财务分析-财务状况分析(英文版) 精品

Financial Statement Analysis
To 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 ap art 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 analysis
GAAP – plex
Economic events about the firm to be reported to the public Relevance vs Reliability
Reporting: Recognition vs Disclosure (where)
Users of Firms’ Financial Information
Equity Investors
Investment analysis
Long term earnings power
Management performance evaluation
Ability to pay dividend
Risk – especially market
Debt Investors
Short term liquidity
Probability of default
Long term asset protection
Covenant violations
Users of Firms’ Financial Information
Management: Strategic planning; Investment in operations;
Performance Evaluation
Litigants - Disputes over value in the firm
Customers - Security of supply
Governments: Policy making and Regulation
– Taxation
– Government contracting
Employees: Security and remuneration
Investors and management are the primary users of financial statements
Fundamental Analysis
Step 1 - Knowing the Business
•The Products; The Knowledge Base
•The petition’ The Regulatory Constraints
Step 2 - Analyzing Information
•In Financial Statements
•Outside of Financial Statements
Step 3 - Forecasting Payoffs
•Measuring Value Added
•Forecasting Value Added
Step 4 - Convert Forecasts to a Valuation
Step 5 - Trading on the Valuation
•Outside Investor: pare Value with Price to; BUY, SELL, or HOLD
•Inside Investor: pare Value with Cost to; ACCEPT or REJECT Strategy
A 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 i ts 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 ponents 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 bination 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 shortings of the Balance Sheet Elusiveness of value
Value cannot be assigned to all assets
Other Balance Sheet issues: Book Value vs. Market Value
Inflation: 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 dollars
Weakness 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 value
How to Measure Effect of Obsolescence
a. Observe difference between market value & book value (after adjusting
for inflation)
b. Estimate the value of the asset’s earning power. But this is simply the
discounted cash flow approach & thus it represents circular reasoning.
Inflation & Obsolescence
Inflation causes book value to understate market value
Obsolescence causes book value to overstate market value
The effect of inflation & obsolescence may not be apparent in an examination of book values because they offset one another
Organizational Capital
a. The whole is worth more than the sum of the parts
b. Returns to Entrepreneurship
c. Difficult to separate from the firm as a going concern
d. Can be estimated only by examining the earning power of the pany
Sources of Organizational Capital Values
a. Long-term relationships
b. Reputational “brand name” capital
c. Growth options
d. Network of suppliers and distributors
More on Organizational Capital
a. It is difficult to separate the firm’s organizational capital from the firm as an
ongoing concern
b. The value of a brand name is not reflected in the replacement cost of assets
c. Can only be estimated by examining the earning power of the pany (DCF)
Adjustments to Book Value
Estimate Replacement Cost
Estimate Liquidation Value
Drawbacks
Do adjusted book values reflect market values?
Adjusted book values do not consider organizational capital Drawbacks of Adjustments
It is often difficult to determine if we have made the correct adjustments Adjustments often fail to consider the value of off-balance sheet items
Replacement Cost
No universal agreement
Can use price index
CPI, PPI, GDP implicit deflator
Ignores organizational capital
Liquidation Value
Secondary markets do not exist
Asset specificity
Contestable markets
Ine statement
Net Sales
Cost of Goods Sold
Gross Profit
Selling & Administrative expenses
Advertising
Lease payments
Depreciation and amortization
Repairs and maintenance
Operating Profit
Other ine (expense)
Interest ine
Interest expense
Earnings before Ine taxes
Ine taxes
Net earnings
Statement of Consolidated Retained Earnings Retained earnings at beginning of year
Net earnings
Cash Dividends
Retained earnings at end of year
Ine 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”
•PREHENSIVE INE 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 p eripheral or incidental transactions of an entity except those that result from revenues or investment by owners.”
