Analysis and Valuation
Analytical frameworks
Equity analysis starts with business, industry and financial-statement review: revenue quality, margins, cash flow, leverage and returns on capital. Ratio analysis includes EPS, P/E, P/B, dividend payout, current ratio and debt/equity. Valuation approaches include discounted cash flow (DCF), dividend discount models, residual income and relative valuation using comparables such as P/E or EV/EBITDA. Bond analysis focuses on credit risk, term structure, duration and convexity; technical analysis studies price and volume patterns but is not a valuation method.
Risk and return
Return has income and capital-gain components. Beta measures sensitivity to systematic market risk; unsystematic risk can be diversified away. CAPM expresses required return as risk-free rate plus beta times market risk premium. Higher required return lowers present values.
Traps
Use diluted EPS when convertible securities are material. Match trailing and forward P/E consistently. In DCF, small changes in growth or discount rate can change value sharply. A low P/E may signal value or distress. In Gordon growth, the model requires sustainable growth below the discount rate; otherwise it produces invalid or negative values.
Worked example
Gordon growth: P0 = D1/(r – g). If next year’s dividend is $2.00, required return is 10% and sustainable growth is 4%, value = 2.00/(0.10 – 0.04) = $33.33. If growth were 11%, the model would break down. Sanity-check implied multiples against peers and history.