[pdf] Financial Analysis of a Selected Company

Running Head: Valuation method and investment decision
0
Valuation method and investment decision

Financial Analysis of the Companies 1
Executive Summary
This report emphasises upon the share valuation methods and investment decisions of
the investors which are undertaken to create value on the investment. It is observed that there
are several investment methods which are used to identify the potential value creation stakes
in market. The Warren Buffet considers several factors such as profitability, return on capital
employed, financial leverage and market share of company before investing in the particular
stocks. In this report, all the internal and external factors need to be analyzed before investing
capital in the business. There are several companies and the valuation methods have been
used to evaluate whether the investors should invest their capital in these companies or not.

Financial Analysis of the Companies 2
Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................3
Task 1.........................................................................................................................................4
Answer to question no-1.............................................................................................................4
Use of equity valuation method..............................................................................................4
Computation of the Return on equity of the companies.....................................................4
Computation of the market price of Shares by using Dividend Discount Model......................5
Computation of the Price earnings Ratio...................................................................................6
Rank the ten investments in order of desirability.......................................................................6
Which investment of the ten would you select.....................................................................15
Why the investment option selected.....................................................................................15
Task-2.......................................................................................................................................15
Research and summaries some interesting facts about Warren Buffet....................................15
Task 3.......................................................................................................................................16
Compare Warren Buffet’s approach to share valuation and the share valuation methodology
..................................................................................................................................................16
Share valuation Methodology...............................................................................................17
Conclusion................................................................................................................................17
References................................................................................................................................18
Appendix..................................................................................................................................20

Financial Analysis of the Companies 3
Introduction
With the increasing ramified economic changes, investors are the person who invests
their capital in company with a view to create value on the investment.
There are several factors which need to be considered by investors before investing capital in
particular stocks such as return, risk and opportunities available in market. All companies
have been selected from different business sectors such as information technology, energy
sector and financial market sectors. After that, in the end, Warren buffet valuation methods
have been compared with other valuation methods (Andalib, Tavakolan, & Gatmiri, (2018).
All the companies have been selected from the information technologies business
sector, energy sector and financial market sector. In the end, comparisons between the
Warrant buffet valuation theory and dividend discount model and PE ratio has been done
(Zuzik, et al. 2018).

Financial Analysis of the Companies 4
Task 1
Answer to question no-1
Use of equity valuation method
In this part, 10 companies from the different industry sectors have been selected
(Guerrini, Vigolo, Romano, and Testa, 2018).
Capital assets pricing model and Discount valuation method have been used to
identify the value of the stocks in market (Yahoo finance, 2018).
Formula to compute return on equity CAPM
RF+ (RM-RF) B
 The RF stands for the risk free rate of return,
 RM stands for Risk of the market
 B= Beta of the Company
Computation of the Return on equity of the companies
Computation of the Cost of equity of company by using the CAPM method
PARTICULARS PRIC
E OF
SHAR
ES
G
R
O
W
T
H
COST OF EQUITY
Computed by using
the CAPM model
RISK
FREE
RATE OF
RETURN
B
E
T
A
MARK
ET
RATE
INFORMATION
TECHNOLOGY
ADSLOT LTD 0.025 -
0.
40
%
7% 2.77% 1
.
2
5
6.5%
ASSEMBLEBAY
LIMITED
0.0.19 0.
20
%
11% 2.77% 2
.
2
5
6.5%
Altium 22.28 1. 7% 2.77% 1 6.5%

Financial Analysis of the Companies 5
10
%
.
1
ENERGY
AUSTRALIS OIL &
GAS LIMITED
0.39 10
.0
0
%
9% 2.77% 1
.
3
7.7%
ALGAE.TEC LIMITED 0.028 1.
50
%
6% 2.77% 0
.
6
8
7.7%
ADX ENERGY LTD 0.011 1.
50
%
11% 2.77% 1
.
7
1
7.7%
ADAVALE
RESOURCES
LIMITED
2.43 0.
53
%
10% 2.77% 1
.
4
7.7%
FINANACIALS
AUSTRALIA AND
NEW ZEALAND
BANKING GROUP
LIMITED
27.98 25
.0
0
%
8% 2.77% 1
.
0
1
8.2%
AUSTRALIAN
FINANCE GROUP
LTD
22.4 -
26
.0
0
%
9% 2.77% 1
.
1
8
8.2%
AUSTRALIAN
COMMONWEALTH
GOVERNMENT
LOANS
25.2 -
30
.0
0
%
8% 2.77% 0
.
8
9
8.2%
(Yahoo finance, 2018).

