财务状况分析英文版.docx

财务状况分析英文版.docx

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财务状况分析英文版

FinancialStatementAnalysis

Todeveloptechniquesforevaluatingfirmsusingfinancialstatementanalysisforequityandcreditanalysis.

Integratesfinancialstatementanalysiswithcorporatefinance,accountingandfundamentalanalysis.

Adoptsactivistpointofviewtoinvesting:

themarketmaybeinefficientandthestatementsmaynottellallthetruth.

WhatWillYouLearnFromtheCourse

•Howstatementsaregenerated

•Theroleoffinancialstatementsindeterminingfirms’values

•Howtopullapartthefinancialstatementstogetattherelevantinformation

•Howratioanalysisaidsinvaluation

•Therelevanceofcashflowandaccrualaccountinginformation

•HowtocalculatewhattheP/Eratioshouldbe?

•Howtocalculatewhattheprice-to-bookratio?

Needforfinancialstatementanalysis

GAAP–Complex

Economiceventsaboutthefirmtobereportedtothepublic

RelevancevsReliability

Reporting:

RecognitionvsDisclosure（where）

UsersofFirms’FinancialInformation

EquityInvestors

Investmentanalysis

Longtermearningspower

Managementperformanceevaluation

Abilitytopaydividend

Risk–especiallymarket

DebtInvestors

Shorttermliquidity

Probabilityofdefault

Longtermassetprotection

Covenantviolations

UsersofFirms’FinancialInformation

Management:

Strategicplanning;Investmentinoperations;PerformanceEvaluation

Litigants-Disputesovervalueinthefirm

Customers-Securityofsupply

Governments:

PolicymakingandRegulation

–Taxation

–Governmentcontracting

Employees:

Securityandremuneration

Investorsandmanagementaretheprimaryusersoffinancialstatements

FundamentalAnalysis

Step1-KnowingtheBusiness

•TheProducts;TheKnowledgeBase

•TheCompetition’TheRegulatoryConstraints

Step2-AnalyzingInformation

•InFinancialStatements

•OutsideofFinancialStatements

Step3-ForecastingPayoffs

•MeasuringValueAdded

•ForecastingValueAdded

Step4-ConvertForecaststoaValuation

Step5-TradingontheValuation

•OutsideInvestor:

CompareValuewithPriceto;BUY,SELL,orHOLD

•InsideInvestor:

CompareValuewithCostto;ACCEPTorREJECTStrategy

Avaluationmodelguidestheprocess:

Forecastingisattheheartoftheprocessandavaluationmodelspecifieswhatistobeforecasted（Step3）andhowaforecastisconvertedtoavaluation（Step4）.Whatistobeforecasted（Step3）dictatestheinformationisimplied?

BalanceSheet

•Assets（SFAC6）:

“probablefutureeconomicbenefitsobtainedorcontrolledbyaparticularentityasaresultofpasttransactionorevents

--noreferencetorisk（eg,assetssoldbutinwhichentityretainsarisk）

•Liabilities（SFAC6）:

‘probablefuturesacrificeofeconomicbenefitsarisingfrompresentobligationsofaparticularentitytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents”

--notalwaysfollowed（eg,certainleasesand,untilrecently,pensionbenefits）

•Equity（SFAC6）:

theresidualinterestinthenetassetsofanentitythatremainsafterdeductingitsliabilities”

--doesnothandlesituationswhereasourceofcapitalhaselementsofdebt&equity（eg,convertibles）

•Classifiedbyliquidity

CA:

convertedtocashorusedwithin1-yearoroperatingcycle（iflonger）

CL:

obligationsexpectedtobesettledwithin1-yearoroperatingcycle

•TangibleA&Lreportedaboveintangibles（goodwill,contingentliabilities）

MeasurementofAssets&Liabilities

•HistoricalCost,formostcomponentsofBalanceSheet

•Maybeatmarketunder“lowerofcostormarketrule”

•Reversalsofpriorwritedownsallowedformarketableequitysecuritiesbutnotforinventories

•Financialservicefirms（banks,brokerage,insurance）reportcertainA&Latmarket

•A&Lofforeignaffiliatesreportedatend-of-periodX-rateoracombinationofitandspecifiedhistoricalX-rates

•Intangibleassetshaveuncertainandhardtomeasurebenefitsandarereportedonlywhenacquiredviaa“purchasemethod”acquisition

--brandnames

--whenreported,calledGoodwill,Patents,etc.

TwoFundamentalshortcomingsoftheBalanceSheet

Elusivenessofvalue

Valuecannotbeassignedtoallassets

OtherBalanceSheetissues:

BookValuevs.MarketValue

Inflation:

Thecorrectwaytothinkaboutinflationisthatinflationrepresentsadeclineinthevalueofonegood–thecurrencyofdenomination（i.e.,theU.S.dollarinourcase）.Whenthevalueofthecurrencydeclines,pricesofallothergoods&servicesrisebecausethosepricesaremeasuredintermsofdollars

WeaknessofHistoricalCostAccounting:

itignorestheimpactofchangesinthepurchasingpowerofthecurrency.Thenetimpactofnotconsideringinflationisthatbookvalueunderstatesthemarketvalue.

