Financial Statement Analysis
Session #1: Fundamental Analysis and
In-Mu Haw (许 仁茂)
Create value through acquisition to build brands (over 100)
Lenovo vs. HP Stock Price
Lenovo created value
Chet Wood, Managing Partner of Deloitte LLP, Merger &
About 70 percent of all health plan M&As fail to create
meaningful shareholder value.
CFOs and management can take a stronger role in M&A
deal evaluation, especially on revenue growth.
Use of Financial Statements for Valuation
“I am considering to buy a small packing
company. They offered me ...view middle of the document...
They outperform Discounted Cash Flow (DCF) model (cash-based):
No need to forecast Free Cash Flows!
3 RE (RE, AEG, ReOI) models give you the same valuation!
RE models PROTECT managers & investors against paying too
The market may be inefficient, so learn how we can challenge
the market price of a stock as an active investor.
Course Contents of PART I: Valuation
PART I: Financial Statements & Valuation
Residual Earnings model to estimate a firm’s intrinsic value
Session #1: Foundation of Fundamental Analysis and Valuation (Ch. 3, 4)
Session #2: Pricing Book Value: Residual Earnings (RE) Model (Ch. 5, 7)
Session #3: Pricing Earnings: Abnormal Earnings Growth (AEG) Model (Ch. 6)
Residual Earnings Model (Session #2)
− × is called Residual Earnings.
0 = 0 +
1 − × 0
2 − × 1
Value = Book value of equity + Extra value (P/B ratio) Session 2
Value = Capitalized Earnings + Extra Value (P/E ratio) Session 3
Beyond the Horizon
Valuation Error (%)
Features of PART II: “Strategic”
Analysis of Financial Performance
Perform strategic financial statement analysis (Extension)
“Published” FS are useful for credit analysis but not for valuation!
It’s the operating activities that add value in a business
FS mixes with non-value relevant information.
Identify value drivers of profitability and sustainable growth
Increase firm value through operation (Apple, Samsung), operating
liabilities (Dell) & M&A (Lenovo, Procter & Gamble)
This course marries financial accounting, finance, and strategy
PART II: Strategic Analysis of Financial Performance
Analyze value drivers (sources) of profitability & growth
Session #4: Strategic Financial Statements (Ch.8 & 10) & Analysis of
Profitability (Ch. 12) (Extension)
Session #5: Analysis of Growth (Ch. 13)
PART III: Forecasting & Valuing Operations
Session #6: Valuation of Operations (enterprise) (Ch. 14)
• Group Project Presentation and Company Analysis (40%):
Applying class learning to the equity valuation of a firm
(presentation slides only, No written report required) (March
13 in the last class)
• Final Exam (50%): open note, open book (March 20)
• In-class Exercises & Class Participation (10%)
Be active in your group discussion & exercises (Sit close for effective
discussion, Peer group evaluation at the end)
Please select your own group members (4 or 5 students per
Session #1:Foundation of Fundamental
Analysis and Valuation
P/B, P/E and Fundamental Analysis (Ch. 3)
Earnings and Free Cash Flows (Ch. 4)
Overview of Valuation Models (Ch. 4)
(key issues only)
I. P/B, P/E and Fundamental Analysis