Financial Analysis of the Companies 6
Computation of the market price of Shares by using Dividend Discount Model
This method is used to compute the share price of Companies by using the growth,
last year price and retained earnings (Beatson, & Chen, 2018).
Price of the company D1/ Ke-G
D1 Dividend payment
Ke= Cost of the equity
G= Growth rate
Particular Net
incom
e( $ in
millio
n
Divi
den
d
pay
-out
rati
o
Dividend
payment
Re
te
nti
on
rat
io
Growth
rate
KE D1 (In
million)
K
E
-
G
Sh
are
pri
ce
of
Co
mp
an
y
INFORMATION
TECHNOLOGY
ADSLOT LTD 2105.8 2% 45.48528 98
%
2.1% 7% 46.45 5.
3
%
873
.2
ASSEMBLEBAY
LIMITED
1537 0% 2.6129 10
0%
0.2% 11% 2.62 1
1.
0
%
23.
8
Altium 63.31 2% 1.2662 98
%
2.0% 7% 1.29 4.
9
%
26.
3
ENERGY
AUSTRALIS
OIL & GAS
64.29 2% 1.41438 98
%
2.2% 9% 1.44 7.
0
20.
8

Financial Analysis of the Companies 7
LIMITED %
ALGAE.TEC
LIMITED
24.35 2% 0.36525 99
%
1.5% 6% 0.37 4.
6
%
8.0
ADX ENERGY
LTD
520 3% 15.6 97
%
2.9% 11% 16.05 8.
2
%
195
.7
ADAVALE
RESOURCES
LIMITED
-235 0% 10
0%
0.0% 10% 0.00 9.
6
%
FINANACIALS
AUSTRALIA
AND NEW
ZEALAND
BANKING
GROUP
LIMITED
9928 6% 595.68 94
%
5.6% 8% 629.28 2.
6
%
240
70.
5
AUSTRALIAN
FINANCE
GROUP LTD
4975 4% 199 96
%
3.8% 9% 206.64 5.
3
%
387
1.6
AUSTRALIAN
COMMONWEA
LTH
GOVERNMENT
LOANS
1075 5% 56.2225 95
%
5.0% 8% 59.01 2.
6
%
222
9.9
(ASX. 2018).
Computation of the Price earnings Ratio
Computation of the PE Ratio
PARTICULARS MPS EP
S
PE ratio
(MPS/EPS)
INFORMATION TECHNOLOGY
ADSLOT LTD 0.02
5
0.5
7
0.04
ASSEMBLEBAY LIMITED 0.0.1
9
0.2
5
0.65
Altium 22.2 0.3 63.66

Financial Analysis of the Companies 8
8 5
ENERGY
AUSTRALIS OIL & GAS LIMITED 0.39
ALGAE.TEC LIMITED 0.02
8
1.4 0.02
ADX ENERGY LTD 0.01
1
1.3 0.01
ADAVALE RESOURCES LIMITED 2.43 0 0.00
FINANACIALS
AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED
27.9
8
2.2 12.72
AUSTRALIAN FINANCE GROUP LTD 22.4 1.5 14.93
AUSTRALIAN COMMONWEALTH GOVERNMENT
LOANS
25.2 0.5
7
44.21
(Yahoo finance, 2018).

