BUS 600 Week 7 Assignment 1

Assignment 1
Chapter 6 – Finance

Is Finance a science or an art?
After researching some materials, I have the same thought that Finance is a science and also an art.

Why science?
Finance has strong relation in scientific fields such as statistics and mathematics.

Why art?
Finance investment relates to human emotions or behaviour that play a large role in many aspects of the financial world.

One needs to understand the science behind the number analysis and the art behind the stock picking exhibited by investors.
Therefore, I would like to relate this with Warren Buffett’s investment methodology as a reference here.

Buffett's Brief Methodology summary:

1. Has the company consistently performed well?

Study the ROE (return on equity) that will reveals the rate at which shareholders are earning income on their shares. Look at the performance consistency comparing to other companies in the same industry for the past 5 years or 10 years historical performance data. ROE is calculated as follows:

= Net Income / Shareholder's Equity

2. Has the company avoided excess debt?

Debt and equity ratio is another key thing to consider carefully. The debt/equity ratio is calculated as follows:

= Total Liabilities / Shareholders' Equity

The higher the ratio, the more the debt - rather than equity - is financing the company.

3. Are profit margins high? Are they increasing?

The profitability of a company depends on a good profit margin and also on consistency increase of the profit margin. This margin is calculated by:

= Net Income / Net Sales

>4. How long has the company been public?

Buffett typically considers only companies that have been around for at least 10 years. It makes sense that one of Buffet's criteria is longevity/ sustaining.

5. Do the company's products rely on a commodity?

Company product diversity and offer anything different than another firm within the same industry is important and provide competitive advantage in the market.

6. Is the stock selling at a 25% discount to its real value?

To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher than its liquidation value.
Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization to see if the value

is at least 25% higher than the company's market capitalization.

Let’s try to analyze the stock that you are planning to invest or already owned.