Week 1 - Financial Analysis and Valuation Framework Flashcards
Financial Statement Analysis
the process of extracting
information from financial statements to better understand
a company’s current and future performance and financial
condition
Financial Statement Objectives serves who?
- management
- investors and analysts
- creditors, lenders, and rating agencies
- regulatory agencies
Costs to disclose
Compliance and audit costs
monitoring costs
proprietary costs
litigation costs
others
benefits of financial disclosures
access to capital
good reputation
valuation and analysis
risk assessment
others
What is Form 10-K
the Audited Annual Report
- four financial statements
- explanatory notes
- managements discussion and analysis
what is Form 10-Q
Unaudited quarterly report
- summary versions of the four financial statements
- limited additional disclosures
Information beyond financial statements
- footnotes
- management discussion and analysis
- independent auditor report
- regulatory filings
- prospectus
- analyst research reports
Different assurance of financial reports: Notice to Reader (Compilation)
Assurance level = none
cost = low
complexity = simple
scope = organizing information from management without verification
use = internal use or small companies
Different assurance of financial reports: Review Engagement
assurance level = limited
cost = moderate
complexity = intermediate
scope = inquiry and analytical procedure to provide limited assurance
use = small companies seeking loans or private companies with external investors
Different assurance of financial reports: Audit Engagement
Assurance level = reasonable
cost = high
complexity = complex
scope = inquiry and analytical procedure to provide limited assurance
use = public companies, large private companies using bonds or requiring loans
Framework for Analysis and Valuation: Industry Analysis
porter’s 5 forces
economic cycle
Framework for Analysis and Valuation: Business Analysis
Business Model
competitive advantage
business cycle
Framework for Analysis and Valuation: financial statement analysis
ratio analysis
common size statement analysis
Framework for Analysis and Valuation: forecasting and Valuation/Credit Analysis
Financial modeling
DCF/Multiple
Collateral
What is an industry
An industry is a group of companies and organizations that
produce similar products or provide similar services.
Industries are classified based on the primary business
activities of the companies within them. Example of FF 12
Industry
What is NAICS
(North American Industry Classification System): Used primarily
in the United States, Canada, and Mexico to classify business establishments by
type of economic activity.
What is SIC
(Standard Industrial Classification): An older system that is still in use
in some contexts, particularly for historical data comparison and some specific
industries
What is GICS
(Global Industry Classification Standard): Developed by MSCI and
Standard & Poor’s for use by the global financial community, particularly for
investment research and portfolio management.
What are Porter’s 5 Forces
- Buyers
- Suppliers
- Entrants
- Substitutes
- Competition
What are barriers to entry
Unique industry characteristics reduce the rate of entry of competitors, therefore
maintaining profit level of existing companies in the industry
Ex: economies of scale, patents, regulatory / governments, asset specificity
Competition Concerns
Number of companies - more companies means more competition
Slow industry growth - slow growth makes companies compete for increased market share
Low Switching Costs - buyers can easily switch to competitors products
High fixed costs - makes it difficult to attain lower cost per unit
high exit barrier - have to stay in competition even though they don’t earn as much returns
Entry is easy/difficult when
easy:
- low scale threshold
- access to distribution channels
- common accessible technology
- low switching costs
difficult:
- high scale threshold
- restriction distribution channels
- patented knowledge
- high brand switching costs
exit is easy/difficult when
easy:
- marketable assets
- low exit costs
- independent business
difficult
- specialized assets
- high exit costs
- interrelated business
Threat of substitutes
Competition is high when:
- Buyers have no brand loyalties and/or there is no established brands
- Changing to another product saves money without sacrificing features or performance
- Simple and inexpensive to change to another product
- The producers of substitute products have very high margins and can easily attract buyers through
price reductions.
Bargaining power of buyers
Buyers are powerful if:
- They purchase large volumes relative to supplier sales
- Product is standard or undifferentiated
- They can produce the product themselves
- Supplier have high fixed costs
- The product is not of strategic importance to the buyers.
Bargaining power of suppliers
suppliers are powerful if:
- The supply market is dominated by a few companies
- The buyers are neither large nor concentrated
- They do not have to contend with substitute products
- Their products are differentiated or the suppliers have build up switching costs
- They poses a credible threat of forward integration.
What is the economic cycle:
Expansion -> peak -> recession -> depression -> tough -> recovery
product/business life cycle:
introduction -> growth -> maturity -> saturation -> decline
External Factors that affect industries
economic environment: recession, interest rate, taxes
international: local economic and labor conditions, political instability, tax laws, local and national government regulation
political environment: regulations, president election, trade agreement, any government policies affecting supply and demand
Social environment: customs and conventions, cultural, fashion trend, ethic/issues
technology: new process, new products