Financial Analysis of the Companies 9
Rank the ten investments in order of desirability
Rank the ten investments in order of desirability
PARTICULARS PE
rati
o
Market
Price
of the
shares
KE Bet
a
CO-
EFFICIE
NT OF
VARIAN
CE
RANK (IN
TERMS OF
BETA/
COST OF
EQUITY)
RANK (IN
TERMS OF
BETA/
COST OF
EQUITY)
INFORMATION
TECHNOLOGY
ADSLOT LTD 0.04 873.19 7% 1.2
5
16.8 8 3
ASSEMBLEBA
Y LIMITED
0.65 23.81 11
%
2.2
5
20.2 10 1
Altium 63.6
6
26.28 7% 1.1 16.0 5 6
ENERGY 20.75 9% 1.3 14.3 6 5
AUSTRALIS
OIL & GAS
LIMITED
0.02 8.04 6% 0.6
8
11.2 3 8
ALGAE.TEC
LIMITED
0.01 195.67 11
%
1.7
1
15.4 7 4
ADX ENERGY
LTD
10
%
1.4 14.6 9 2
ADAVALE
RESOURCES
LIMITED
FINANACIALS 12.7
2
24070.
55
8% 1.0
1
12.2 2 9
AUSTRALIA
AND NEW
ZEALAND
BANKING
GROUP
LIMITED
14.9
3
3871.5
8
9% 1.1
8
12.9 4 7
AUSTRALIAN
FINANCE
GROUP LTD
44.2
1
2229.9
3
8% 0.8
9
11.7 1 10
Notes –

Financial Analysis of the Companies 10
Beta- (Yahoo finance, 2018).
Market risk factor- (Yahoo finance, 2018)
RF-(Bloomberg, 2018)

Financial Analysis of the Companies 11
Which investment of the ten would you select
The best investment option which would be made to have higher return and less risk in the
investment option is Adavale Resources Limited. This investment option will give higher
return and will be accompanied with the less risk (Please see the attached excel file) (Chan, et
al. 2018).
PARTICULARS MARK
ET
RATE -
RISK
FREE
RATE
Divide
nd
payme
nt
DI/KE-G CO-
EFFICIE
NT OF
VARIAN
CE
RANK RANK
IN
TERM
S OF
BETA/
COST
OF
EQUIT
Y
IN
TERMS
OF
HIGHER
KE
INFORMATION
TECHNOLOGY
ADSLOT LTD 3.7% 2.16% 29.462% 16.8180 5 6
ASSEMBLEBAY
LIMITED
3.7% 0.17% 1.323% 20.1568 10 2
Altium 3.7% 0% -1.100% 16.0047 8 3
ENERGY
AUSTRALIS OIL
& GAS LIMITED
4.9% 0.00% -10.000% 14.2638 7 4
ALGAE.TEC
LIMITED
4.9% 4.05% 65.020% 11.1688 3 8
ADX ENERGY
LTD
4.9% 1% 3.718% 15.3849 9 1
ADAVALE
RESOURCES
LIMITED
4.9% 4.98% 51.334% 14.5803 1 9
*
FINANACIALS
AUSTRALIA
AND NEW
ZEALAND
0.0543 6.06% 48.416% 12.2360 4 7

Financial Analysis of the Companies 12
BANKING
GROUP
LIMITED
AUSTRALIAN
FINANCE
GROUP LTD
0.0543 2.49% 53.132% 12.8577 6 5
AUSTRALIAN
COMMONWEA
LTH
GOVERNMENT
LOANS
0.0543 5.23% 98.791% 11.7064 2 10
Why the investment option selected
The main reason for selecting this investment option is based on its less market price
and higher PE ratio comparatively to others. The cost of capital of company is 7% which is
too lower and will eventually increase the overall return on capital employed at large.
Task-2
Research and summaries some interesting facts about Warren Buffet
The Warren Buffet is the biggest investors who endeavoured towards creating value
on his investment and investment made on the behalf of others. He analyses several factors of
the market and invest capital in the positive side of the organization. He evaluates the share
price, beta of company, market premium and financial leverage of company before investing
capital in the company. He has been appointed as CEO of Bershire Hathway (Lee, & Heo,
2016).
Before investing capital in particular company, He uses profitability, earning per
share and estimation of the risk associated with the invested amount. He reveals that a change
in price and future outlook of the company does not depend upon only single factors. He
analysis risk, Profitability, beta, financial leverage and other associated factors before
investing capital. It is evaluated that the intrinsic value estimates the precise figure which