Revenues
+ Other ine and revenues
- E xpenses
= Ine from CONTINUING OPERATIONS
∀Unusual or infrequent events
= Pre tax earnings from continuing operations
- I ne 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 Ine *
* Per share amounts are reported for each of these items High quality ine statement reflect repeatable ine statement Gain from non-recurring items should be ignored
when examining earnings
High quality earnings result from the use of conservative accounting principles that do not overstate revenues or understate costs
Low Quality of Earnings Indicators
1.Unstable Ine Statement Elements unrelated to normal
business operations
2 Earnings that reflect dubious adjustments to estimated
liability accounts
3 Earnings that have been determined using liberal accounting
policies (methods and estimates) because of the resulting
overstatement of net ine. Such overstatement also results in the overstatement of future earnings projections
ine based on ultraconservative accounting policies
since the resulting net ine is misleading as a basis for
predicting future earnings
What to do?pare the pany’s accounting polices to the prevalent
accounting policies in the industry
5.Unreliable and inaccurate accounting estimates
What to watch for?Prior estimates materially differ from actual
experience, such as where the pany’s 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 ine 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 period
b. Shifting of expense among reporting periods
c. Smoothly rising earnings trend
d. Sharp increase or decrease in sales in the last quarter of the years
as reflected in the 4th quarter ine statement
e. Trading of investment securities among affiliated panies
f. Significant modification in estimated liability accounts in the last
quarter
g. Writing down a good asset (inventory) and selling it next year to
show higher earnings
h. 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 impact
What to do?Look at the functional relationship of sales and net ine over time. An inconsistent relationship may be a manipulator
indicator. Restate earnings by taking out profit increments or
reductions due to ine management ploys
7.Deferral of costs that do not have future economic benefit
What to watch for
a. Inventory of unsalable items in view of current environment (8
track tapes, typewriters, large automobiles during oil shortage)
b. Sudden write-offs of inventory
c. Goodwill on the balance sheet but the pany 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 do
Restate net ine as if the unrealistic deferral had not been made.
8. Unjustified Changes in Accounting Principles and Estimates
What to watch for
a. A firm has a past history of making frequent accounting changes
b. Accounting changes that create earnings growth
c. The pany fires the auditor and hires another one because of a
disagreement over a proposed accounting change.
What to do
a. Determine whether the accounting change is justified by seeing if it
confirms to requirements in FASB statements, Industry Audit Guides
& IRS regulations
b. Ascertain whether the accounting change is preferable, given nature of
business (e.g., decreasing the life of a puter 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 ine, restate earnings as
they would have been if the old method had been retained.
9.Premature or Belated Revenue Recognition
What to watch for
a. Accruing unbilled sales
b. Is there a sufficient provision for future losses in connection with
the recognition of revenue?
c. Improper deferral of revenue to a later period
d. Reversal of previously recorded profits
What to do- Restate revenue as if proper revenue recognition were made
10.Underaccrual or Overaccrual of Expenses
What to watch for
a. Failure to incur necessary maintenance expenditures
b. Inadequate warranty provision
What to do- Adjust net ine for difference between expense
provided & normal expense
11.Improper Accounting Policies
What to watch for
a. Reduction of expense for overly anticipated recoveries of excess
costs due to modifications in government contracts
b. Substantial provision for future costs in present year (e.g.
warranties) because firm was remiss in making sufficient
provisions in prior years
What to do-restate earning of years affected so can determine
proper earnings trend
12.Modification in Loan Agreements Due to Financially
Weak Borrowers
What to watch for - lowering of interest on loan
What to do - downwardly adjust net ine for inclusion of accrued interest ine on risky loans
13.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 Costs
What to watch for
a. Declining tend in discretionary costs as a % of net sales or to
assets to which they apply
b. Vacillation in the ratio of discretionary costs to sales over the
years as this may indicate management of earnings
What to do
a. Determine trend in discretionary costs over time through
use of index numbers
b. Determine ratio of discretionary costs to sales over last 5
years. An example is ratio of repairs & maintenance to
sales and/or to fixed assets
15.Book Ine Substantially Exceeds Taxable Ine
What to watch for - A continual, significant rise in deferred ine tax credit account due to liberal accounting policies
16.Residual Ine that is Substantially less than Net Ine
Residual Ine may be determined by deducting the imputed cost
of capital (weighted average cost of capital time total assets)
from net ine.
What to do - Determine ratio over time of residual ine to net ine
17. A High Degree of Uncertainty Associated with Ine
Statement ponents
What to watch for
a. Firm engaged in long-term activities requiring many estimates in
ine measurement process
b. Significant future loss provisions
c. Estimates have been consistently materially different from actual
experience
What to do
a. pare o ver time firm’s estimated liability provisions with actual
losses occurring. – e.g., warranty cost s
b. Determine what percent of total assets are intangible, which by
their nature require material estimates to be made
18.Unreliably Reported Earnings
What to watch for
a. Poor system of internal control because it infers possible
errors in reporting system
b. High turnover rate in auditors
c. pany has reputation for managing earnings and/or using
liberal accounting policies
d. Indications of lack of management integrity as evidenced by
such things as bribes
What to do
a. Determine trend in audit fees over time
b. Examine for disclosure made by pany related to adjustments
due to prior years' accounting errors
c. Look at accounting, financial and brokerage research
publications that note and give examples of panies with
questionable accounting policies.
