Posts tagged " financial services "

JPMorgan Class A & Co (JPM) Extended Graph Analysis

July 15th, 2020 Posted by Extended Analysis No Comment yet

Company Profile

JPM logo

JPMorgan Chase & Co. is the oldest and largest  financial institution and a multinational investment bank. Headquartered in New York, New York, United States. The company was founded on December 1, 2000 by AAron Burr and incorporated in Delaware. The company is a provider of multiple investment banking and financial services.

JPMorgan chase & Co. is traded as NYSE:JPM, its predecessor was Bank of the Manhattan Company which was founded in September 1, 1799

JPMorgan Chase & Co (JPM) Extended Graph Analysis

 

1. JPM Cash Flow

JPM CASH FLOW

2015 2016 2017 2018 2019 2020
Net cash flow provided by operating activitIes 73,466,000,000 20,196,000,000 -2,501,000,000 14,187,000,000 6,046,000,000 -33,846,000,000
Net cash used for investing activities 106,980,000,000 -114,949,000,000 -10,283,000,000 -197,993,000,000 -54,013,000,000 -225,464,000,000
Net cash provided by (used for) financing activities -187,511,000,000 98,271,000,000 14,642,000,000 34,158,000,000 32,987,000,000 325,857,000,000
Capital expenditure -77,008,000,000 -124,102,000,000 -107,658,000,000 -104,459,000,000 -255,576,000,000 -354,142,000,000
Free cash flow 73,466,000,000 20,196,000,000 -2,501,000,000 14,187,000,000 6,046,000,000 -33,846,000,000

Facts:

  • Net cash from operating activities was -$33.846 billion in 2020 trailing twelve months.
  • Net cash from investing activities was -$225.464 billion in 2020 trailing twelve months.
  • Cash provided by (used for) financing activities was $325857 billion in 2020 trailing twelve months.
  • Capital expenditures were -$354.142 billion in 2020 trailing twelve months.
  • Free cash flow was -$33.846 billion in 2020 trailing twelve months.

Explanation

  • Cash from operating activities was negative due to the impact of a significant amount of accounts receivable.
  • Net cash used for investing activities was purchases of property, plant and equipment and other investing activities..
  • Net cash provided by (used for) financing activities was preferred stock issued, common stock repurchased, dividends payments and a significant amount of other financing activities.
  • Capital expenditures were purchases of property, plant and equipment.
  • Free cash flow was erratic in movement in the last five years and has a negative amount in the trailing twelve months due to negative cash from operations.

Interpretations

The company was not efficient in generating cash from operations in 2020 trailing twelve months due to a decrease in net income by 18 percent from 2019. Free cash flow was negative as well due to negative cash from operations.

2. JPM BALANCE SHEET

JPM BALANCE SHEET

2015 2016 2017 2018 2019
Total cash 20,490,000,000 23,870,000,000 25,900,000,000 22,320,000,000 21,700,000,000
Net property, plant and equipment 14,360,000,000 14,130,000,000 14,160,000,000 14,930,000,000 25,818,000,000
Total assets 2,370,000,000,000 2,490,000,000,000 2,530,000,000,000 2,620,000,000,000 2,690,000,000,000
Total liabilities 2,120,000,000,000 0 2,280,000,000,000 2,370,000,000,000 2,430,000,000,000
Retained earnings 146,420,000,000 162,440,000,000 177,680,000,000 199,200,000,000 223,210,000,000
Stockholders equity 247,570,000,000 254,190,000,000 255,690,000,000 256,520,000,000 261,320,000,000

Facts:

  • Total cash was $21.7 billion in 2019.
  • Net property, plant and equipment was $26 billion in 2019.
  • Total assets were $2.690 trillion in 2019.
  • Total liabilities were $2.430 trillion in 2019.
  • Retained earnings was $223 billion in 2019
  • Stockholders equity was $261 billion in 2019.

Explanation

  • Total cash represents 0.81 percent of the total assets.
  • Net property, plant and equipment represent 1 percent of the total assets.
  • Total assets have a growth of 14 percent in five years.
  • Total liabilities represents 90 percent of the total liabilities and stockholders equity.
  • Retained earnings represents 85 percent of total equity.
  • Stockholders equity represents 10 percent of the total liabilities and equity.

Interpretation

The company is highly leveraged, it uses more of creditors money than the investors investment in equity. In other terms, the creditors have more stake in the company.

3. JPM INCOME AND MARKET

JPM INCOME AND MARKET

2015 2016 2017 2018 2019 2020
Revenue 93,543,000,000 95,668,000,000 99,624,000,000 109,029,000,000 115,627,000,000 114,755,000,000
Net Income 24,442,000,000 24,733,000,000 22,778,000,000 30,923,000,000 34,844,000,000 28,483,000,000
Market Capitalization 241,899,000,000 308,768,000,000 371,052,000,000 319,780,000,000 429,913,000,000 296,506,000,000
Intrinsic Value 303,298,000,000 403,087,000,000 839,971,000,000 707,132,000,000 973,461,000,000 778,154,000,000

Facts

  • Revenue was $115 billion in 2020 trailing twelve months.
  • Net income was $28 billion in 2020 trailing twelve months
  • Market capitalization was $295.506 billion in 2020 trailing twelve months.
  • Intrinsic value was $778 billion in 2020 trailing twelve months.

Explanation

  • Revenue grew 23 percent in five years.
  • Net income grew 17 percent in five years.
  • Market capitalization was lesser by 31 percent against intrinsic value from 2019 to the trailing twelve months.
  • Intrinsic value was higher than market capitalization meaning the stock price of JPM was undervalued.

Interpretation

Net income represents 25 percent of the revenue. The company’s income statement does show any negative bottom line in the last five years.

