财务状况分析（英文版）

《财务状况分析（英文版）》由会员分享，可在线阅读，更多相关《财务状况分析（英文版）（64页珍藏版）》请在装配图网上搜索。

1、Financial Statement AnalysisTo develop techniques for evaluating firms using financial statement analysis for equity and credit analysis.Integrates financial statement analysis with corporate finance, accounting and fundamental analysis.Adopts activist point of view to investing: the market may be i

2、nefficient and the statements may not tell all the truth.What Will You Learn From the Course How statements are generated The role of financial statements in determining firms values How to pull apart the financial statements to get at the relevant information How ratio analysis aids in valuation Th

3、e relevance of cash flow and accrual accounting information How to calculate what the P/E ratio should be ? How to calculate what the price-to-book ratio ?Need for financial statement analysisGAAP ComplexEconomic events about the firm to be reported to the publicRelevance vs ReliabilityReporting: Re

4、cognition vs Disclosure (where)Users of Firms Financial InformationEquity InvestorsInvestment analysisLong term earnings powerManagement performance evaluationAbility to pay dividendRisk especially marketDebt InvestorsShort term liquidityProbability of defaultLong term asset protectionCovenant viola

5、tionsUsers of Firms Financial InformationManagement: Strategic planning; Investment in operations; Performance EvaluationLitigants - Disputes over value in the firmCustomers - Security of supplyGovernments: Policy making and Regulation Taxation Government contractingEmployees: Security and remunerat

6、ionInvestors and management are the primary users of financial statementsFundamental AnalysisStep 1 - Knowing the BusinessThe Products; The Knowledge BaseThe Competition The Regulatory ConstraintsStep 2 - Analyzing InformationIn Financial StatementsOutside of Financial StatementsStep 3 - Forecasting

7、 PayoffsMeasuring Value AddedForecasting Value AddedStep 4 - Convert Forecasts to a ValuationStep 5 - Trading on the ValuationOutside Investor: Compare Value with Price to; BUY, SELL, or HOLDInside Investor: Compare Value with Cost to; ACCEPT or REJECT StrategyA valuation model guides the process: F

8、orecasting is at the heart of the process and a valuation model specifies what is to be forecasted (Step 3) and how a forecast is converted to a valuation (Step 4). What is to be forecasted (Step 3) dictates the information is implied?Balance Sheet Assets (SFAC6): “probable future economic benefits

9、obtained or controlled by a particular entity as a result of past transaction or events- no reference to risk (eg, assets sold but in which entity retains a risk) Liabilities (SFAC6): probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer a

10、ssets or provide services to other entities in the future as a result of past transactions or events”- not always followed (eg, certain leases and, until recently, pension benefits) Equity (SFAC6): the residual interest in the net assets of an entity that remains after deducting its liabilities”- do

11、es not handle situations where a source of capital has elements of debt & equity (eg, convertibles) Classified by liquidity CA : converted to cash or used within 1-year or operating cycle (if longer)CL: obligations expected to be settled within 1-year or operating cycle Tangible A&L reported above i

12、ntangibles (goodwill, contingent liabilities)Measurement of Assets & Liabilities Historical Cost, for most components of Balance Sheet May be at market under “lower of cost or market rule” Reversals of prior write downs allowed for marketable equity securities but not for inventories Financial servi

13、ce firms (banks, brokerage, insurance) report certain A&L at market A&L of foreign affiliates reported at end-of-period X-rate or a combination of it and specified historical X-rates Intangible assets have uncertain and hard to measure benefits and are reported only when acquired via a “purchase met

14、hod” acquisition- brand names- when reported, called Goodwill, Patents, etc.Two Fundamental shortcomings of the Balance SheetElusiveness of valueValue cannot be assigned to all assetsOther Balance Sheet issues: Book Value vs. Market ValueInflation: The correct way to think about inflation is that in

15、flation represents a decline in the value of one good the currency of denomination (i.e., the U.S. dollar in our case). When the value of the currency declines, prices of all other goods & services rise because those prices are measured in terms of dollarsWeakness of Historical Cost Accounting: it i

