财务状况分析（英文版）.docx

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 inefficient 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 The 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: Recognition 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 violationsUsers 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 remunerationInvestors 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 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: Forecasting 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 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 assets 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”- does 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 intangibles (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 service 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 method” 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 inflation 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 ignores 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 & 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 overstate 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 concernd. 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 firms 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 ValueDrawbacksDo 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 universal 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 paymentsDepreciation 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 yearIncome 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 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 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 entity except those that result from revenues or investment by owners.”Revenues+Other income and revenues-Expenses=Income from CONTINUING OPERATIONS"Unusual or infrequent events=Pre tax earnings from continuing operations-Income tax expense=After tax earnings from continuing operations*"Discontinued operations (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 examining 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 adjustments 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 ultraconservative 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 materially 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 used.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 as 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 which 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 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 future 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 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. 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 seeing 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? (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 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. Underaccrual 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 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 proper 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 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. Vacillation 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 repairs & 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 ac