Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis – II - Question Paper

Like any other ratio, a high or low PS ratio connotes various interpretations for an analyst. High or low PS ratio depends on the profit margin of the company. Thus, PS ratio for a steel manufacturer may vary from the PS ratio for a chip maker.

Price-to-Sales Ratio may also vary consequent to the capital structure of the company. A company with a lot of debt component in its balance sheet may have to allocate more resources for servicing the interest burden, and thus might see erosion in its profits. a different issue with PSR is that sales figure does not contain any info about the debt burden of the company. Thus, it may so happen that a few companies may have no profits but only huge debt and could be on the verge of bankruptcy. Due to all these, it is advisable to compare both the PE ratio and PS ratio for the company on a historical basis for a reliable analysis. Mathematically, relationship ranging from these 2 ratios can be established Ratio x (Profit Margin)

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6. At point A, the price line rises above the moving avg. line, which is showing a slight down pattern. It is an indication to sell. Around that time, the MACD indicator crosses the reference line from beneath (C), and it is an indication to buy.

At point B, the price line falls beneath the moving avg. line which is showing an uptrend. It can be considered a secondary reaction and a bounce back of prices should be expected and it is an indication to buy. In October, the MACD line crosses the reference line from above (D) and hence is an indication to sell.

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part E: Caselets

Caselet 1



7. SEBI describes Insider trading as any trading by a person who is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive info in respect of securities of the company, or who has received or has access to such unpublished price-sensitive info. The parties to the insider trading can be promoters, directors, management, lawyers, accountants, investment bankers, public relation punters and just about anybody with info pertaining to the transaction. The insiders buy the stock in advance, with sufficient info in their hand that sends the price upside and they sell those securities, when the announcement of that price sensitive deal is finally announced, and that’s how they make profit. Someone in the company intimates a group of brokers who are quick to take a position on the stock and by that time the announcement takes place where everybody has profited. The info leaks out when the deal is on the negotiation table, and the point when it is intimated to the stock exchange under the deal is accomplished the insiders cash in. The investment bank concerned in the relevant deal would also be privy to the price sensitive info and the insider trading can take place from there too.

Earning:   Approval pending.