Obsolescencecausesbookvaluetooverstatemarketvalue

HowtoMeasureEffectofObsolescence

a.Observedifferencebetweenmarketvalue&bookvalue（afteradjustingforinflation）

b.Estimatethevalueoftheasset’searningpower.Butthisissimplythediscountedcashflowapproach&thusitrepresentscircularreasoning.

Inflation&Obsolescence

Inflationcausesbookvaluetounderstatemarketvalue

Obsolescencecausesbookvaluetooverstatemarketvalue

Theeffectofinflation&obsolescencemaynotbeapparentinanexaminationofbookvaluesbecausetheyoffsetoneanother

OrganizationalCapital

a.Thewholeisworthmorethanthesumoftheparts

b.ReturnstoEntrepreneurship

c.Difficulttoseparatefromthefirmasagoingconcern

d.Canbeestimatedonlybyexaminingtheearningpowerofthecompany

SourcesofOrganizationalCapitalValues

a.Long-termrelationships

b.Reputational“brandname”capital

c.Growthoptions

d.Networkofsuppliersanddistributors

MoreonOrganizationalCapital

a.Itisdifficulttoseparatethefirm’sorganizationalcapitalfromthefirmasanongoingconcern

b.Thevalueofabrandnameisnotreflectedinthereplacementcostofassets

c.Canonlybeestimatedbyexaminingtheearningpowerofthecompany（DCF）

AdjustmentstoBookValue

EstimateReplacementCost

EstimateLiquidationValue

Drawbacks

Doadjustedbookvaluesreflectmarketvalues?

Adjustedbookvaluesdonotconsiderorganizationalcapital

DrawbacksofAdjustments

Itisoftendifficulttodetermineifwehavemadethecorrectadjustments

Adjustmentsoftenfailtoconsiderthevalueofoff-balancesheetitems

ReplacementCost

Nouniversalagreement

Canusepriceindex

CPI,PPI,GDPimplicitdeflator

Ignoresorganizationalcapital

LiquidationValue

Secondarymarketsdonotexist

Assetspecificity

Contestablemarkets

Incomestatement

NetSales

CostofGoodsSold

GrossProfit

Selling&Administrativeexpenses

Advertising

Leasepayments

Depreciationandamortization

Repairsandmaintenance

OperatingProfit

Otherincome（expense）

Interestincome

Interestexpense

EarningsbeforeIncometaxes

Incometaxes

Netearnings

StatementofConsolidatedRetainedEarnings

Retainedearningsatbeginningofyear

Netearnings

CashDividends

Retainedearningsatendofyear

IncomeStatement

•BasedonAccrualaccounting

•BasedonMatchingPrinciple

•Revenues（SFAC6）“inflowsofanentityfromdeliveringorproducinggoods,renderingservices,orcarryingoutotheractivitiesthatconstitutetheentitiesongoingmajororcentraloperations”

•Expenses（SFAC6）“outflowsfromdeliveringorproducinggoods,renderingservices,orcarryingoutotheractivitiesthatconstitutetheentitiesongoingmajororcentraloperations”

•COMPREHENSIVEINCOMECONCEPT“thechangeinequityfromtransactionsfromnon-ownersources.Itincludesallchangesinequityduringaperiodexceptthoseresultingfrominvestmentsbyownersanddistributionstoowners”

•Gains“Increasesinequityfromperipheralorincidentaltransactionsofanentityexceptthosethatresultfromrevenuesorinvestmentbyowners.”

•Losses“Decreasesinequityfromperipheralorincidentaltransactionsofanentityexceptthosethatresultfromrevenuesorinvestmentbyowners.”

Revenues

+Otherincomeandrevenues

-Expenses

=IncomefromCONTINUINGOPERATIONS

Unusualorinfrequentevents

=Pretaxearningsfromcontinuingoperations

-Incometaxexpense

=Aftertaxearningsfromcontinuingoperations*

Discontinuedoperations（netoftax）*

Extraordinaryoperations（netoftax）*

Cumulativeeffectofaccountingchanges（netoftax）*

=NetIncome*

*Pershareamountsarereportedforeachoftheseitems

Highqualityincomestatementreflectrepeatableincomestatement

Gainfromnon-recurringitemsshouldbeignoredwhenexaminingearnings

Highqualityearningsresultfromtheuseofconservativeaccountingprinciplesthatdonotoverstaterevenuesorunderstatecosts

LowQualityofEarningsIndicators

1.UnstableIncomeStatementElementsunrelatedtonormalbusinessoperations

2Earningsthatreflectdubiousadjustmentstoestimatedliabilityaccounts

3Earningsthathavebeendeterminedusingliberalaccountingpolicies（methodsandestimates）becauseoftheresultingoverstatementofnetincome.Suchoverstatementalsoresultsintheoverstatementoffutureearningsprojections

4.Netincomebasedonultraconservativeaccountingpoliciessincetheresultingnetincomeismisleadingasabasisforpredictingfutureearnings

Whattodo?

Comparethecompany’saccountingpolicestotheprevalentaccountingpoliciesintheindustry

5.Unreliableandinaccurateaccountingestimates

Whattowatchfor?

Priorestimatesmateriallydifferfromactualexperience,suchaswherethecompany’sassumedinterestrateonpensionfundassetssignificantlydiffersfromtheactualinterestrateearnedasreflectedbysignificantactuarialgainsandlosses.

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