4. JPM FINANCIAL RATIOS

JPM FINANCIAL RATIOS

2015 2016 2017 2018 2019 2020
Asset turnover (average) 0.03 0.04 0.04 0.04 0.04 0.04
Return on assets % 0.91 0.93 0.90 1.19 1.30 0.96
Return on equity % 10.34 10.05 9.86 13.35 14.91 12.21
Debt/Equity 1.30 1.29 1.24 1.22 1.24 1.29

Facts

  • Asset turnover was averaging 0.04 in 2020 trailing twelve months.
  • Return on assets was 0.96 percent in 2020 trailing twelve months.
  • Return on equity was 12.21 percent in 2020 trailing twelve months.
  • Debt/Equity ratio was 1.29 in 2020 trailing twelve months.

Explanation

  • Asset turnover indicates that for every dollar in assets, the company generated .04 cents of sales which is not very efficient in using its assets.
  • Return on assets indicted that for every $1 invested in assets it generated 0.96 cents of net income.
  • Return on equity indicates that for every dollar invested in equity it generated 12 cents in profit.
  • Debt/Equity ratio indicates that for every dollar invested in equity the company has $1.29 in debt. Debt level is 129 percent of equity.

Interpretation

Financial ratios show that the management was not very efficient in generating a return on the investment made.The company is highly leveraged.

5. JPM KEY EXECUTIVE COMPENSATION

JPM KEY EXECUTIVE COMPENSATION

2015 2016 2017 2018 2019
Key Executive Compensation
Salary 9,884,250 11,303,234 11,998,628 12,026,026 12,655,889
Bonus 16,000,000 17,000,000 25,300,000 27,100,000 31,373,333
Annual Other Income 0 0 0 0 0
Restricted Stock Award 35,684,204 48,615,750 61,146,766 66,211,372 74,673,974
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 961,291 357,786 427,581 648,889 708,657
Total 62,529,873 77,340,235 98,947,621 106,004,281 119,556,090
James S Dimon, Chairman of the Board and CEO
Salary 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
Bonus 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000
Annual Other Income 0 0 0 0 0
Restricted Stock Award 11,100,000 20,500,000 21,500,000 23,000,000 24,500,000
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 621,060 205,551 286,228 519,840 578,246
Total 18,230,313 27,236,892 28,321,737 30,033,745 31,612,616
Gordon A. Smith, Co-President and Co-COO, CEO of Consumer and Community Banking
Salary 750,000 750,000 750,000
Bonus 7,700,000 8,500,000 8,700,000
Annual Other Income 0 0 0
Restricted Stock Award 10,950,000 11,550,000 12,750,000
Securities Options 0 0 0
LTIP Payout 0 0 0
Non-Equity Compensation 0 0 0
Other Compensation 0 0 0
Total 19,405,985 20,804,089 22,209,071
Daniel Pinto, Co-President, Co-Chief Operating Officer, CEO of the Corporate and Investment Bank
Salary 6,884,250 8,303,234 8,238,628 8,276,026 8,239,222
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 9,584,204 11,615,750 10,696,766 12,761,372 13,723,974
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 217,881 103,640 80,384 68,548 72,246
Total 16,687,210 20,022,624 19,015,778 21,105,946 22,035,442
Mary Callahan Erdoes, CEO, Asset and Wealth Management
Salary 750,000 750,000 750,000 750,000 750,000
Bonus 6,900,000 7,300,000 7,500,000 7,900,000 8,100,000
Annual Other Income 0 0 0 0 0
Restricted Stock Award 9,450,000 10,330,000 10,950,000 11,250,000 11,850,000
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 0 0 0 0 0
Total 17,100,000 18,432,124 19,242,152 19,900,000 20,754,269
Marianne Lake, CEO, Consumer Lending
Salary 750,000 750,000 750,000 750,000 750,000
Bonus 4,100,000 4,700,000 5,100,000 5,700,000 4,840,000
Annual Other Income 0 0 0 0 0
Restricted Stock Award 5,550,000 6,150,000 7,050,000 7,650,000 8,550,000
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 112,350 48,595 60,969 60,501 58,165
Total 10,512,350 11,648,595 12,960,969 14,160,501 15,198,165
Jennifer A. Piepzak, CFO
Salary 666,667
Bonus 3,733,333
Annual Other Income 0
Restricted Stock Award 3,300,000
Securities Options 0
LTIP Payout 0
Non-Equity Compensation 0
Other Compensation 0
Total 7,746,527

Facts:

  • Total key executive compensation was $62,529,873 in 2015.
  • Total key executive compensation in 2016 was $77,340,235.
  • Key executive compensation 2017 was $98,947,621.
  • Key executive compensation in 2018 was $106,004,281.
  • Executive compensation in 2019 was $119,556,090.

Explanation

  • Total key executive compensation represents 0.32 percent of the net income in 2019.
  • Total compensation of James S Dimon, Chairman of the Board and CEO represents 26 percent of the total key executive compensation.
  • Compensation of Gordon A. Smith, Co-President and Co-COO, CEO of Consumer and Community Banking represents 19 percent of the total compensation.
  • ‘Compensation of Daniel Pinto, Co-President, Co-Chief Operating Officer, CEO of the Corporate and Investment Bank represents 18 percent of the total key executive compensation.
  • The compensation of Mary Callahan Erdoes, CEO, Asset and Wealth Management represents 17 percent of the total compensation.
  • The compensation of Marianne Lake, CEO, Consumer Lending represents 13 percent of the key executive compensation.
  • Compensation of Jennifer A. Piepzak, CFO represents 6 percent of the total compensation.

Interpretation

The total key executive compensation was less than one percent of the total net income in 2019. 

6. JPM LOBBYING AND CONTRIBUTIONS

JPM LOBBYING AND CONTRIBUTIONS

PERIOD AMOUNT
1999 $600,000
2000 $2,910,000
2001 $6,300,000
2002 $4,700,000
2003 $6,710,000
2004 $4,080,000
2005 $3,640,000
2006 $6,120,000
2007 $6,460,000
2008 $5,930,000
2009 $6,170,000
2010 $7,410,000
2011 $7,620,000
2012 $8,060,000
2013 $5,460,000
2014 $6,280,000
2015 $3,590,000
2016 $2,920,000
2017 $2,990,000
2018 $2,970,000
2019 $2,810,000
2020 $1,944,507

Facts:

  • JPMorgan is incurring lobbying and contributions expenditures since 2011 to politicians.

