Applied Equity Analysis and Portfolio Management + Online Video Course: Tools to Analyze and Manage Your Stock Portfolio

CHAPTER 4

Historical Performance Analysis

This chapter covers the basics of historical financial performance analysis. The learning objectives for this chapter are:

1. Use basic financial statement inputs to calculate financial ratios and other performance metrics and analyze a company's financial health and valuation.

2. Interpret the level and trend of each metric alone and versus a peer firm and assess the implications for the firm's financial health and valuation.

3. Calculate a firm's weighted average cost of capital.

4. Estimate the intrinsic value of a company using a discounted free cash flow model.

5. Compare the company's estimated intrinsic value to its actual stock price and determine if it is undervalued, overvalued, or fairly valued.

6. Rank the financial and valuation metrics using a diffusion index.

This chapter is introductory because it focuses on interpreting the metrics in a historical context—it's a preliminary step in our multistep analysis process. There are several good reasons to proceed in this manner. First, it's easier to learn how to analyze the metrics this way. Properly completing this stage of the analysis requires interpretation of more than two dozen indicators and a discounted free cash flow valuation model. As you gain proficiency in financial analysis and valuation, you will reach a point where you are able to simultaneously consider how the assumptions used to forecast the financial statements are affecting the forecasted metrics and the ...