Introduction Emerging markets present tremendous opportunities to investors as their growth prospects are much higher than mature economies. However, emerging markets also present valuation challenges to analysts as their stock markets may have lower liquidity, financial disclosure requirements can be low, and political situations can be unstable. Making Nominal and Real Financial Projections in Emerging

# Equity Analysis

## Supply and Demand Analysis

Supply Analysis Commonly demand analysis is the greater concern when analyzing and industry, but supply analysis is not without its useful insights. The story of supply is largely told by knowing an industry’s capacity and the degree to which it is over or under-utilized. If the analyst knows that capacity is being highly utilized, then

## Industry Analysis

This article will describe elements of industry analysis beyond Porter’s Five Competitive Forces. Sample Steps for an Industry Analysis Industry Life Cycle Industries tend to follow a natural progression which can be outlined as follows: 1) Pioneer Stage: a high degree of uncertainty at this point. The product is unproven and cash flow is most

## Porter’s Five Competitive Forces

A firm’s profitability is heavily influenced by the overall strength of its industry. One approach for evaluating an industry structure is Porter’s Five Competitive Forces: Force 1: Threat of New Entrants The easier it is to enter an industry, the more competitive that industry becomes. Increased competition tends to depress profit margins. If the industry

## Equity Analysis Part 2 – Introduction

Moving into part two of equity analysis, the material introduces more calculations than part one. Candidates will see a number of formulas that are commonly applied when valuing stocks. It is important not only to know the formulas, but also to able to interpret them and understand their respective strengths and weaknesses. Building on the

## Equity Risk Premium (ERP) and Required Return on Equity

The ERP is the amount of return required by an investor above and beyond the risk free rate, where the risk free rate is commonly the rate of return from a sovereign government bond with a maturity comparable to the investor’s time horizon. Historical Estimates for ERP: this approach calculates the ERP based on historical

## Equity Return Measures

Holding Period Return (HPR) r = ((Dividend + Share Price Change)/Share Price Paid)-1 Expected vs. Realized Holding Period Return Expected HPR is based on investor expectations for share price appreciation and dividend payments; different investors may have different expectations for the same stock and would therefore have different expected HPRs. Realized HPR is based on

## The Process of Valuing Equity

Valuation: Relative vs. Intrinsic Relative valuation is an approach where an asset’s price attractiveness is evaluated in comparison to the valuation of like securities. For example, an analyst may calculate the justified P/E ratios for stocks in a specific industry to determine which companies are relatively “cheap” and which are relatively “expensive” based on the