Explanation:

A note from OpenSecret.org Center for Responsive Politics, quoted below:

“Contributions to 527s are not included in the Individuals, PACs, Soft (Indivs), or Soft (Orgs) columns, so the sum of these columns may not equal the Total column.

The numbers on this page are based on contributions of $200 or more from PACs and individuals to federal candidates and from PAC, individual and soft money donors to political parties, as reported to the Federal Election Commission. While election cycles are shown in charts as 1996, 1998, 2000 etc. they actually represent two-year periods. For example, the 2002 election cycle runs from January 1, 2001 to December 2002.

Soft money contributions were not publicly disclosed until the 1991-92 election cycle. Soft money donations to parties were banned after the 2002 cycle.

Data for the current election cycle was released by the Federal Election Commission on June 22, 2020.”

Interpretation

Lobbying and contributions to politicians vary every cycle; it may increase or decrease in amount depending on the attention given by the federal government on the issues of the company.

Overview

The net margin was good at 25 percent in the trailing twelve months, it has diversity income streams. The company uses more resources from creditors than from the investor’s investment in equity. In other terms, the creditors have more stake than the investors.  The stock price of JPM was undervalued up to the point of writing and posting to websites.

CITATION

https://www.jpmorganchase.com/

https://www.morningstar.com/stocks/xnys/jpm/quote

https://www.opensecrets.org/orgs/summary?id=D000000103

Researched and written by Criselda

 

COL Financial Group Inc (COL) Extended Graph Analysis

December 19th, 2019 Posted by Extended Analysis No Comment yet

About the Company

COL Financial

COL Financial Group Inc (COL) is an online stock trading services, formerly CitisecOnline.com Inc. Incorporated on August 16, 1999 and the company’s new name was approved by the SEC on February 21, 2012.

COL is a publicly listed company in the Philippine Stock Exchange (PSE). On January 2001 the company launched its proprietary online trading platform, and became  the leading online financial services provider in the Philippines. 

The company established its wholly owned foreign subsidiary COL Securities (HK) Limited (the “HK Subsidiary” or “COLHK”) on June 20, 2001 to provide investors with online access to HK stock market. COLHK was a broker with Interactive Brokers (IB).

 

1. COL CASH FLOWS

COL CASH FLOW

2014 2015 2016 2017 2018 2019
Net cash provided by operating activities 1,724,035,060 2,116,349,463 1,204,000,608 3,342,946,006 -753,862,651 449,925,197
Net cash used for investing activities -12,046,372 -26,112,260 -235,496,719 -267,019,663 -31,284,294 -47,052,277
Net cash provided by (used for) financing activities -275,790,000 -236,825,000 -236,500,000 -285,600,000 -333,200,000 -382,100,000
Capital expenditure -12,102,102 -26,113,336 -35,503,862 -63,977,777 -31,284,294 -47,060,759
Free cash flow 1,711,925,958 2,090,236,127 1,168,496,746 3,278,968,229 -785,146,945 398,864,438
Working Capital 1,200,000,000 1,228,000,000 1,114,000,000 983,000,000 1,150,000,000 1,150,000,000

Facts:

  • Net cash from operation was Php 449.9 million in 2019.
  • Net cash used for investing activities were Php -47 million in 2019.
  • Net cash provided by (used for) financing activities were Php -382 million in 2019.
  • Capital expenditures were Php -47 million in 2019.
  • Free cash flow was Php 398.9 million in 2019.
  • Working capital was Php 1.150 billion in 2019.

Explanation:

  • Cash from operation had an increase of 160 percent from 2018 to the trailing twelve months.. 
  • In 2018 cash from operation was negative due to huge amount of changes in working capital.
  • Net cash used for investing activities were investment in property, plant and equipment and purchases of intangibles.
  • Net cash provided by financing activities were dividend payments.
  • Capital expenditures were investment in property, plant and equipment; and purchases of intangibles.
  • Free cash flow was erratic in movement and has a negative growth of 77 percent in five years. 
  • The working capital indicates that COL is capable of meeting current obligations using its current assets.

Interpretation

The company has managed to generate cash from its principal business operations from 2014 except in 2018 where it suffered a negative result due to significant disbursements.

 

2. COL BALANCE SHEET

COL BALANCE SHEET

2014 2015 2016 2017 2018 2019
Cash and cash equivalents 4,649,563,456 6,495,273,522 7,227,706,547 10,017,107,305 9,526,808,545 9,526,808,545
Current assets 6,256,513,502 7,837,202,198 8,568,619,424 11,315,962,825 10,530,872,434 10,530,872,434
Net property, plant and equipment 35,825,494 44,268,412 60,667,539 85,996,168 76,030,681 76,030,681
Non-current assets 104,891,220 115,628,820 336,122,058 564,874,523 587,738,648 587,738,648
Total assets 6,361,404,722 7,952,831,018 8,904,741,482 11,880,837,348 11,118,611,082 11,118,611,082
Current liabilities 5,056,759,000 6,609,562,286 7,454,399,737 10,332,663,716 9,380,783,286 9,380,783,286
Total non-current liabilities 28,192,690 26,277,714 28,826,298 43,549,010 44,257,971 44,257,971
Total liabilities 5,084,951,690 6,635,840,000 7,481,226,298 10,376,212,726 9,425,041,257 9,425,041,257
Stockholders’ equity 1,276,453,032 1,316,991,018 1,423,515,447 1,504,624,622 1,693,569,825 1,693,569,825

Facts:

  • Cash and cash equivalents were Php 9.527 billion in 2018..
  • Current assets were Php 10.531 billion in 2018.
  • Net property, plant and equipment was Php 76 million.in 2018.
  • Non-current assets were Php 588 million in 2018.
  • Total assets were Php 11.119 billion in 2018.
  • Current liabilities were Php 9.381 billion in 2018.
  • Non-current liabilities  were Php 44 million in 2018.
  • Total liabilities were Php 9.425 billion in 2018.
  • Stockholders’ equity was Php 1.694 billion in 2018.

