the company to take on more risks to turn their situation around whereas Debt
Holders are incentivized to get the company to preserve its assets as much as possible..
I KNOW, WE ARE TALKING ABOUT INVESTMENTS

6. EQUITY VALUATION
For years, we have sought a way to quantitatively access our decisions to invest in a
company.. Afterall, there should be a solid rationale behind such decisions..
Aswath Damodaran, a professor at New York University popularize some of the modern-
day valuation models such as DCF (Discounted Cashflow Model), and derivatives such as
FCFF (Free Cashflow to Firm) and FCFE (Free Cashflow to Equity) (no more acryonyms we
promise!)
In general, without diving into the details, the models try to assess the INTRINSIC WORTH
of a company via projected ‘earnings’ of the company - discounting its Projected
Cashflows by some Discount Rate..
Dividing the end figure by number of shares in case of FCFE, allows one to have a sense
of amount of Free Cash Flow attributed to each share..
AH, THIS IS THE MILLION DOLLAR QUESTION..
LIQUIDITY LEVEL: 4 ****

7. TIME OUT!
Turns out Finance is based on a old saying -
A bird in the hand is worth more than
2 in the bush...
That means money today is worth more than
money tomorrow so for me to be indifferent
between receiving money today and tomorrow, i
must be compensated with ‘interest’ if i receive
the money tomorrow...
Similarly, a company’s Cashflows in the distant
future must be discounted to its Present Value..
THE TIME VALUE OF MONEY
WHAT IS DISCOUNT RATE?

8. TIME OUT!
It is widely believed that Benjamin Graham was
the ‘Father’ of fundamental value analysis and
whose works have influenced major investors of
today such as Warren Buffet..
One famous book here is ‘The Intelligent
Investor’..
Do give it a read if you are interested in Security
Analysis and Value Investing..
FATHER OF FUNDAMENTAL VALUE..
BENJAMIN GRAHAM
INTRINSIC WORTH OF A COMPANY..

9. RELATIVE VALUATION
Well, comparing one company’s performance with its peers seem intuitive enough.. Even
without realizing we often compare Google’s performance with other Technology giants,
Bank of America’s performance with JP Morgan and so on..
This is called RELATIVE VALUATION; we find comparables to a company and gauge how
the company has performed against a group of peers on financial metrics such as Return
on Assets (R0A), Earnings per Share (EPS), Return on Equity (ROE) and so on..
Now choosing comparables for a company is somewhat an Art but besides being in the
same industry, we also ideally want them to be engaged in broadly similar products or
services and be broadly similar in size..
COMPARING A COMPANY WITH ITS PEERS..

10. CONCLUSION
Let’s recap our learnings..
Please visit the next module in this
Investing 101 course.. !
Book value versus Market Value
LEARNING ONE:
Time Value of Money
LEARNING TWO:
Equity Valuation - Intrinsic Worth
and Value Investing
LEARNING THREE:
Relative Valuation - Comparison
with Peers
LEARNING FOUR:

11. UNTIL THE NEXT
TIME!
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Ula Academics.