16、gnores the impact of changes in the purchasing power of the currency. The net impact of not considering inflation is that book value understates the market value.Obsolescence causes book value to overstate market valueHow to Measure Effect of Obsolescencea. Observe difference between market value &

17、book value (after adjusting for inflation)b.Estimate the value of the assets earning power. But this is simply the discounted cash flow approach & thus it represents circular reasoning.Inflation & ObsolescenceInflation causes book value to understate market valueObsolescence causes book value to ove

18、rstate market valueThe effect of inflation & obsolescence may not be apparent in an examination of book values because they offset one another Organizational Capitala. The whole is worth more than the sum of the partsb. Returns to Entrepreneurshipc. Difficult to separate from the firm as a going con

19、cernd. Can be estimated only by examining the earning power of the companySources of Organizational Capital Valuesa. Long-term relationshipsb. Reputational “brand name” capitalc. Growth optionsd. Network of suppliers and distributorsMore on Organizational Capitala. It is difficult to separate the fi

20、rms organizational capital from the firm as an ongoing concernb. The value of a brand name is not reflected in the replacement cost of assetsc. Can only be estimated by examining the earning power of the company (DCF)Adjustments to Book ValueEstimate Replacement CostEstimate Liquidation ValueDrawbac

21、ksDo adjusted book values reflect market values?Adjusted book values do not consider organizational capitalDrawbacks of AdjustmentsIt is often difficult to determine if we have made the correct adjustmentsAdjustments often fail to consider the value of off-balance sheet itemsReplacement CostNo unive

22、rsal agreementCan use price indexCPI, PPI, GDP implicit deflatorIgnores organizational capitalLiquidation ValueSecondary markets do not existAsset specificityContestable marketsIncome statementNet SalesCost of Goods SoldGross ProfitSelling & Administrative expensesAdvertisingLease paymentsDepreciati

23、on and amortizationRepairs and maintenanceOperating ProfitOther income (expense)Interest incomeInterest expenseEarnings before Income taxesIncome taxesNet earningsStatement of Consolidated Retained EarningsRetained earnings at beginning of yearNet earningsCash DividendsRetained earnings at end of ye

24、arIncome Statement Based on Accrual accounting Based on Matching Principle Revenues (SFAC6) “inflows of an entity from delivering or producing goods, rendering services, or carrying out other activities that constitute the entities ongoing major or central operations” Expenses (SFAC6) “outflows from

25、 delivering or producing goods, rendering services, or carrying out other activities that constitute the entities ongoing major or central operations” COMPREHENSIVE INCOME CONCEPT “the change in equity from transactions from non-owner sources. It includes all changes in equity during a period except

26、 those resulting from investments by owners and distributions to owners” Gains “Increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investment by owners.” Losses “Decreases in equity from peripheral or incidental transactions of an en

27、tity except those that result from revenues or investment by owners.”Revenues+Other income and revenues-Expenses=Income from CONTINUING OPERATIONSUnusual or infrequent events=Pre tax earnings from continuing operations-Income tax expense=After tax earnings from continuing operations*Discontinued ope

28、rations (net of tax)*Extraordinary operations (net of tax)*Cumulative effect of accounting changes (net of tax) *=Net Income * Per share amounts are reported for each of these itemsHigh quality income statement reflect repeatable income statementGain from non-recurring items should be ignored when e

29、xamining earningsHigh quality earnings result from the use of conservative accounting principles that do not overstate revenues or understate costs Low Quality of Earnings Indicators1. Unstable Income Statement Elements unrelated to normal business operations2Earnings that reflect dubious adjustment

30、s to estimated liability accounts3Earnings that have been determined using liberal accounting policies (methods and estimates) because of the resulting overstatement of net income. Such overstatement also results in the overstatement of future earnings projections4. Net income based on ultraconserva

31、tive accounting policies since the resulting net income is misleading as a basis for predicting future earningsWhat to do?Compare the companys accounting polices to the prevalent accounting policies in the industry5. Unreliable and inaccurate accounting estimatesWhat to watch for? Prior estimates ma