Explanation

  • Cash and cash equivalent increases year-over-year and it has a growth of 105 percent in five years.
  • Cash and cash equivalents represents 90 percent of total current assets.
  • Current assets has a growth of 68 percent in five years. The decrease was 7 percent from 2017 to 2018.
  • Current assets represents 90 percent of the total assets.
  • Net property, plant and equipment had a growth of 112 percent in five years.
  • Net property, plant and equipment represents 13 percent of total non-current assets.
  • Non-current assets increases year-over-year and has a growth of 460 percent in five years.
  • Non-current assets represents 5 percent of total assets.
  • Total assets has a growth of 75 percent in five years.
  • Current liabilities represents 99.53 percent of the total liabilities.
  • Accounts payable has a significant amount which represents 99 percent of current liabilities.
  • Non-current liabilities represents 0.47 percent of total liabilities.
  • Total liabilities represents 85 percent of the total liabilities and stockholders equity.
  • Stockholders’ equity represents 15 percent of the total liabilities and stockholders’ equity.

Interpretation

Col Financial has a huge amount of accounts payable which represents 98 percent of the total liabilities. These accounts payables are actually trade payables which comprise of the following:

Php
Customers* 8,989,453,360
Clearing house 265,379,830
Dividends Payable 22,160,
Total 9,254,855,150

* Payable to customers are money balances amounting to Php 8,989,453,360 are noninterest-bearing and has no specific credit terms.

 

3. COL INCOME AND MARKET

COL INCOME AND MARKET

2014 2015 2016 2017 2018 TTM
Sales 711,550,710 737,037,592 833,719,568 969,394,284 1,154,701,557 1,046,191,248
EBIT 342,558,453 368,256,787 439,386,101 532,973,159 694,077,186 578,881,301
Net Income 262,267,000 262,693,342 328,482,350 378,721,215 512,554,189 521,797,076
EBITDA 357,789,777 380,792,153 458,127,308 535,175,045 755,094,045 643,886,804
Market Capitalization 7,232,000,000 7,125,000,000 7,664,000,000 7,378,000,000 7,730,000,000 8,663,200,000
Intrinsic Value 9,641,649,565 11,481,860,911 23,136,546,325 19,391,575,990 31,645,596,740 33,050,526,265

Facts:

  • Sales were Php 1 billion in 2019.
  • EBIT was Php 579 million in 2019.
  • Net income was Php 522 million in 2019.
  • EBITDA was Php 644 million in 2019.
  • Market capitalization was Php 8.663 billion in 2019.
  • Intrinsic value was Php 33 billion in 2019.

Explanation:

  • Sales increases year-over-year and has a growth of 47 percent in five years.
  • EBIT increases year-over-year and has a growth of 69 percent in five years.
  • Net income has a growth of 99 percent in five years.
  • EBITDA has grown 80 percent in five years.
  • Market  capitalization has grown 20 percent in five years.
  • Intrinsic value grows 242 percent in five years. 
  • Intrinsic value is greater by 282 percent against market capitalization.

Interpretation

The management has the ability to generate sufficient revenue for the operation of the business. The company has not seen any negative bottomline and it increases year-over-year in the last five years

 

4. COL FINANCIAL RATIOS

COL FINANCIAL RATIOS

2014 2015 2016 2017 2018 TTM
Asset Turnover (average) 0.13 0.10 0.10 0.09 0.10 0.10
Return on Asset (ROA) % 4.70 3.67 3.90 3.64 4.46 4.89
Return on Equity (ROE) % 20.33 20.26 23.97 25.87 32.05 30.79
Financial Leverage (average) 4.98 6.04 6.26 7.90 6.57 6.18
Return on Invested Capital % 20.42 20.33 24.04 25.94 32.16 30.79
Interest Coverage 217.58 279.99 334.12 347.65 293.74 293.74
Earnings per Share PHP 0.55 0.55 0.69 0.80 1.08 1.10

Facts:

  • Asset Turnover was averaging 0.10 in the trailing twelve months.
  • Return on assets was 4.89 percent in the trailing twelve months.
  • Return on equity was 30.79 percent in the trailing twelve months.
  • Financial leverage was averaging 6.18 in the trailing twelve months.
  • Return on invested capital was 30.79 percent in the trailing twelve months.
  • Interest coverage was 293.74 ratio in the trailing twelve months.
  • Earnings per share was 1.10 in the trailing twelve months.

Explanation:

  • Asset turnover means that every Peso in assets, the company generated 0.10 centavos of sales.
  • Return on assets indicates that the company generated 4.89 centavos of net income for every Peso invested in assets.
  • Return on equity means that for every Peso invested in equity, it generated 30.79 or 31 centavos of net income.
  • Financial leverage means that  every Peso in equity COL had Php 6.18 in total assets. The Php 5.18 was borrowed. This means that the company is at risk. The table above shows that the ratio was high from 2014 to the trailing twelve months.
  • Return on invested capital of 30.79 percent is the return that the company generates over its invested capital which is the long-term debt and the amount of common and preferred shares.
  • Interest coverage means the company has the ability to make more than enough cash to meet interest payments.
  • Earnings per share  means that each shareholder will receive Php 0.10 of profit for each share of stock invested.

Interpretation

Financial ratios indicates the performance of the company. Financial leverage shows a concern, hence the ratio was high which indicate a risk in the operation in the last five years.

 

5. COL KEY EXECUTIVES

 

Position Name
President & CEO Conrado F. Bate
Treasurer and CFO/Chief Audit Executive/Chief Risk Officer Catherine L. Ong
Corporate Secretary/Compliance Officer Sharon T. Lim
Assistant Corporate Secretary Juan G. Barredo
Assistant Corporate Secretary Stephanie Faye B. Reyes
Vice President and Chief Technology Officer Nikos J. Bautista
Vice President and Financial Controller Lorena E. Velarde
Vice President and Head of Research Department April Lynn C. Lee-Tan
AVP – Head of Operations Department Melissa O. Ng
AVP – Head of Premium Business Group Edmund Daniel P. Martinez
AVP – Software Development Gabriel Jose E. Mendiola
AVP – Customer Support Joyce G. Chan

Explanation

The compensation of the key executives were not disclosed in the financial statement of COL Financial Group Inc.