High Quality of Earnings Indicators:
Ine Backed up by Cash
Ine not involving the Inclusion of amortization costs
related to questionable assets, such as deferred charges
Ine that reflects Economic Reality
4.Ine Statements ponents that are Recognized Close to the
Point of Cash Inflow and Cash Outflow
Policies that lower quality of earnings
1. reduce expense for expected recovery of excess costs resulting
from changes in government contract – only collected 65%
2. unrealistic decline in percentage of sales allowance to sales
3. provision for future costs (warranties) high because
underprovided in past
4. “Big Bath”
5. re-negotiate terms of loan with weak borrower
6. transfer from 1 sub to another
7. sell securities at a gain and buy them back at higher price- have
to recognize loss
How pany smoothes earnings Check list
1Does level discretionary cost conform to past
2Is there a drop in trend of discretionary costs as percentage of sales
3Does cost cutting program involve significant cut in discretionary costs
4Does cost cutting program eliminate fat?
5Do discretionary costs show fluctuations relative to sales 6Is there a sizable jump in discretionary costs?
Summary checklist of key points
A. No single “real” net ine figure exists
B. The analyst must adjust reported net ine to 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 are both quantitative and
qualitative
Cash flow statement
1. SCF (Statement of Cash Flows) adds in situations where Balance Sheet
and Ine Statement provide limited insight
2. SCF helps identify the categories into which panies fit
3. Financial flexibility is a useful weapon to gain a petitive advantage
and is best measured by studying the SCF
The key analytical lessons
The cash flow statement – not the ine statement – provides the best information about a highly leveraged firm’s financial health
There is no advantage in showing an accounting profit, the main consequence of which is incurring taxes, resulting, in turn, in reduced cash flows
Cash Flow and pany Life Cycle
Cash Flow and Start-up panies
Little or no operating cash flows
Large cash outflows for investing activities
Large need for external financing (mostly from issuing mon stock, issue long term debt)
Cash Flows and Emerging Growth panies
Some operating cash flow (not enough to sustain growth)
Large cash outflows to expand activities
Requires cash flows from financing
Pay back some short-term debt, issue some mon stock
Cash Flows and Established Growth panies
Fund growth from operating cash flow
Depreciation is substantial
Repayment of long term debt, begin to pay dividend
Cash Flows and Mature Industry panies
Modest capital requirements
Depreciation and amortization is significant
Net negative reinvestment
Large dividend payout, reduction in long term debt Cash Flows and Declining Industry panies
Net cash user (similar to emerging growth)
Lower dividends, Slim operating cash flows
sell assets
Cash Flows and Financial Flexibility
Safety of dividend
Finance growth with internal funds
Meet other financial obligations
Financial Ratios Analysis:Ratios are more informative than raw numbers
1. Ratios provide meaningful relationships between individual values in
the financial statements
2. Ratios help investors evaluate management
3. Enable parison of a firm’s performance to
The aggregate economy
Its industry or industries
Its major petitors
Its past performance
Ratios and Financial Analysis
parability among firms of different sizes
Provides a profile of the firm
Caution:
Economic assumption of Linearity – Proportionality
Nonlinearity can cause problems:
Fixed costs, EOQ for inventories
Benchmarks; Is high Current ratio good? For whom?
Industry-wide norms.
Accounting Methods; Timing & Window Dressing
LIMITATIONS
1. No theory to define ‘good’
2. Historical, not economic
3. Most as of a single point in time
4. Seasonal operations
5. One-time effects
6. Designed for manufacturers
Liquidity Ratios: attempt to measure the ability to pay obligations such as current liabilities and the pool of assets available to cover the obligations. Liquidity is the ability of an asset to be converted to cash quickly at low cost. Converting an asset to cash occurs in one of two ways. Sell the asset, hoping it has reasonable liquidity, or in the case of a financial asset, like accounts receivable or Treasury bill, maturity brings cash. Working capital circulates from inventory to accounts receivable to cash, etc. Accounting value estimates of liquid assets are reasonable estimates of their value.
Current assets (the pool of circulating cash assets available to be allocated to pay bills) minus current liabilities (the pool of obligations the business must pay in the near future) is an analytical amount called net working capital (NWC).
NWC = current assets - current liabilities
NWC/total asset ratio = net working capital / total assets
The current ratio is the classic liquidity ratio, but is merely a variation of the idea above—what pool of circulating assets is available relative to the pool of current obligations:
Current ratio = current assets / current liabilities
Quick ratio =(cash + marketable securities + accounts receivable) /
current liabilities
Cash ratio = (cash + marketable securities) / current liabilities
Cash flow from operation ratio = OCF / current liabilities
Leverage ratios are two types: balance sheet ratios paring leverage capital to total capital or total assets, and coverage ratios which measure the earnings or cash-flow times coverage of fixed cost obligations.
