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Fianacial Statement Analysis Foundation

3075 words - 13 pages

Financial Statement Analysis
Session #1: Fundamental Analysis and
March 2015
In-Mu Haw (许 仁茂)

Create value through acquisition to build brands (over 100)


Lenovo vs. HP Stock Price

Lenovo created value
through acquisitions

Poor acquisition
(overpaid: $8.8B)

$18 million
in 2013

Deloitte Report
Chet Wood, Managing Partner of Deloitte LLP, Merger &
Acquisition Services:

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
1+ 2


Value = Book value of equity + Extra value (P/B ratio) Session 2
Value = Capitalized Earnings + Extra Value (P/E ratio) Session 3


Forecast Period

4 Years

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


Course Contents
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)

Course Syllabus
• 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
Price to...

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