 

6. COL LOBBYING AND CONTRIBUTIONS

 

There is no lobbying and contributions found for COL Financial Group Inc.

 

7. COL FINANCIAL STRENGTH

COL FINANCIAL STRENGTH

DATA

PHP
Working capital 1,150,000,000
Total assets 11,118,611,082
Sales 1,046,191,248
EBIT 578,881,301
Market value of equity 8,663,200,000
Book value of total liabilities 9,425,041,257
Retained earnings 881,772,457

CALCULATION

Ratio Score Result
A – Working Capital / Total Assets 0.10 1.20 0.12
B – Retained Earnings / Total Assets 0.08 1.40 0.11
C – EBIT / Total Assets 0.05 3.30 0.17
D – Market Value of Equity / Book Value of Total Liabilities 0.92 0.60 0.55
E – Sales / Total Assets 0.09 1.0 0.09
Z-Score 1.05

 

Formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

 

Explanation

Z-Score is a statistical measurement that compare data points from different sets of data to find correlations. This measurement by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. This measure indicates the probability of bankruptcy.

Interpretation

The calculated Z-Score of COL Financial was 1.05, not an impressive score. According to Dr. Altman, a grading scale of 0 to 1.8 tells us that the company will declare bankruptcy in the future. Please take note that the measurement used today is the current financial data, the result of this measurement will change in the succeeding years depending on the movement of the financials in the succeeding period. It is necessary to update the data to get the current score.

Moreover, there are four main categories in the calculation of Z-Score namely, the profitability or the return on investment, liquidity, leverage and the operating or efficiency. Hence this calculation relies on different metrics this is a significant measure in determining the financial strength of the company.

 

CITATION

https://edge.pse.com.ph/companyPage/stockData.do?cmpy_id=601

https://edge.pse.com.ph/companyPage/directors_and_management_list.do?cmpy_id=601

https://edge.pse.com.ph/companyPage/financial_reports_view.do?cmpy_id=601

Researched and written by Criselda

Twitter: criseldarome

 

investment-technology-group-inc-itg

Investment Technology Group Inc (ITG) Has Negative Growth

November 25th, 2012 Posted by Investment Valuation No Comment yet

Investment Technology Group Inc (ITG) is a financial services company based in the United States.  ITG is a  multinational agency brokerage and financial markets technology and was founded in 1983.

ITG Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculated first the enterprise value as our first step. I believed this is important because it measures the total value of the company.

The Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.
Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ITG EV

Looking closer at the table above, the market capitalization for ITG decreased at a rate of 53 percent in 2008 and 24 percent average thereafter. Total debt represented 12 percent average, while cash and cash equivalent represented 42 percent average of the enterprise value. Thus, enterprise value was lesser by 30 percent against market value. buying the entire business of ITG will be paying 100 percent of its equity, Purchasing the entire business of  Investment Technology Group to date, November 12, 2012, will cost $75 at $1.92 per share. The current market price to date is $7.86 per share.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach   

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method      

ITG NCAVPS

The net asset current value approach indicates that the price of Investment Technology Group was overvalued because the market price was greater than the 66 percent ratio of NCAVPS. The stock price of ITG was expensive from 2007 until the trailing twelve months (6) 2012.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. So, let us see if the stock of VSEC passed the test.

  ITG MC NCAV

The MC/NCAV indicates that the stock price was overvalued from 2007 to 2012 because the ratio exceeded the 1.2 ratios. Hence, the price of Investment Technology Group was expensive and therefore, didn’t pass the stock test.

Benjamin Graham’s Margin of Safety (MOS)  

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

ITG MOS

Explanation

Benjamin Graham’s margin of safety indicates a 61 percent average for Investment Technology Group, while in the trailing twelve months (6) 2012 it has a margin of safety at 99 percent.  Intrinsic value was $144 average.

The formula: Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

wherein;

EPS: the company’s last 12-month earnings per share,  G: the company’s long-term (five years) sustainable growth estimate,  9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham  proposed an 8.5, but we changed it to 9), and 2: the average yield of high-grade corporate bonds.

ITG IV

Earnings per share (EPS) and the sustainable growth rate (SGR) factors intrinsic value.

EPS

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend-payout ratio.

    ITG SGR

Explanation

The average return on equity was -4.34, the ratio was negative because the ROE ratio for 2011 and the ttm6 was negative also due to negative net earnings during these periods. There was no payout ratio because the company is not paying cash dividends to its common shareholders.

There are also two approaches to calculating the sustainable growth rate. These are by using the relative ROE and the average ROE. Changes in approach also affect the results of intrinsic value and the margin of safety. To understand further, the results of these two approaches were summarized in the table below.

ITG Relative

Explanation

The intrinsic value line dropped in 2009 at a rate of 82 percent and started to rise again in 2010 at 57 percent. Then it continued to soar up very high in 2011 and the ttm9 2012 at a rate of 1947 percent and 175 percent, respectively. The financials of ITG showed zero earning from 2008 until 2011 and during the ttm6 2012, its net earnings were -57 percent.  This is the reason why in ttm6 the IV line soared up very high because the loss was great. On the other hand, EV line was deteriorating in value at a rate of 37 percent average.

ITG Graph

For the Investment Technology Group, there was a zero margin of safety during 2010 because EV line was higher than the IV line. Converting the space in value or in percentage, we get an average of 61 percent and this is the margin of safety. MOS is the result of subtracting the intrinsic value against the enterprise value.