32、terially differ from actual experience, such as where the companys assumed interest rate on pension fund assets significantly differs from the actual interest rate earned as reflected by significant actuarial gains and losses.What to do?Restate net income as if realistic accounting estimates were us

33、ed.6.Earnings that have been artificially smoothed or managed.What to watch for?a. Revenue reflected earlier or later than the realistic time periodb. Shifting of expense among reporting periodsc. Smoothly rising earnings trendd. Sharp increase or decrease in sales in the last quarter of the years a

34、s reflected in the 4th quarter income statemente. Trading of investment securities among affiliated companiesf. Significant modification in estimated liability accounts in the last quarterg. Writing down a good asset (inventory) and selling it next year to show higher earningsh. The “big bath”, in w

35、hich everything is written off in a really bad year so that it will be easier to show good profits in the following years. This sometimes occurs when new management takes over and wishes to blame old management for poor profits or when earnings are already so low that their further reduction my not

36、have significant impactWhat to do?Look at the functional relationship of sales and net income over time. An inconsistent relationship may be a manipulator indicator. Restate earnings by taking out profit increments or reductions due to income management ploys7. Deferral of costs that do not have fut

37、ure economic benefitWhat to watch fora. Inventory of unsalable items in view of current environment (8 track tapes, typewriters, large automobiles during oil shortage)b. Sudden write-offs of inventoryc. Goodwill on the balance sheet but the company has none (operating at losses, significant decline

38、in market share, bad publicity)d. Costs that are currently capitalized when in prior years, they were expensed (e.g. Tooling costs in inventory)What to doRestate net income as if the unrealistic deferral had not been made.8.Unjustified Changes in Accounting Principles and EstimatesWhat to watch fora

39、. A firm has a past history of making frequent accounting changesb. Accounting changes that create earnings growthc. The company fires the auditor and hires another one because of a disagreement over a proposed accounting change.What to doa. Determine whether the accounting change is justified by se

40、eing if it confirms to requirements in FASB statements, Industry Audit Guides & IRS regulationsb. Ascertain whether the accounting change is preferable, given nature of business (e.g., decreasing the life of a computer because of new technological advances in the industry)c. Does change make sense?

41、(Lowering bad debt expense as % of accounts receivable does NOT make sense when customer defaults are rising)d. If accounting change results in increasing net income, restate earnings as they would have been if the old method had been retained.9. Premature or Belated Revenue RecognitionWhat to watch

42、 fora. Accruing unbilled salesb. Is there a sufficient provision for future losses in connection with the recognition of revenue?c. Improper deferral of revenue to a later periodd. Reversal of previously recorded profitsWhat to do- Restate revenue as if proper revenue recognition were made10. Undera

43、ccrual or Overaccrual of ExpensesWhat to watch fora. Failure to incur necessary maintenance expendituresb. Inadequate warranty provision What to do- Adjust net income for difference between expense provided & normal expense11. Improper Accounting PoliciesWhat to watch fora. Reduction of expense for

44、overly anticipated recoveries of excess costs due to modifications in government contractsb. Substantial provision for future costs in present year (e.g. warranties) because firm was remiss in making sufficient provisions in prior yearsWhat to do-restate earning of years affected so can determine pr

45、oper earnings trend12. Modification in Loan Agreements Due to Financially Weak BorrowersWhat to watch for - lowering of interest on loanWhat to do - downwardly adjust net income for inclusion of accrued interest income on risky loans13. Change in corporate policy for the current year, which impacts

46、earnings (e.g., writing insurance renewal contracts in the 4th quarter of the current year rather than the 1st quarter of the next year).14. Unjustified Cutback in Discretionary CostsWhat to watch fora. Declining tend in discretionary costs as a % of net sales or to assets to which they applyb. Vaci

47、llation in the ratio of discretionary costs to sales over the years as this may indicate management of earningsWhat to doa. Determine trend in discretionary costs over time through use of index numbersb. Determine ratio of discretionary costs to sales over last 5 years. An example is ratio of repair

48、s & maintenance to sales and/or to fixed assets15. Book Income Substantially Exceeds Taxable IncomeWhat to watch for - A continual, significant rise in deferred income tax credit account due to liberal accounting policies16. Residual Income that is Substantially less than Net Income Residual Income

49、may be determined by deducting the imputed cost of capital (weighted average cost of capital time total assets) from net income.What to do - Determine ratio over time of residual income to net income17. A High Degree of Uncertainty Associated with Income Statement ComponentsWhat to watch fora. Firm

50、engaged in long-term activities requiring many estimates in income measurement processb. Significant future loss provisionsc. Estimates have been consistently materially different from actual experienceWhat to doa. Compare over time firms estimated liability provisions with actual losses occurring.

