Financial statements are the formal records of financial activities of a company. The overview of the profitability and financial conditions of a company for both long & short term is reflected from its financial statements. Financial statements are of the following four categories.
Indirect Investment | The Investment Companies | International Investment:- Buying & selling of shares of investment companies which in turn keep portfolio of securities is generally referred as indirect investment. Mutual fund is common example of the investment company that is involved in the process of providing indirect investment opportunity to many investors. The investors do not need to make efforts to purchase securities and then manage the portfolio by themselves. They simply put their money into an investment company which performs all the work and all the decisions. This means that investors buy shares of specific portfolio which is being managed by an investment company and this investment in share become indirect investment for them.
In company analysis analysts consider the basic financial variables for the estimation of the intrinsic value of the company. These variables contain sales, profit margin, tax rate, depreciation, asset utilization, sources of financing and other factors. The conduction of further analysis of company include the competitive position of the company in the industry, technological changes, management, labor relations, foreign competition and so on.
Markowitz Portfolio Theory deals with the risk and return of portfolio of investments. Before Markowitz portfolio theory, risk & return concepts are handled by the investors loosely. The investors knew that diversification is best for making investments but Markowitz formally built the quantified concept of diversification. He pointed out the way in which the risk of portfolio to an investor is reduced through diversification. The particular measure of portfolio risk was first developed by the Markowitz and the expected risk & return for portfolio are derived on the basis of the covariance relationship.
Dividend discount model is used to calculate the growth rate of stock. Generally there is infinite life of stock. If there is a known growth rate of the dividends of the stock each year, it is evaluated as growing perpetuity. It is not possible to apply standard value tables on a growing perpetuity. But a mathematical identity makes it possible to find the present value of the perpetuity. Such mathematical identity is referred to as Dividend Discount Model (DDM). Dividend discount model is named as Gordon’s Growth Model and is given by the following formula