ITG Relative Valuation Methods  

Relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)   

This valuation will help us understand whether stocks are undervalued or overvalued. To get the answer, we simply multiply the price to earnings (P/E) ratio with the company’s relative earning per share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

ITG PE EPS

It indicates that the price was overvalued in 2007 because the enterprise value was greater than the P/E*EPS ratio. In 2008 to 2012, the price was undervalued because enterprise value was lesser than the P/E*EPS ratio. The enterprise value was 74 percent average of the P/E*EPS ratio. Overall, the P/E*EPS valuation indicates that the Investment Technology Group price was cheap.

The Relative and Average Approach

Another approach in calculating this ratio is by using the average price to earnings ratio.

ITG Relative PE

The relative ratio approach for ITG has a lower price to earnings ratio than the average price to earnings ratio. The average percentage for P/E*EPS in 2011 was -1427 percent. This is the reason why the percentage in the average approach was negative.

The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)      

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E). And the difference represents the earnings (EPS).

ITG EV EPS

The EV/EPS valuation method indicates that the price (P/E) was 57 percent and the earnings (EPS) was 43 percent average. This indicates that the price was overvalued because the ratio was more than 50 percent.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

   ITG EV EBITDA

The average result for EV/EBITDA was 8 years or 8 times. Meaning, it will take 8 times the cash earnings of ITG to cover the costs of buying the entire business. and considered a long period of waiting. This valuation also indicates the profitability of the company. Since 8 years is a long period, digging into the financials of ITG, its net earnings were negative 20 percent. Investment Technology Group suffered losses from 2008 until ttm6 2012. So, ITG is unprofitable.

Conclusion

Overall, the stock price of ITG was overvalued or expensive. The growth was negative which shows that ITG is unprofitable. Therefore, I recommend a SELL in the stock of Investment Technology Group.

Researched and Written by Cris

knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Is Highly Leveraged

September 17th, 2012 Posted by Company Research Report No Comment yet

Knight Capital Group Inc (KCG) was an American global financial services firm engaging in market making, electronic execution, and institutional sales and trading. Source: WikiPedia

Knight Capital Group Inc (KCG) Balance Sheet

The balance sheet allows us to see how much a company owes (liabilities)and how much it owns (assets). To keep things in balance between assets and liabilities, we have retained earnings (equity). I evaluated the following key indicator like financial liquidity, leverage, among who had majority control and asset management.

Financial Liquidity

Financial liquidity is to determine the ability to pay short-term debt accounts payable that can be converted quickly to cash. Commonly used liquidity ratios include the current ratio, working capital ratio, and net working capital. The current ratio is an indicator of a company’s short-term liquidity; which divides current assets by current liabilities. In addition, the working capital ratio is used as a barometer to measure a company’s over health and liquidity; which is current assets less current liabilities divided by total assets. Networking capital indicates the ratio or percentage of working capital against total assets.

KCG financial liquidity

Explanation

Financial liquidity ideal results were equivalent to 1 or 100 percent or more. KCG based on the graph had only a total average of 71 percent availability over their current liabilities. In other words, in every $1 of short-term debt, they had available assets of net working capital was declining, it was down to 20 percent based on 2008 results. It had an average of 5 percent means still they were are unable to meet the short-term debt.

Leverage

Leverage is the amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged. It is composed of debt ratio, debt to equity and solvency. The debt ratio is to determine how many total assets financed by borrowing funds, through the results of a current asset over current liabilities. Further, debt to equity ratio is the ratio of total shareholders’ equity financed by borrowing funds, from the result of total liabilities over the result of total stockholders’ equity. Furthermore, the solvency ratio measures a company’s ability to meet long-term obligations. Through the result of income after tax add the depreciation and divide to the result of current and long-term liabilities.

KCG leverage

Explanation

KCG leverage is too high in terms of the short term. The company finance from borrowed funds was equivalent to $.68 for every $1 of debt. Based on equity, it had an average of 213 percent financed by borrowed funds. It means that in every $1 of equity it was financed two times and it was too high. The ideal solvency result is 20 percent.

Majority in Control

In evaluating,  it is also important to consider who is in majority control of the company. To determine, it includes control from current liabilities to total assets which to identify how much will be claimed by the creditor against total assets of the company. On the other hand, long-term debt to total assets is to make out how much claim has the banks or the bondholder against its total assets. Then, stockholders’ equity to total assets is to know how much the owner can claim in its total assets.  Let us see the results for Knight Capital Group Inc.

KCG mjority control

Explanation

From the above results; if we based on their total five years of operation; the majority in control was the creditor holder at 33 percent, followed by the stockholder at 32 percent then last to bank/bondholder only at 6 percent. Though from the first three years, it was the stockholders it went down to 20 percent in 2011 compared to the creditor which rose up to 43 percent.

Asset Management

Asset management is composed of the following: total asset turnover, receivable turnover ratio, and payable ratio. When we speak of total asset turnover, it tells us the number of times that the assets turn per period, from the results of revenue over current assets. While receivable turnover ratio measures the number of days that companies collect its receivable or convert it into cash by using the result of outstanding receivable over its revenue for the period multiplied by 365 days. Then, the payable turnover ratio is to determine the number of days that the company pays its obligation to its suppliers from the outstanding accounts payable over its total cost of revenue multiplied by 365 days.

KCG Asset Management

Explanation

Based on the table above, KCG ’s five years of operation it showed that the company had a minimum of 167 days to convert their sales into cash. While in the total five years of operation, their minimum of the number of days to pay to its supplier were  529 days.

KCG Income Statement

The income statement is the bottom line result of the business for the period after deducting all the direct cost associated with its revenue and the operating expenses like admin and maintenance cost. Then, we can determine the net margins. Below are the results, in terms of their profitability, revenue, expenses and margin report for Knight Capital Group Inc.

Profitability

Profitability is a key measure for the business success; its composition of net margin ratio which defines as the net results after deducting all the expenses, from net income over revenue for the period. Asset turnover measures effectiveness how their assets easily convert to sales; through revenue over the total asset.  Return on assets or ROA tells us how much profit the company generated for each dollar of total assets by the result of net income over a total asset.