Financial Analysis of the Companies 13
could be used to analysis the future value of the stocks in the near future (McMillan, (2018).
There are several notes given as below about the Warren Buffet (Ferreira, & Marques,
2015).
Warren Buffet Investment in Information technologies.
INFORMATION TECHNOLOGY
In information technology busienss industry, Adslot Ltd, Assemblebay Limited and
Altium Companies have been taken.
It is analyzed by the Warren Buffet that the share price of ADSLOT LTD is $ .025 which
also shows the variation of 12% positive since last two years. The financial leverage and risk
of the business on international level is too low. The growth and Beta value of company is
moderate. It shows that company will give good value creation on the invested capital
(Penman, 2018).
Assemblebay Limited is having $ .019 share price which also shows the variation of 7.5%
positive since last two years. However, the employee turnover is low but the return on capital
employed is reflecting positive indicator for the investment purpose. The growth and Beta
value of company is higher which might give higher risk to the investors (Marella, & Raga,
2014).
In context with the Altium Company, Warren Buffet has shown that company has big loss but
due to its intrinsic value it will have good return after 10 years (Hurley, & Johnson, (2014)

Financial Analysis of the Companies 14
In Energy sector, Australian Oil and Gas Limited, Algae tech limited, Adex Energy and
Adavale Resources Limited Company have been taken into consideration.
It is observed that Australian Oil & Gas Limited has lower share price as compared to other
companies in the same industry which will make easy for the investors to buy more stakes in
company with less capital. The beta value is also low and company is showing good
profitability. AS per the Warren Buffet, investors should invest capital in Australia Oil & Gas
Company (Djukic, et al. 2016).
In case of ALGAE.TEC LIMITED, the net profit margin ratio of Company has increased by
22% since last five year. The financial leverage and capital structure is very high. As per the
Warren Buffet, Company will grow and offer good amount of return in future if it maintains
its financial leverage (Yahoo finance, 2018).
In case of ADX ENERGY LTD, Buffet has reveals that company will be showing stable
return and will have lower return throughout the time (Hickman, & Petry, (2011).
In case of ADAVALE RESOURCES LIMITED, there will be less return available to
investors as company has low amount of profitability and highly risky business (Penman,
2012).
Companies indulged in Financials Activities
FINANACIALS
AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED
AUSTRALIAN FINANCE GROUP LTD
AUSTRALIAN COMMONWEALTH GOVERNMENT
LOANS
As per the Warren Buffet, the share price of AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED is $ 25.002 which also shows the variation of 15% positive
since last two years. The beta of company has increased with the changes in market factors. It
has been observed that higher profitability and increased turnover have shown that company
will create good value in the future (Umoren, & Enang, 2015).

Financial Analysis of the Companies 15
AUSTRALIAN FINANCE GROUP LTD is also having $ 22 which also shows the variation
of 11% positive since last two years. The profitability of company is also higher. Investors
should invest their capital in this bank for long run (Levine, & Servos, 2017).
In context with the AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS, Warren
Buffet has shown that company has low profitability which shows that investors should their
money invested in this company for long run if it wants to create value on the investment
(Yahoo finance, 2018).
Task 3
Compare Warren Buffet’s approach to share valuation and the share valuation
methodology
After considering various factors, it is observed that the Warren Buffet, the share
price of the company is highly based on the intricacies of the demand and supply factors
which are prevailing in the market. There are several factors such as profitability, return on
capital employed, financial leverage and market share of company which also affect the
investment decision of the investors (Tseng, and Chiang, 2016).
There are several factors which needs to be undertaken as per the views of the Warren Buffet
(Holland, 2017).
In terms of the Return on equity
Investors should analysis the return on equity and EPS of the company.
Financial leverage of company
The financial leverage should also be considered such as financial risk and
sustainability of the risk. Company should have low financial leverage before investing
capital (Yahoo finance, 2018).
Total turnover
The total turnover of Company has increased by 20% since last five years which
shows positive indicator for the sustainable growth of the business.