51、e.g., warranty costsb. Determine what percent of total assets are intangible, which by their nature require material estimates to be made18. Unreliably Reported EarningsWhat to watch fora. Poor system of internal control because it infers possible errors in reporting systemb. High turnover rate in a

52、uditorsc. Company has reputation for managing earnings and/or using liberal accounting policiesd. Indications of lack of management integrity as evidenced by such things as bribesWhat to doa. Determine trend in audit fees over timeb. Examine for disclosure made by company related to adjustments due

53、to prior years accounting errorsc. Look at accounting, financial and brokerage research publications that note and give examples of companies with questionable accounting policies.High Quality of Earnings Indicators:1. Net Income Backed up by Cash2. Net Income not involving the Inclusion of amortiza

54、tion costs related to questionable assets, such as deferred charges3. Net Income that reflects Economic Reality4. Income Statements Components that are Recognized Close to the Point of Cash Inflow and Cash OutflowPolicies that lower quality of earnings1. reduce expense for expected recovery of exces

55、s costs resulting from changes in government contract only collected 65%2. unrealistic decline in percentage of sales allowance to sales3. provision for future costs (warranties) high because underprovided in past4. “Big Bath”5. re-negotiate terms of loan with weak borrower6. transfer from 1 sub to

56、another7. sell securities at a gain and buy them back at higher price- have to recognize lossHow company smoothes earningsCheck list1 Does level discretionary cost conform to past2 Is there a drop in trend of discretionary costs as percentage of sales3 Does cost cutting program involve significant c

57、ut in discretionary costs4 Does cost cutting program eliminate fat?5 Do discretionary costs show fluctuations relative to sales6 Is there a sizable jump in discretionary costs?Summary checklist of key pointsA. No single “real” net income figure existsB. The analyst must adjust reported net income to

58、 an earnings figure that is relative to him/her.C. Earnings quality evaluation is important in investment, credit, audit & management decision making.D. Appraising the quality of earnings requires an examination of accounting, financial, economic and political factors.E. Earnings quality elements ar

59、e both quantitative and qualitativeCash flow statement1. SCF (Statement of Cash Flows) adds in situations where Balance Sheet and Income Statement provide limited insight2. SCF helps identify the categories into which companies fit3. Financial flexibility is a useful weapon to gain a competitive adv

60、antage and is best measured by studying the SCFThe key analytical lessonsThe cash flow statement not the income statement provides the best information about a highly leveraged firms financial healthThere is no advantage in showing an accounting profit, the main consequence of which is incurring tax

61、es, resulting, in turn, in reduced cash flowsCash Flow and Company Life CycleCash Flow and Start-up CompaniesLittle or no operating cash flowsLarge cash outflows for investing activitiesLarge need for external financing (mostly from issuing common stock, issue long term debt)Cash Flows and Emerging

62、Growth CompaniesSome operating cash flow (not enough to sustain growth)Large cash outflows to expand activitiesRequires cash flows from financingPay back some short-term debt, issue some common stockCash Flows and Established Growth CompaniesFund growth from operating cash flowDepreciation is substa

63、ntialRepayment of long term debt, begin to pay dividendCash Flows and Mature Industry CompaniesModest capital requirementsDepreciation and amortization is significantNet negative reinvestmentLarge dividend payout, reduction in long term debtCash Flows and Declining Industry CompaniesNet cash user (similar to emerging growth)Lower dividends, Slim operating cash flowssell assetsCash Flows and Financial FlexibilitySafety of dividendFinance growth with internal fundsMeet other