On the other hand, return on equity (ROE), using DuPont, measures the return of such profit percent for every dollar of equity. It can be determined using the result of the net profit margin multiplied by asset turnover. The financial structure ratio is the specific mixture of long–term debt and equity that a company uses to finance its operations. Further, the tax efficiency ratio measures how much profit left after deducting the income tax. It can be determined using the result of net income over profit before tax.

KCG Profitability Graph

KCG PROF2

Explanation

Did Knight Capital Group Inc. become profitable? The graph showed that KCG profitability within five years was in the positive result. It had a high net margin result in 2008 at 19 percent and went down from 2009 to 2011 to 8 percent a  total of $.12 generated per $1 of the sale. ROE had $0.03 generated in every $1 sale.

Revenue

Revenue is the source of income received from its normal business activities, usually from the sale of goods and services to customers. And gross profit is an income after deducting the associated cost directly from goods or services. In addition, operating income is the result after considering its operations and general expenses of the company. Moreover, income before tax is an income after deducting the taxes.

KCGRfinal new

Explanation

The revenue data and its graph imply that it was progressive except in 2010 which slow down by 1 percent. And the gross profit went continuously upward. In addition, the income before tax shows a declining trend from 2009 at 122 percent. However, recovered in 2011 by 20 percent.

Expenses

KCGENEW

Explanation

How did the expenses affect their margin? KCG expenses graph and table tell us that they have high expenses incurred in operating compared to the cost of revenue. This is no doubt since they are equity market makers and institutional brokerages. In other terms, they have lots of expenses probably in salaries and involved with research. Thus the business nature itself could define their expenses. The increase in operating expenses is not worrisome since the revenue result could justify and it was effective. It also showed that the percentage of operating expenses really affects the net margin.

Margins

The Margin determines how much can be generated in every $1 of the sale. It is composed of a gross profit margin. Further, the operating margin denotes how much percentage left after deducting the operating expenses. Furthermore, earnings before income tax or simply EBIT is the result of income before taxes. The net margin ratio or the equivalent percentage after applying all the expenses for that period.

KCG Margin Graph

KCG MARGINNEW

Explanation

Gross profit had generated a profit of $.79 over $1 on sale. And the operating margin and EBIT had the same result. The two both declined from 36 percent in 2009 and in 2010 down to 14 percent have an average $.21 generated in every $1. On the other hand, the net margin had a total average return at $.12 in every $1. It tells us they had a profitable result though in a declining trend.

KCG Cash Flow

Cash flow is a statement that helps in determining if the company has available cash for the operation alone. In other words, if they have a good free cash flow to maintain the maintenance of its resources. and if they had an excess of funds to refinance or cash available for business expansion.

Cash Flow Summary Graph

kcgfinal new

Explanation

The cash flow summary of KCG was in sideways. The cash flow from 2007 and 2008 was progressive with an equivalent of 36 and 57 percent. And then went down in 2009 and 2010 by 4 and -19 percent and went up by 22 percent in 2011. It tells us the management is recovering and efficient. In addition, the cash flow from investing in 2007 to 2009 had cash due to sales of mature investment.

Interpretation

Moreover, an outflow resulted due to the high cash used in the purchasing of PPE that purchases in investment. Financing had a reversed transaction from investing which from 2007 to 2009; it had an outflow of cash used for another financing. While, from 2010 and 2011 it had an inflow of cash due to long-term debt issued at 337 percent and change in short-term borrowing at 288 percent, respectively.

Cash Flow from Operating Graph

KCG new CFO

Explanation

Net operating cash flow had a negative result in 2010 due to the net income represented at 15 percent. Other asset and liabilities had a decreased of 84 percent. And also the increase of payables at 89 percent over their five years of operations.

  • Cash flow from operating ratio of sales measures how much cash generated from its revenue for the period.
  • And the operating cash flow ratio; by using the result of operating cash flow from operating over current liabilities;  measures how much cash left after considering short debt.
  • In addition, free cash ratios help us conclude if the company will grow in the future. Through the result of operating cash flow fewer, dividends paid less capital expenditure over operating cash flow.
  • Capital expenditure ratio measures company sustainability in maintaining their assets by using the result of operating cash flow over capital expenditure for the period.
  • Moreover, the total debt ratio is the result of operating cash flow over total liabilities. This measures the company’s efficiency.
  • Next, the current coverage ratio measures how much cash available after paying all its current debt.

knight capital group inc.

Explanation

Cash flow ratio results implied that based on the data and the movement showed. The operating cash flow of sales had an average of 11 percent In other words, $.11 generated in every $1 of sales. The operating cash flow ratio and the current coverage ratio was 269 percent in 2008. And went down to -26 percent in 2010; resulted in 80 percent average or $.80 cash available for every $1 of debt.

Interpretation

Free cash flow was not stable, fell down during 2009 due to fixed asset exceeded by -110 percent or $.57 in every $1. Capital expenditure was sufficient even though the company suffered -177 percent in 2010. It resulted in an average of 389 percent or $3.89 available cash over $1 of CAPEX maintenance. In addition, total debt ratio; through positive; was not sufficient with an average of $.09 for every $1 of debt.

Research and Written by Dyne

Edited by Cris

knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Rise and Fall

August 16th, 2012 Posted by Investment Valuation No Comment yet

Knight Capital Group Inc. (KCG) is based in Jersey City, NJ is a global financial services firm They provide access to the capital market across multiple asset classes to a broad network of clients. Including broker-dealers, institutions, and corporations. It started in 1990 as a market maker in equity securities. KCG recently ventured also into investment banking and asset management.

Please take note that this valuation was done for special events or issues that pop-up in the stock market recently. In which Knight’s trading loss of $440M shows cracks in equity markets.

KCG Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  On the other hand, market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ev

Explanation

The total debt represents a 21 percent average of enterprise value, while cash and cash equivalent represent 32 percent average of the enterprise value.  On the other hand, the enterprise value is lesser by 11 percent in market value due to its cash which is higher than total debt.  Likewise, buying the entire company an investor would be paying $1107 at $3 per share.  The distribution in buying would be as follows:

Operating assets – 100 percent  =  Equity – 100 percent 

Market capitalization is trending at 4, -1, -6, -14, and -13 percent from 2008 to 2012 TTM. Average of -6 percent. Enterprise value is trending at -8, -0.3, 12, -13 and -1 percent from 2008 to 2012 TTM. Average of -22 percent. Price dropped to 74 percent in the trailing twelve months.

