Financial Statement Analysis (22E00100) Assistant Professor Henry Jarva Aalto University

Transcription

1 Financial Statement Analysis (22E00100) Assistant Professor Henry Jarva Aalto University

2 Important topics Accounting analysis Earnings quality Motivations for earnings management Red flags Cash flow Analysis Financial ratios Profitability analysis (ROA & ROE) Liquidity and solvency analysis Valuation 2

3 Balance Sheet Equation = = =.. + = + = 3

4 Reformulated balance sheet Assets Liabilities and stockholders equity Financial assets Cash equivalents Financial liabilities Short-term borrowings Short-term investments Current maturities of long-term debt Short-term notes receivable (?) Short-term notes payable (?) Long-term debt investments Long-term borrowing (bank loans, bonds payable, notes payable) Lease obligations Preferred stock Operating assets: All else Operating liabilities All else Minority interest Common equity 4

5 Issues in reformulated balance sheet Cash. Working cash, or operating cash, which is needed as a buffer to pay bills as they fall due, is an operating asset (typical amount might be 3 percent of sales). Short-term notes receivable. Notes can be written by customers for goods received in trade, with or without interest, and, with interest, by borrowers. If the notes are temporary investments, treat them as financial assets. If they are trade notes, treat them as operating assets. Debt investments. For nonfinancial firms, investments in bonds and other interest-bearing investments are financial assets. Long-term equity investments. Long-term equity investments are investments in the operations of other companies, and so they are classified as operating assets. 5

6 Issues in reformulated balance sheet Deferred revenues (unearned revenues). These include receipts from customers that are not yet recognized as revenue. Treat them as operating liabilities. Leases. The lease asset is an operating asset. The lease obligation is reported under liabilities and classified as a financial obligation in reformulated statements. Deferred tax assets and liabilities. Deferred taxes arise almost always from accounting differences in calculating the operating income component of taxable income and reported book income. So treat them as operating assets or liabilities. Minority interest. Minority interest is not an oblication, like debt, that is satisfied with cash generated from free cash flows. Rather is an equity sharing in the results of the consolidated operations. In the reformulated statements treat it as a separate line item: NOA NFO = OE + Minority Interest where NOA = net operating assets and NFO = net financial obligations 6

7 Balance Sheet Equation = = =.. + = + = = + ( ) 7

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9 Dell, Inc. 9

10 Balance Sheet Equation = = =.. + = + = = + ( ) 10

11 NOPAT 11

12 NOPAT 12

13 Valuation Models

14 Dividend Discounting Model P 0 = Div r t = 1 (1 + e t ) t where P 0 = equity value at the end of period 0 Div t = net cash distributions to equity at the end of period t r e = cost of equity capital See Exercise 1. 14

15 Free cash flow (FCF) While there is not agreement on its exact definition, one of the more useful measures of free cash flow is: Cash flows from operations Net capital expenditures required to maintain productive capacity Dividends on preferred stock and common stock (assuming a payout policy) Free cash flow (FCF) Another definition that is widely used and similar concept is: FCF = NOPAT Change in NOA 15

16 Traditional Discounted Free Cash Flow Model (to All Investors) where P 0 = equity value at the end of period 0 FCF t = free cash flows to debt and equity holders during period t r W = weighted average cost of capital Debt 0 = value of debt at the end of period 0 See Exercise 2. FCF P - t 0 = Debt t t = 1 (1 + rw ) 0 16

17 Discounting Free Cash Flows to Equity P 0 = FCFE r ) t = 1 (1 + e t t where P 0 = equity value at the end of period 0 FCFE t = free cash flows to equity holders during period t r e = cost of equity capital See Exercise 1 (just replace dividends with FCFE). 17

18 Discounted Residual Income Model P 0 = CE 0 + t= 1 NI t - re (1 + * CE r e ) t t-1 where P 0 = equity value at the end of period 0 NI t = net income for period t r e = cost of equity capital CE t = book value of common equity at the end of period t 18

19 Two Stage Discounted Residual Income Model P 0 NI - r * CE NI T t e t-1 T + 1 = CE t t = 1 (1 + re ) (re - - r e g)(1 * CE + r e ) T T where P 0 = equity value at the end of period 0 NI t = net income for period t r e = cost of equity capital CE t = book value of equity at the end of period t g = constant terminal growth rate in residual income beyond period T+1 19

20 Discounting Residual Income to All Investors (Debt and Equity) P NOI t W t -1 0 = NOA Debt t t= 1 (1 + rw ) where P 0 = equity value at the end of period 0 NOI t = net operating income (after taxes) r W = weighted average cost of capital NOA t = net operating assets at the end of period t Debt 0 = value of debt at the end of period 0 - r * NOA 0 20