7/16/2015 1

FINANCIAL RATIOS & PORTFOLIO MANAGEMENT

Asset Management (Activity or Efficiency)

Liquidity

Leverage

Profitability (Margin)

PORTFOLIO SELECTION & MANAGEMENT

Attributes & Data

EVALUATION • Company level

• Industry level

I – Market index return, Ri – Security return, Rp – Portfolio return

Attributes •Tax favoring •Marketability of securities •Convenience •Risk & Return •Liquidity of portfolio

Data Portfolio of securities

• Stocks

• Bonds • Real estate, Previous stones, Art etc • Convertibles, Warrants

Risk &

Return

Portfolio Class • Cyclical • Defensive • Growth • Cyclical growth

Parameters & Conditions P/E – Price - Earnings D/E – Debt - Equity P/S - Price – Sales BV/MV - Book value / Market value P/BV - Price /Book value ROCE – Return on Capital Employed ROE – Return of Equity Dividend payout (Dividend Per Share] Earnings Per Share (EPS)

Mathematical measures

• Average, • Standard deviation, • Variance • Co-variance • Regression coefficient • Co-relation coefficient

RATIOS

•Measurement of earning •Forecasting of earnings

Return %Expected Return Std deviation Portfolio Std deviation Coefficient of correlation $Beta coefficient Covariance Total Portfolio return

MARKET VALUE RATIOS

Price - Sales & Price - Earnings Performance;

SELECTION

1 Dependent on

i

ii

iii

iv

1. Correctness 2. Completeness 3. Consistency 4. Comparability

Conditions

3. Refers to the agreement with the “Accounting Principles Board (APB or FASB or Others)” i.e. In accordance with US GAAP or similar Accounting standards

NXXXX ....321Portfolio of Securities

Nxxxx ....321

Neeee xxxx ....321

N ....321

ji

ji

xx

ji

x

xxCovr

),(

,

N

i

iiip IXR1

)(

I

Rii

),( ji xxCov$Measures the risk & its diversification on the portfolio of securities % Expected or the Average return

7/16/2015 2

MARKET PARTCIPANTS

1. *Banks etc Ot 2. Speculator, Sp 3. Hedger, Hg 4. Arbitrageur, Ab

Risk • High – Sp • Medium – Ot, Hg • Low – Ab,

Return maximization

INVESTMENT Objectives & Criteria ___________ ________ •Safety •Tax advantage •Yield & Capital Gains

• Term • Maturity

Market Value, M

Intrinsic Value , I

Portfolio Management Continued …

BUY HOLD SELL

STRATEGY# IMPLEMENTATION

REVIEW

PERFORMANCE ANALYSIS

I I

M

M

Undiscounted

Discounted NPV / IRR/ARR/ PI

(Present value)

Price(P) Quantity ( Volume, V )

PORTFOLIO INDICATORS

2

3

4

5

6

FINANCIAL OR PORTFOLIO ADVISOR ( Security Analyst)

7

√

√

√

X

√

V

X

X X

√ √ X

Market Intrinsic Intrinsic Market

Market Intrinsic Market Intrinsic

Hedging

Speculation

MARKETS

Without financial advise

Assessment Assessment

Asse

ss

With financial advise

& TRADING CHARACTERISITICS

In Sp Hg Ab

√ X X

X √ √

V √ X

X √

Portfolio & Direct Investments

AND OR

√

Taker Avoider

Inflation Interest Rate

P/E EPS

Market capitalization

Arbitragueing

Security portfolio

Risk & diversifica

tion

(No Profit /Loss)

(With Profit /Loss)

(Profit without Risk)

7/16/2015 3

FUTURES

OPTIONS

SE (Stock Exchange)

Commodity

Currency

Interest Rate

•Operates in stock exchange market •Provides high liquidity for the assets •Less risky or default is low •Settlement can be done before Its maturity

FORWARDS • Operates in OTC market via Investment bank • Provides less liquidity upon the expiration of assets • High risky • Settlement is done only at the time of maturity contract

OTC (Over the Counter)

SWAPS

Debt for Equity Equity linked Debt

Fixed income securities

Portfolio Management Continued …

&

Contracts

Contracts

Contracts

Hedging

Arbitraging Speculating

Market Trading Characteristics

7/16/2015 4

LEGEND Portfolio Selection & Management _____________________________________________________________ •Review – Considers the market & Intrinsic value conditions for marketable securities.

•Strategy Implementation – Buy & Hold, Sell, Long & Short Buy or Sell

•Market Participants - Investor, Hedger, Arbitrageur & Speculator

•Portfolio Indicators – Market price Volume, Net Present Value or Rate of Return

_____________________________________________________________ # - indicates the strategy implementation is a complex combination of BUY, HOLD or SELL situations which can be taken by the investor or client. The investment decisions are however dependent upon both the financial or portfolio advisor and the client or the investor for the prevailing market conditions. The combinations shown in the slide are for indicative purposes ONLY. In reality there are much more possibilities than that are shown in the block.

It does not bear any resemblance with actual market behavior as the real market is dependent upon the several other factors & increasingly complex. The “x” & “V” marks In the block represent the individual situation taken by the investor or client during the process of portfolio management whilst trading the portfolio of securities. ‘ *Others include Commercial Banks, Central & Non bank dealers, Financial institutions Treasuries, Foreign exchange brokers .Refers to the derivatives market or other financial markets like Equity , Capital markets etc. With increasing portfolio risk, the dilution of P/E or EPS occurs, therefore in most situations Market participants resort to hedging , arbitragueing or speculating.

LEGEND Financial Ratios & Valuations They Indicates the relative valuation of the company in terms of the security values trading the market [ Regular financial statements & Common size statements.] The true earnings of the company in an Industry are largely dependent upon the extent or the rate of interest, tax prevailing.

Evaluation Industry scenario Historic & Current performance of industry segments

Company scenario Earnings & forecasting Performance of company. The Company performance is derived using key variables As Sales volume, Dividend payout (DPS/EPS)

Ratios Effect of foreign exposures related to the accounting system, transaction & allied operations on the ratios needs careful consideration. The overall Financial performance depends however on the size Of the company & nature of business