Kinzerska I.

Donetsk University of Economics and Law

ASSESSMENT OF INVESTMENT ATTRACTIVENESS

The most attractive investment companies are in the process of growth in the first two stages of its life cycle. The companies on a stage of maturity are also attractive investment in earlier periods, when they have not reached the highest point of economic growth. Further investment takes place when the products of the company have relatively high market prospects and the volume of investments into modernization is small and investment can be returned in short-terms.

Stages of the enterprise life cycle are determined by the dynamic analysis of indicators of output volume, total assets, amount of capital and profits for the several last years. As the pace of change we can assess the stages of the enterprise life cycle.

Financial analysis of company’s activities assumes assessment of their investment attractiveness. Its purpose is to assess of the expected profitability of the invested funds, the terms of their return, and also identifying of the most significant financial results of the investment risks.

The most common methods of evaluating the investment attractiveness are:

1) the definition of the term of the investment payback;

2) calculation of the average return on investments;

3) calculation of the current net value;

4) determining of the internal rate of return.

The payback period is determined by the number of years required to return the initial investments. The main advantage of the indicator is the simplicity of calculations and interpretation. And one of the shortcomings of this indicator is that it ignores the impact of cash flows beyond the payback period.

When we talk about high-risk investments, then the payback period should be compared with the value of the life cycle of investments, the time interval during which the investment project must produce income. If this period exceeds the calculated payback period, then one should define the term during which the company will have an additional income for investment in fixed assets. In the case, when the payback period and life cycle are aligned, the company will incur losses in the form of hidden costs. As a result the income could be obtained from the invested funds.

The method of the average investment yields on the principles of the calculation is determined by dividing the average annual net income by the average value of investments. The main drawback of this method is that it ignores the time component of cash flows. The other two methods are based on a comparison of the upfront investments value with a total sum of the discounted cash flows for the life cycle of investments. Cash flows are net income plus depreciation.

To determine the discounted value, first, you must determine the discount rate. This rate of investment calculations is the level of the possible return of the examined draft. Next, the sum of discounted cash flows, which were within the life cycle of investment, is determined. This amount is compared with the cost of the initial project costs. This implies a concept of net present value, which is the difference between these two variables. If the positive figure can be received after the payment, the investment project can be taken because the total cash flow during the life cycle of investment capital will override, increasing the market value of the company and providing the desired level of return on the investments. If the NPV is a negative value, the project is rejected. With the deficit of the financing short-term projects are preferred.

It should be noted that under the crisis situation in economy the efficient usage of quantitative methods in the evaluation of investment projects is reduced. The uncertainty of the economic situation affects the quality of forecasts, and because of this there is an increased risk in the evaluation of investments. The high level of inflation explains the need of taking the future cash flows into account.

In market economy conditions, most businesses rely on low investments in their operations. The main source of investment in the economic environment is the stock market, which includes shares and bonds issued by banks, shares of voucher investment funds, banks and businesses bonds, and issue of emerging public companies shares.

The securities market expands and gives access to the resources needed for the development of all economic entities. For example, the issue of shares can provide these resources indefinitely, that is, for the period of the entire existence of the enterprise. Bond issue can provide a loan at more favorable conditions than in the banking environment.

Due to the fact that the main targets of transactions in the stock market are the securities, a prerequisite of a rational investment activity is the ability to properly assess the quality of securities – the potential targets of investment.

Quality assessment of the main varieties of securities is based on the definition of financial stability of the issuer. Obviously, economically inefficient and unsustainable in financial terms company is unlikely to adequately meet its obligations set out in the documentary form of any of its securities.

To assess the investment attractiveness of particular company securities, you can use a number of factors that characterize its financial stability and economic efficiency. The reliability of the securities is assessed by the financial statements of the issuer. Analyzing the balance sheet and report on the results of financial activities, one can calculate the three groups of indicators describing the financial condition of the issuer:

• indicators of the first group characterize the reliability of the whole enterprise;

• indicators of the second group determine the reliability of the issuer in terms of invested in securities funds return for an investor of the enterprise;

• the third group of indicators can assess the reliability of the issuer in terms of guarantee of the investor-specific income securities.

Ssecurities reliability analysis is based on the calculation of the above indicators, a tabular form, where it is convenient to estimate the absolute values of the indicators in aggregate, to compare them with those alternatives and, ultimately, to assess their attractiveness to investors, is recommended to be used.