Basic Financial Analysis and Valuation

Transcription

1 30 Sep 2017 Basic Financial Analysis and Valuation By Puah Soon Lim, CFA

2 2 Disclaimer The information in this workshop is for general information purposes only and is provided on an as is basis without any representations or warranties of any kind. The information does not constitute legal, financial, trading or investment advice and it does not make any recommendation or endorsement regarding any and all products mentioned. All participants of the presentation and persons reading the information in these presentation slides are advised to seek independent advice and/or consult relevant laws, regulations and rules prior to relying on or taking any action based on the information presented. All examples and views expressed are entirely the presenter s own. Bursa Malaysia Berhad, the Bursa Malaysia group of companies (the Company) and the presenter do not accept any liability for: the information provided during the presentation and in the presentation slides (including but not limited to any liability pertaining to the accuracy, completeness or currency of the information); and for any investment or trading decisions made on the basis of this information. DISCLAIMER: Bursa Malaysia and its Group of Companies (the Company) reserve all proprietary rights to the contents of this presentation. Whilst the company endeavors to ensure that the contents in this presentation are accurate, complete or have been obtained from sources believed by the Company to be accurate and reliable, neither the Company nor the presenter make any warranty, express or implied, nor assume any legal liability or responsibility for the accuracy, completeness or currency of the contents of this presentation. In no event shall the Company be liable for any claim, howsoever arising, out of or in relation to this presentation. Copyright Bursa Malaysia Berhad 2017 (30632-P)

3 Part 1 - Financial Analysis DISCLAIMER: Bursa Malaysia and its Group of Companies (the Company) reserve all proprietary rights to the contents of this presentation. Whilst the company endeavors to ensure that the contents in this presentation are accurate, complete or have been obtained from sources believed by the Company to be accurate and reliable, neither the Company nor the presenter make any warranty, express or implied, nor assume any legal liability or responsibility for the accuracy, completeness or currency of the contents of this presentation. In no event shall the Company be liable for any claim, howsoever arising, out of or in relation to this presentation. Copyright Bursa Malaysia Berhad 2017 (30632-P)

4 Learning Outcomes The Four Question that a Balance Sheet Answer The Three Things to Extract from the Income Statement Four Things to Examine in a Cash Flow Statement 4

5 The Four Question that a Balance Sheet Answer 5 5

6 The Four Questions that a Balance Sheet Answer 1. Who owns the business 2. How lean and mean is the organisation running? 3. How liquid is the organisation? 4. Is the organization solvent? 6

7 1. Who owns the business? When you have more debt than equities, the lenders own the business When you have more equities than debt, the stockholders own the business When you have Consistent Retained Earnings, the Business Owns the Business 7

8 1. Who owns the business? 8

9 2. How Lean and Mean is the organization running? Working Capital Management Working Capital = Current Assets Current Liabilities Cash Account Receivable Inventory Account Payable 9

10 2. How Lean and Mean is the organization running? 10

11 2. How Lean and Mean is the organization running? Day-to-day Cash Component of cash Rainy-day cash 11

12 2. How Lean and Mean is the organization running? Current Ratio Current Asset Current Liabilities 12

13 3. How liquid is the organisation Cash Investments Account Receivable Raw Materials Inventory Finished Goods Inventory Office Equipment Manufacturing Equipment Headquarter Building Manufacturing Building Brand Names Most Liquid Least Liquid 13

14 3. How liquid is the organisation 14

15 3. How liquid is the organization? Quick Ratio Quick Assets Current Liabilities Quick assets are current assets minus inventories, prepaid expenses and any other illiquid current assets. 15

16 3. How liquid is the organisation? The Cash Conversion Cycle CCC = DIO + DSO - DPO 16

17 3. How liquid is the organisation? The Cash Conversion Cycle An Example Item Fiscal 20X5 Fiscal 20X4 Revenue 765,050 Not Needed COGS 535,000 Not Needed Inventory 180, ,000 A/R 156, ,000 A/P 60,000 57,000 Average Inventory (180, ,000)/2 182,500 Average AR (156, ,000)/2 150,000 Average AP (60,000+57,000)/2 58,500 17

18 3. How liquid is the organisation? The Cash Conversion Cycle DIO = 182,500/(535,000/365) = days DSO = 150,000/(765,000/365) = days DPO = 58,500/(535,000/365) = days CCC = = days 18

19 3. How liquid is the organisation? THE CASH CONVERSION CYCLE 124 days Inventory period 72 days Account receivable period days Account payable period 156 days Cash conversion cycle Raw Material purchased Payment for raw materials Sale of finished goods Cash collected on sales 19

20 3. How liquid is the organisation? Commonly used liquidity ratios 20

21 4. Is the organization solvent? 21

22 4. Is the organization solvent? 22

23 4. Is the organization solvent? Assets Liabilities =? 23

24 Making Sense of the Balance Sheet On a balance sheet, value investors and business analysts look for the following: The composition of assets, liabilities, and owners equity (lots of inventory and little cash can be a bad sign) Trends (increasing debt, decreasing owner s equity also bad) Quality (do stated values reflect actual values?) 24

25 Tea Break DISCLAIMER: Bursa Malaysia and its Group of Companies (the Company) reserve all proprietary rights to the contents of this presentation. Whilst the company endeavors to ensure that the contents in this presentation are accurate, complete or have been obtained from sources believed by the Company to be accurate and reliable, neither the Company nor the presenter make any warranty, express or implied, nor assume any legal liability or responsibility for the accuracy, completeness or currency of the contents of this presentation. In no event shall the Company be liable for any claim, howsoever arising, out of or in relation to this presentation. Copyright Bursa Malaysia Berhad 2017 (30632-P)

