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Fianacial Statement Analysis Foundation

3075 words - 13 pages

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

Create value through acquisition to build brands (over 100)

2

Lenovo vs. HP Stock Price

Lenovo created value
through acquisitions

Poor acquisition
(overpaid: $8.8B)

$18 million
in 2013
3

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.

4

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
much.
The market may be inefficient, so learn how we can challenge
the market price of a stock as an active investor.

11

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)

12

Preview

Residual Earnings Model (Session #2)
− × is called Residual Earnings.
0 = 0 +

1 − × 0
(1+)

+

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
13

0

Forecast Period

4 Years

Beyond the Horizon

180.00%

176.20%

Valuation Error (%)

160.00%

140.00%

120.00%

100.00%

76.50%

66.30%
80.00%

60.00%

40.00%

16.70%

6.10%

10.30%

20.00%

0.00%

Dividends

Cash
Flows

Residual
Earnings

Dividends

Cash
Flows

Residual
Earnings

14

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

15

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)
16

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
group)
17

Session #1:Foundation of Fundamental
Analysis and Valuation
I.
II.
III.

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)

18

I. P/B, P/E and Fundamental Analysis
10/31/2014
Price to...

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