Financial Analysis of the Companies 16
Interest coverage
The interest coverage capacity of company is 24% which shows that company has
good earnings before interest and tax to cover its interest payment.
Profitability of the business
The profitability of company is based on the net profit and return on capital employed
(Montana, et al. 2017).
Nature of the organization and legal compliance
Nature of the business, legal compliance program of the company will also be
undertaken by company before investing company (Levine, & Zervos, 2017).
Share valuation Methodology
Warren Buffet uses the two-column Valuation Methodology to identify the market value
and intrinsic value of company (Dorminey, Sivakumar, & Vijayakumar, 2018).
These all models are used to evaluate the share price of company (Tsai, 2018).
 Relative valuation
P/E ratio is used to give the ranking to stocks or determining the undervalued and overvalued
share (Andersson, et al. 2018).
Dividend Discount Model Discounted Cash Flow Model
This model is used to compute the share price
of company on the basis of cost of equity,
growth and last year dividend (Rossi, &
Forte, 2016).
This model is used to compute the value of
the shares of the company which does not
offer dividend to its shareholders (Yahoo
finance, 2018).

Financial Analysis of the Companies 17

Financial Analysis of the Companies 18
Therefore, it could be inferred that Warren Buffet method is more appropriate method
for the investors if they want to mitigate the possible risk and destruction of their invested
capital. The Warren Buffet Method is most suitable method as compared to other method for
the investors to create value on the investment (Andalib, Tavakolan, & Gatmiri, 2018).

Financial Analysis of the Companies 19
Conclusion
After analysing all the details and valuation models, it could be inferred that Warren
Buffet considers several factors before investing capital in particular stocks. On the other
hand, other valuation models consider only two to three factors to identify whether company
will grow in long run. Now in the end, it could be inferred that consideration of several
factors such as profitability, return on capital employed, financial leverage and market share
of company is required by the investors before investing in the particular stocks.

Financial Analysis of the Companies 20
References
Andalib, M. S., Tavakolan, M., & Gatmiri, B. (2018). Modeling managerial behavior in real
options valuation for project-based environments. International Journal of Project
Management, 36(4), 600-611.
Andalib, M. S., Tavakolan, M., & Gatmiri, B. (2018). Modeling managerial behavior in real
options valuation for project-based environments. International Journal of Project
Management, 36(4), 600-611.
Andersson, H., Hultkrantz, L., Lindberg, G., & Nilsson, J. E. (2018). Economic Analysis and
Investment Priorities in Sweden’s Transport Sector. Journal of Benefit-Cost Analysis,
1-27.
ASX. (2018, may 09). ASX. Retrieved from., https://www.asx.com.au/prices/company-
information.htm
Beatson, S. A., & Chen, J. (2018). Foreign investment, corporate governance and
performance in the Chinese listed a share companies. Journal of Chinese Economic
and Business Studies, 16(1), 59-93.
Bloomberg, 2018, Treasury Government bonds rates, retrieved on 12th May, 2018, from
https://www.google.co.in/search?
q=Bloomberg+govermentn+bond+rate&oq=Bloomberg+govermentn+bond+rate&aqs
=chrome..69i57j0l5.5915j0j9&sourceid=chrome&ie=UTF-8
Chan, K. F., Powell, J. G., Shi, J., & Smith, T. (2018). Dividend persistence and dividend
behaviour. Accounting & Finance, 58(1), 127-147.
Djukic, M., Jovanoski, I., Ivanovic, O. M., Lazic, M., & Bodroza, D. (2016). Cost-benefit
analysis of an infrastructure project and a cost-reflective tariff: A case study for
investment in wastewater treatment plant in Serbia. Renewable and Sustainable
Energy Reviews, 59, 1419-1425.
Dorminey, J., Sivakumar, K., & Vijayakumar, J. (2018). Differential Volume and Price
Reactions to Loss Announcements and the Association With Loss Reversals. Journal
of Accounting, Auditing & Finance, 33(2), 151-173.

