overview of financial reporting, financial statement analysis, and valuation copyright © 2007...
TRANSCRIPT
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Overview of Financial Reporting, Financial Statement Analysis, and Valuation
Copyright © 2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Slides Prepared by
Karen Foust
Tulane University
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Six-Step Process
1. Identify the industry’s economic characteristics
2. Identify company strategy3. Assess financial statement quality—adjust
if necessary4. Analyze risk and profitability5. Prepare forecasted financial statements6. Value the firm
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STEP 1: Industry’s Economic Characteristics
Profit Margin
Asset T/O
ROA
LTD/TA
Grocery 3.5% 2.9 10.15% 29.8% Pharmaceutical 12.1% .678 8.2% 25.3% Utility 10.5% .495 5.2% 65.6% Bank 13.0% .09 1.2% 8.7%
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Industry’s Economic Characteristics
• Can use:– Value chain analysis
– Porter’s Five Forces
– Economic Attributes Framework
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Value Chain Analysis
PepsiCo Bottlers
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Value Chain Analysis
• BY PEPSICO:
– New beverage product development
– Manufacture of concentrate
• BY BOTTLERS
– Mixing to produce beverage or syrup
– Containerizing
– Distribution to retail outlets
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Porter’s Five Forcesapplied to soft drink/beverage industry
• Buyer power - relative bargaining power
– LOW
• Supplier power
– LOW
• Rivalry among existing firms
– MODERATE
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Porter’s Five Forcesapplied to soft drink/beverage industry (cont’d)
• Threat of new entrants– LOW
• Threat of substitutes– LOW
• Implies profitability is– HIGH
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Economic Attributes Framework
• Demand
• Supply
• Manufacturing
• Marketing
• Investing & Financing
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Economic Attributes Framework
applied to soft drink/beverage industry
• Demand– Relatively insensitive to price
– Low growth in U.S. but high growth elsewhere
– Not cyclical
– Higher in warmer weather
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Economic Attributes Framework
applied to soft drink/beverage industry
• Supply– Two principal suppliers
– High brand recognition
– Domination of distribution channels
– High barriers to entry
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Economic Attributes Framework
applied to soft drink/beverage industry
• Manufacturing– Manufacture of concentrate/syrup not
capital intensive
– Bottling/distribution IS capital intensive
– Simple process
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Economic Attributes Framework
applied to soft drink/beverage industry
• Marketing– Brand recognition, established demand;
advertising can stimulate• Investing/Financing
– Bottling/distribution require long-term financing
– Profitability high, growth slow (in U.S.) leads to excess cash flow
– Other countries growth requires financing
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STEP 2: Company Strategy
• Nature of product or service
– niche market? Unique product?
• Integration within value chain
• Geographical diversification
• Industry diversification
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STEP 3: Financial Statement Quality
• Income Statement
• Balance Sheet
• Statement of Cash Flows
• Statement of Shareholders’ Equity
First three required; most companies include all four.
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Financial Statement Quality
BALANCE SHEETalso called Statement of Financial Position:Assets = Liabilities + Owners’ Equity
Assets: Monetary or Non
Current assets M (most)
Investments M (debt)
Non (equity)
Property, Plant & Equipment Non
Intangibles Non
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Financial Statement Quality
BALANCE SHEET continued
Liabilities
Current
NoncurrentLong-term debt
Other
Deferred income taxes
Executory contracts?
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Chapter 1, Slide 18
Financial Statement Quality
BALANCE SHEET continued
Owners’ Equity: residual interest
Common stock
Other classes of stock
Additional paid in capital
Retained earnings (increased by net income, decreased by dividends)
Accumulated other comprehensive income
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Financial Statement Quality
INCOME STATEMENT -- accrual basis
Income from continuing operationsIncome, gains/losses from discontinued
operations
Extraordinary gains/lossesCumulative effect of a change in accounting
principle NOTE: Should not appear after 2005 due to change in GAAP.
Comprehensive Income
Quality of Earnings? Persistence?
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STATEMENT OF CASH FLOWS
free cash flows
Categories:
Operating
Investing
FinancingInvesting/financing activities not involving cash
Financial Statement Quality
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STEP 4: Profitability and Risk Analysis
• TOOLS:
– Common-size financial statements
– Percentage change statements
– Financial Statement Ratios• Profitability: EPS, ROCE• Risk: CR, Debt to Equity
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STEP 5: Forecast Financial Statements
• Earnings forecasts
• Operating cash flow forecasts
• Other key metrics
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STEP 6: Value the Firm
Valuation based on:
• Dividends
• Earnings
• Cash flows
All three methods will give same value
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Sources of Financial Statement Information
• Annual Report to Shareholders
• Form 10-K Annual Report
• Form 10-Q Quarterly Report
• Prospectus or Registration Statement
• Form 20-F Annual Report (for non-U.S. firms)