Balance sheet ratios
Long-term debt ratio = long-term debt / ( long-term debt + equity)
Debt-equity ratio = long-term debt/equity
Total debt ratio = total liabilities / total assets
A coverage ratio, such as the times interest earned ratio, measures an amount available relative to amount owed. How many times is the obligation covered?
Times interest earned = EBIT / interest expense
= (EAT+Tax+Interest Exp)/ interest expense
Times Cash flow coverage =(OCF+Tax+Interest Exp)/ interest expense
Total assets turnover = Sales / Total assets
Accounts Receivable turnover = Sales / AR
[Days A/R outstanding = 365 / Accounts Receivable turnover]
Inventory turnover = Sales / Average Inventory, or
COGS / Average Inventory
[Inventory Conversion = 365 / Inventory turnover]
Payable turnover (deferral) = Purchase (or COGS) / AP
[Days A/P outstanding = 365 / Payable turnover]
Note: Cash Cycle = Inventory Conversion + Days A/R outstanding –
Days A/P outstanding
Profitability Ratios: refers to some measure of profit relative to revenue or an amount invested.
The net profit margin measures the proportion of sales revenue that is profit available for sources of funds (EBIT-tax).
Gross profit margin = gross profit / sales
Operating profit margin = EBIT / sales
Net profit margin = net ine / sales
Return on assets = (net ine + interest )/ average total assets
Return on equity = net ine/ average equity
Payout ratio = dividends / net earnings
Plowback ratio = 1 - payout ratio= (earnings – dividends)/(net earnings) = (earnings retained in period)/( net earnings)
Growth in equity = plowback ratio x ROE
Market Based Ratios
•For pricing an IPO if business going public
•P/E Ratio
What investors are willing to pay for a $ of earnings (Current
/ Forecast)
What creates a high P/E?
•Market/Book
Usually much different than 1.
•Price/Cash Flow
The Du Pont System is a process of analyzing ponent ratios, (also called deposition) of the ROA and ROE to explain their level or changes
Ratio Pr 1 Leverage Turnover Asset y ofitabilit Equity Debt ROA Equity
TA TA Sales Sales NI Equity
TA TA NI Equity NI ROE ⨯⨯=⎪⎪⎭
⎫ ⎝⎛+⨯=⨯⨯=⨯==
Industry analysis:
Definition of an industry: the group of firms producing products that are close substitutes for each other.
Forces driving industry petition: There are five forces in determining the petitive structure of an industry, they are: (1)Entry, (2)Threats of substitutions, (3)bargaining power of buyers, (4)Bargaining power of suppliers, and (5)rivalry among current petitors, and can be pictured as:
Five forces model:
Potential Entrants
Threats of new entrants
(Suppliers) (Buyers )0 bargaining power Industry petitors bargaining power
Rivalry among existing firms
Threats of substitutes
Substitutes
Threats of entry: new entrants bring to an industry new capacity, the desire to gain market share, and often substantial resources. Price can bid down or incumbent’s costs inflated as a result, reducing profitability.
Barriers to entry:
A. Economics of scales deter entry by forcing the entrants to e in at a
large scale and risk strong reaction from existing firms or e in at a
small scale and accept a cost disadvantage.
B. Product differentiation: product differentiation means that established
firms have brand identification and customer loyalties. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overe existing customer loyalties.
C. Capital requirement: the need to invest large financial resources in
order to pete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or R&D.
Capital requirement maybe also needed for customer credit, inventory start-up cost, as well as production cost.
D. Switching costs: A barrier to entry is created by the switching cost,
that is, one-time cost facing the buyer of switching from one supplier’s product to another’s.
E. Access to distribution channels: the more limited the wholesale or
retail channels for a product are and the more existing petitors have these tied up, obviously the tougher entry into the industry.
F. Cost disadvantages independent of scale: proprietary product
technology, favorable access to raw materials, favorable locations,
government subsidy, and learning or experience curve.
G. Government policy:
Expected retaliation: conditions that signal the strong likelihood of retaliation to entry and hence to deter it are the following:
A. A history of vigorous retaliation to entrants.
B. Established firms with substantial resources to fight back.
C. Established firms with great mitments to the industry and
highly illiquid assets employed in it.
D. slow industry growth, which limits the ability of the industry
to absorb a new firm without depressing the sales and
financial performance of established firms.。