Financial Analysis of the Companies 21
Ferreira, S., & Marques, R. C. (2015). Contingent valuation method applied to waste
management. Resources, Conservation and Recycling, 99, 111-117.
Guerrini, A., Vigolo, V., Romano, G. and Testa, F., 2018. Levers supporting tariff growth for
water services: evidence from a contingent valuation analysis. Journal of
environmental management, 207, pp.23-31.
Hickman, K., & Petry, G. H. (2011). A comparison of stock price predictions using court
accepted formulas, dividend discount, and P/E models. Financial Management, 76-
87.
Holland, L. C. (2017). A Flexible Valuation Model Incorporating Declining Growth
Rates. Accounting and Finance Research, 7(1), 116.
Hurley, W. J., & Johnson, L. D. (2014). A realistic dividend valuation model. Financial
Analysts Journal, 50(4), 50-54.
Lee, C. Y., & Heo, H. (2016). Estimating willingness to pay for renewable energy in South
Korea using the contingent valuation method. Energy Policy, 94, 150-156.
Levine, R., & Zervos, S. (2017). Stock markets, banks, and economic growth.
Marella, G., & Raga, R. (2014). Use of the Contingent Valuation Method in the assessment
of a landfill mining project. Waste management, 34(7), 1199-1205.
McMillan, D. G. (2018). Returns and Dividend Growth Switching Predictability.
In Predicting Stock Returns (pp. 57-75). Palgrave Pivot, Cham.
Montani, D., Perrini, F., Gervasio, D., & Pulcini, A. (2017). The Importance of
“Contextualisation” in Small and Medium-Sized Firms Valuation: Evidences from an
Italian Case Study. International Journal of Business and Management, 13(1), 70.
Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-
ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-
limited-asxben-a-great-dividend-stock/

Financial Analysis of the Companies 22
Penman, S. H. (2012), A synthesis of equity valuation techniques and the terminal value
calculation for the dividend discount model. Review of Accounting Studies, 2(4), 303-
323.
Penman, S. H. (2018). A synthesis of equity valuation techniques and the terminal value
calculation for the dividend discount model. Review of Accounting Studies, 2(4), 303-
323.
Rossi, E., & Forte, G. (2016). Assessing Relative Valuation in Equity Markets: Bridging
Research and Practice. Springer.
Tsai, J. F. (2018). Business Valuation And Investment Strategy for 3M Company.
Umoren, A. O., & Enang, E. R. (2015). IFRS adoption and value relevance of financial
statements of Nigerian listed banks. International Journal of Finance and
Accounting, 4(1), 1-7.
Yahoo finance, 2018, Altium, retrieved on 12th May, 2018, from
https://in.finance.yahoo.com/
Yahoo finance, 2018, ADSLOT LTD, retrieved on 12th May, 2018, from
https://in.finance.yahoo.com/
Yahoo finance, 2018, AUSTRALIS OIL & GAS LIMITED, retrieved on 12th May, 2018,
from https://in.finance.yahoo.com/
Yahoo finance, 2018, ASSEMBLEBAY LIMITED, retrieved on 12th May, 2018, from
https://in.finance.yahoo.com/
Yahoo finance, 2018, ALGAE.TEC LIMITED, retrieved on 12th May, 2018, from
https://in.finance.yahoo.com/
Yahoo finance, 2018, ADAVALE RESOURCES LIMITED, retrieved on 12th May, 2018,
from https://in.finance.yahoo.com/
Yahoo finance, 2018, AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED,
retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Financial Analysis of the Companies 23
Yahoo finance, 2018, AUSTRALIAN FINANCE GROUP LTD, retrieved on 12th May, 2018,
from https://in.finance.yahoo.com/
Yahoo finance, 2018, ADX ENERGY LTD, retrieved on 12th May, 2018, from
https://in.finance.yahoo.com/
Yahoo finance, 2018, AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS,
retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Zuzik, J., Mixtaj, L., Weiss, E., Weiss, R., & Laskovský, V. (2018). Quality of business
valuation methods in Slovakian mining industry.

Financial Analysis of the Companies 24
Appendix

Financial Analysis of the Companies 25