THE FINANCIAL HEALTH OF A

COMPANY
PROFITABILITY, QUALITY OF MANAGEMENT, MARKET SHARE

WHAT IS PROFITABILITY?
purpose of a company: to generate profit
profit = a financial gain, especially the
difference between the amount earned
and the amount spent in buying,
operating, or producing something

HOW CAN A COMPANY LOOK AT

PROFITABILITY?
Profitability ratios
a class of financialmetricsthat are used
to assess a business's ability to
generate earnings as compared to its
expenses and otherrelevant
costsincurred
Can be compared to previous internal
values of the company, or compared to
peers

EBIT (EARNINGS BEFORE INTEREST

AND TAXES)
revenue - COGS - operating expenses
also known as operating earnings
Focuses solely on the companys ability
to generate earnings, disregarding
variables such as taxes

PROFIT MARGINS

ROS (RETURN OF SALES)

ROTA (RETURN ON TOTAL ASSETS)

QUALITY OF MANAGEMENT

ROE (RETURN ON EQUITY)

ROI (RETURN ON INVESTMENTS)

MARKET SHARE

MARKET SHARE
the percentage of an industry or a
market's total sales that is earned by a
particular company over a specified
time period
gives a general idea of the size of a
company to its market and its competitors
as the total market for a product or service
grows, a company that is maintaining its
market share is growingrevenuesat the
same rate as the total market

STOCK MARKETS
SHARES

WHAT IS A STOCK MARKET?

A stock/equity market is a market for the trading
of company stocks (where the stock is partitioned
into shares) and derivatives at an agreed price.
The size of the world stock market has increased
significantly in the past years.

WORLD MAP (BY MARKET CAPITAL)

IN 2015

*In billions of dollars

Heres the map of the world, where size is determined by market capital.

SHARES
Shares represent a fraction of ownership in a business.
Different classes of shares have different rights.
An individual or company(including a corporation) that
legally owns one or more shares of a company is a
shareholder.
Shareholders vary from individual stock investors
to large hedge fund traders.
Share holders are granted privileges depending on the
class/kind of stock.

RIGHTS OF THE SHAREHOLDER

WHY ISSUE SHARES?

For additional capital to invest in new projects.
The promoters may simply wish to reduce their
holding, freeing up capital for their own private use.
Once a company is listed, it will be able to issue
further shares, thereby again providing itself with
capital for expansion without incurring any debt.
Financing a company through the sale of stocks in a
company is known as equity financing.

HOW DOES IT WORK?

Passed back to

Generates

Pool their money

with

Invest in

TRADING
A process of buying and selling shares between
shareholders.
The desire of stockholders to trade shares has led
to the establishment of Stock Exchanges,
organizations which provide marketplaces for
trading shares and other derivatives.
Investor usually buy and sell shares on the
exchange markets via a registered stock broker.

Stock exchanges

NEW YORK STOCK EXCHANGE

(WALL STREET)

LONDON STOCK EXCHANGE

TOKYO STOCK EXCHANGE

LISTING REQUIREMENTS
There is a set of conditions imposed by a
given stock exchange upon companies that want
to be listed on that exchange.
Minimum number of shares
Minimum market capitalization
Minimum annual income

Example :
London Stock Exchange has requirements for a minimum
market capitalization of 700,000 .

SHARE PRICE
The share price is strictly a result of supply and
demand:
1. Supply
The number of shares offered for sale at any
moment.
2. Demand
The number of shares investors wish to buy at
exactly that time.

WAYS OF BUYING AND SELLING

SHARES
Directly from the company:
If at least one share is owned, most companies will allow
the purchase of shares directly from the company .
A direct public offering is an initial public offering(IPO) in
which the stock is purchased directly from the company,
usually without the aid of brokers.

Through a stock broker:

They arrange the transfer of stock from a seller to a
buyer.
Both the buyer and the seller pay commission known as
brokerage to the broker.

WAYS OF BUYING AND SELLING

SHARES
Margin Buying
Buying stock with money borrowed against the stocks in
the same account. These stocks guarantee that the buyer
can repay the loan; otherwise, the stockbroker has the
right to sell the stock to repay to borrowed money.

Short selling
In short selling, the trader borrows stock, then sells it on
the market, hoping for the price to fall. Eventually, the
trader buys back the stock, making money if the price fell
in the meantime and losing money if it rose.

SHORT SELLING

TECHNICAL ANALYSIS
Studies price actions through the use of charts and
quantitative techniques to attempt to forecast
price trends.

Cycles and waves

Candle stick chart

FUNDAMENTAL ANALYSIS

HOW THE STOCK MARKET REACTS

The stock market is very volatile and sensible to
events that occur world-wide.
Example - 9/11 attacks:
Fears led to a lower expected dividend growth rate .
Increased uncertainty led to a larger required return on
investment .
As predicted by Fundamental Analysis (the Gordon Growth
Model), these two effects of the 9/11 attacks were
followed by a drop in stock market prices.

IMPORTANCE AND ROLE OF THE STOCK

MARKETS

Raising capital for businesses

Government capital-raising for development
projects
Mobilizing savings for investment
Facilitating company growth through acquisition
Creating investment opportunities for small
investors
Barometer of the economy

SOURCES
TTC- How the stock market works lectures
Google images
Wikipedia