Benjamin Graham’s Stock Test

Net Current Assets Value per Share (NCAVPS)

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share. Specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

knight capital group inc

Explanation

Market price was 74 percent average over the 66 percent of the NCAVPS. This means that the price was overvalued using market capitalization per share. This indicates that the stock of KCG was trading above its liquidation value from 2007 to 2012 trailing twelve months. Therefore, it did not pass the stock test of Benjamin Graham. In the trailing twelve months, the company’s net current asset value was negative since current liabilities is greater than current assets.

Market Capitalization/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

mc over ncav

The results above showed that the ratio was over 1.2 from 2007 to 2012 trailing twelve months, meaning the stock of KCG is trading at an overvalued price. Therefore the stock of KCG did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety

Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

The margin of Safety (MOS)

margin of safety

The margin of safety represents 73 percent average of the real value (intrinsic value) and the price represents 27 percent average of the real value. This showed that the price is undervalued by an average of 73 percent.

The formula for Intrinsic Value.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate). Then the results are:

iv

Explanation

  • The earning per share (EPS) in the trailing twelve months was adjusted from 1.10 to 0.increaseincreasing in the number of shares of 260 shares, totaling to 355 shares (95 + 260) for TTM. The intrinsic value was then recalculated which resulted in a decrease in value by $16. (from $28 to $12).
  • In addition, calculation for EPS was: Basic Earning per Share = Net Income / Weighted average number of shares wherein,                   
    •  Net Income – $104 
    • Weighted Average # of shares = 95 + (95+260) = 95 + 355 = 450/2 = 225
    • Basic Earning per Share = $104/225 = $0.46
  • Moreover, the enterprise value per share represents 32 percent  average of the intrinsic value. It means the price was undervalued by 68 percent against the true value of the stock.    

Annual Growth Rate (SGR)

 annual growth rate

Intrinsic Value Graph

iv graph

The graph shows that the intrinsic value was greater than the price by 68 percent average, therefore, the price was trading at the undervalued price. Meaning the price was cheap.

The Relative and Average Ratio

Considering the growth of KCG from 2007 to 2012, I calculated the SGR using the relative ratio and the average ratio and compared the results.  It shows that intrinsic value and the margin of safety have higher results. The table below will show you the difference.

   

It shows that using the average ratio in calculating the growth of KCG, resulted in favorable intrinsic value and margin of safety. The result is the average for 5 years.

KCG Relative Value Method

Price to Earning*Earning per Share (P/E*EPS)

The concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

 pe x eps

The price was undervalued from 2007 to 2009, and it was fair value in 2010 and 2011. This is due to an adjustment in the earning per share (EPS) during the trailing twelve months for the increased in stocks by 260 shares.

Moreover, using the average price to earnings rather than the relative price to earnings shows a higher ratio. The table below shows the comparison between the two ratios:

Metrics Relative Ratio Average Ratio
Price to Earnings 61 avg 74 avg
P/E*EPS 8 avg 12 avg
% of EV over P/E*EPS 43% avg 46% avg

With this comparison, we consider the company’s growth from its five years of operation, the results were greater than 8 and 6 percent of the price to earnings and P/E*EPS, respectively.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate price and earnings in enterprise value. And by dividing the enterprise value to projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

  ev over eps

The table showed that Price (P/E) represents an average of 81 percent; while earnings (EPS) represents 19 percent average.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

  ev over ebitda

This means that it will take 4 times of earnings of the company to cover the cost of buying or in other words, an investor will wait four years to cover the costs of the purchase price.

Conclusion

The stock price was trading at an overvalued price when pertaining to the results of Graham’s valuation method. Which are the NCAVPS and the MV/NCAV valuation. As a result;t, the stock was trading above the liquidation value of the company. Therefore, it did not pass the stock test of Benjamin Graham.

The margin of |Safety (MOS)

The margin of safety indicates that the price was undervalued by an average of 68 percent. In the trailing twelve months, the price was undervalued by 75 percent. In other words, the price was cheap.Using the average ratio in calculating the sustainable growth rate, the intrinsic value and the margin of safety represents 42.5 and 72 percent, respectively against 40.66 and 68 percent using the relative ratio.

Relative Valuation

The relative valuation method shows that the price was undervalued from 2007 to 2009. Moreover, the earning per share (EPS) decreased to $0.46 from $1.10. Due to an additional 260 shares totaled to 355 shares in the trailing twelve months. While the EV/EPS showed an overvalued price because the price represents 81 percent. And the earnings represent 15 percent of the enterprise value. In TTM, the price is 100 percent and 0 percent earnings due to the adjusted EPS.

Cost of Buying

Buying the entire business of KCG, an investor will wait 4 years to cover the costs of buying. In other terms, it will take 4 times the earnings of the Knight to cover the purchase price. Price to date, 8/15/2012 was $2.99 at $301.0 market capitalization.

Overview

The stock was trading above the liquidation value of KCG, in other words, the stock was overvalued. And the stocks did not pass the stock test of Benjamin Graham. The margin of safety indicates a 77 percent average and in the trailing twelve months. Moreover, it has a 75 percent margin of safety, meaning the price was cheap at $2.99 per share. On the other hand, relative valuation shows an overvalued price for P/E*EPS. And the EV/EPS valuation. Because the price represents 81 percent. 

Above all,

There was a margin of safety of 75 percent in the trailing twelve months meaning, the price is considered cheap at $2.99 per share.  Further, Graham would take the opportunity to buy stocks if the price was lower by 50 percent of the intrinsic value. Thus he considers the stock trading at a discount price. So, I recommend a BUY in the stock of Knight Capital Group Inc (KCG).

Researched and written by Criselda

Note:

Research Reports can be found under the company tab.