26 The Three Things That The Income Statement Reveal 26

27 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability 27

28 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Top line Growth Bottom Line Growth 28

29 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Tools for evaluating growth prospects 1.CAGR 2.Horizontal Analysis 29

30 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability 30

31 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Gross Margin Operating profit margin Net Margin 31

32 The Three Things That The Income Statement Reveal Key Line Items 32

33 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Gross Profit Margin A decline in the gross profit rate might have several causes. Selling products with a lower markup. Increased competition may result in a lower selling price. Company forced to pay higher prices to its suppliers without being able to pass these costs on to its customers. 33

34 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Operating Profit (EBIT) Margin Operating profit, or EBIT, is a good gauge of how well a company is being managed. It s watched closely by all stakeholders because it measures both overall demand for the company s products or services (sales) and the company s efficiency in delivering those products or services (costs). Bankers and investors look at operating profit to see whether the company will be able to pay its debts and earn money for its shareholders. Vendors look at it to see if the company will be able to pay its bills. 34

35 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Net Profit Margin Net profit margin measures the amount of income that a company was able to generate for each dollar of revenue. Aside from monkeying with the books, there are only three possible fixes for low profitability. One, the company can increase profitable sales. Two, it can figure out how to lower production costs and run more efficiently that is, reduce COGS. Three, it can cut operating expenses, which almost always means reducing the headcount. 35

36 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability 36

37 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability 37

38 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Return on Equity 38

39 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Return on Asset 39

40 The Three Things That The Income Statement Reveal Growth prospect Cost Structure Profitability Asset Turnover 40

41 The Four Things That The Cash Flow Statement Reveal 41

42 The Four Things That The Cash Flow Statement Reveal Profit does not equal to cash A company can be profitable and yet have no cash CFS explain changes in cash from one balance sheet period to another Free Cash Flow gives a company options 42

43 Understanding Valuation The Asset Based Approach The Income Based Approach The Market Based Approach 43

44 Learning Outcomes Understanding The Three Core Valuation Approaches Using The Asset-based Approach Using The Market-based Approach Using The Income-based Approach 44

45 The Three Core Valuation Approaches Asset Based Approach Estimate dollar amount of a company's net asset value, or the fairmarket value of its total assets minus its total liabilities. Basically asks what it would cost to recreate the business. Need to decide which assets and liabilities to include in the valuation, and how to measure the worth of each. RNTA, Price/Book Market Based Approach Appraise value of an asset based on the selling price of similar assets. Commonly used to calculate the value of property or ownership of a business interest, security or intangible asset. Should make adjustments for differences in size, quantity or quality. Relative PE Ratio, EV/EBITDA, Price/Sales. Income Based Approach Estimate the value of an asset based on the income produced. Take the net operating income of the rent collected and dividing it by the capitalization rate (the investor's rate of return) Earning Yield and Dividend Discount Model 45

46 Asset Based Approach Steps in employing the asset approach: 1. Start with the balance sheet. Value = Assets - Liabilities 2. Restate assets and liabilities to fair market value where necessary may be highly judgmental. 3. Identify unrecorded assets and liabilities (including off balance sheet commitments -litigation, warranties ) and adjust the value accordingly. 4. External valuation experts may be engaged to appraised Property, Plant & Equipment (PPE) and intangible assets. 5. Aware of the material impact of the assumption of going concern on valuation. 46

47 The Income Based Approach Now Year 1 Year 2 Year 3 Year 4 Year 5 $10 $10 $10 $10 $10 How much would you be willing to pay for this investment? 47

48 The Income Based Approach THE CONCEPT OF DISCOUNTING FV PV = (1 + R ) n 48

49 The Income Based Approach Now Year 1 Year 2 Year 3 Year 4 Year 5 $10 $10 $10 $10 $ $9.52 $9.07 $8.64 $8.22 $7.84 $

50 The intrinsic value will be: Income Approached Valuation: The fair value of a stock is the present value of all future dividends 50

51 Income Approached Steps in employing the income approach: 1.Project the business income stream (free cash flow) over some future period of time. 2.Determine the discount rate which reflects the risk of getting this income on time. 3.Approximate the worth of the business (terminal value) at the end of the projection period. 4.Compute and aggregate the present value of the future income stream and terminal value to give the prevent value of the business, or what the business is worth today. 51

52 The Income Based Approach 52

53 The Market Approach 1. Find out the market capitalization of the company (Price per Share x No of Shares). 2. Identify a list of public companies in similar industry of comparable size, liquidity, location and market. 3. Compute comparable value multiples or ratios of comparable companies PER, EV/EBITDA, Sales/Market Cap, Price per Million Clicks etc. 4. Also compute company s own historical multiples average and range over the past 3-5 years. 5. Tabulate average and range of valuation multiples of comparable companies and company s historical average and range. 6. Estimate a range of valuation of the company that may be regarding as fair and reasonable. 53

54 The Market Approach Assume Market is Best Means to Discover Value XYZ Peers (5) Market Cap. $250M $50M - $1.5B Current PER 10X 8X 25X EV/EBITDA 8X 5X 12X 5 YR PER Range 8X 25X 5X 30X 5 YR Ave PER 12X 10X 5 YR Ave Growth 8% 12% Forecast 3 YR Growth 20% 10% Dividend Yield (5-YR Average) 2.5% 1.25% 54

55 Step 1 Step 2 Go to Click on the menu Step 3 Step 4 Click on LEARN Steps to download BIEW 2017 Presentation Slides Click on BIEW 2017 to scroll & download PDF

56 Thank You Everyone s Market-in-the-Pocket 56 56