week 1 | framework for analysis & valuation Flashcards
describe financial statement analysis
The process of extracting info from FSs to better understand a company’s current & future performance & financial condition
FSs serve many objectives
- Management
- Investors & analysts
- Creditors, lenders, & rating agencies
- Regulatory agencies
describe valuation
current value of expected payoffs
Cost of High Quality Financial Disclose
Compliance & audit costs
Monitoring cost
Proprietary costs
Litigation cost
Competitive disadvantage
Political costs
Benefit of High Quality Financial Disclose
Access to capital
Good reputation
Valuation & analysis
Risk assessment
2 primary reports companies must supply
Form 10-K & Form 10-Q
what is the Form 10-K
it is an audited Annual Report
- 4 FS
- Explanatory notes
- Management’s discussion & analysis (MD&A)
- Filed within 60 [90] days of year-end for larger [smaller] firms
what is the Form 10-Q
it is an unaudited Quarterly Report
- Summary versions of the 4 FS
- Limited additional disclosures
- Filed within 40 [45] days of year-end for larger [smaller] firms
where can you find form 10-k & 10-q
SEC website
what does managers do with financial accounting info
Managers consider the benefits & costs of disclosure when deciding on the quantity & quality of accounting info to supply
Info Beyond Financial Statements
Financial statement footnotes
Management Discussion & Analysis (MD&A)
Independent auditor report
Regulatory filings → proxy statements (DEF 14A) & other SEC filings (8K)
Prospectus (S1)
Analyst Research Reports
ESG Reporting
whats the point of SEC’s regulation fair disclosure
Goal is to curb the practice of selective disclosure by public companies
3 types of different assurance of financial reports
notice to reader (complication)
review engagement
audit engagement
describe notice to reader
Assurance Level: None
Cost: Low
Complexity: Simple
Scope: Organizing info from management w/o verification
Use: Internal use or small companies
describe review engagement
Assurance Level: limited
Cost: moderate
Complexity: intermediate
Scope: Inquiry & analytical procedure to provide limited assurance
Use: Small companies seeking loans or private companies w/ external investors
describe audit engagement
Assurance Level: reasonable
Cost: high
Complexity: complex
Scope: Inquiry & analytical procedure to provide limited assurance
Use: Public companies, large private companies issuing bonds or requiring loans
what is an industry
- A group of companies & organizations that produce similar products or provide similar services
- Classified based on the primary business activities of the companies within
Commonly Used Industry Code System
- NAICS (North American Industry Classification System)
- SIC (Standard Industrial Classification)
- GICS (Global Industry Classification Standard)
describe NAICS
(North American Industry Classification System)
Used primarily in the US, Canada, & Mexico to classify business establishments by type of economic activity
describe SIC
(Standard Industrial Classification)
An older system that is still in use in some contexts, particularly for historical data comparison & some specific industries
describe GICS
(Global Industry Classification Standard)
Developed by MSCI & Standard & Poor’s for use by the global financial community, particularly for investment research & portfolio management
what is porter’s 5 forces
- barrier to entry
- existing competition
- entry & exit
- threat of substitute products
- bargaining power of buyer
- bargaining power of suppliers
economic/business cycle
expansion > peak > recession > depression > trough > recovery
product life cycle
introduction > growth > maturity > decline
External Factors that Affect Industries
- economic environment
- international
- political environment
- social environment
- technology
examples of external factor: economic environment
- recession
- interest rate
- taxes
examples of external factor: international
- Local economic & labor conditions
- Political instability
- Tax laws
- Local & national gov’t regulations
examples of external factor: political
- Regulations
- President election
- Trade agreement
- Any gov’t policies affecting supply & demand
examples of external factor: social environment
- Customs & conventions
- Cultural
- Fashion trend
- Ethic/issues
examples of external factor: technology
- new process
- new product
what is form 20-F/6-K
Annual/semi-annual report for non-US firms
describe Form DEF-14A
- Proposal required to vote
- Details of ownership
- Biographic info on directors
- Disclosure of executive compensation
describe Form 8-K
- Wide-range of corporate events, reported within 4 days
- Entry into or termination of a material definitive agreement (including petition for bankruptcy)
- Exit from a line of business or impairment of asset
- Change in company’s certified public accounting firm
- Change in control of the company
- Departure of the company’s executive officers
- Changes in the company’s articles of incorporation or bylaws
- Major creditor agreement (full, pricing, collateral)
- MD&A → target performance
what does common size mean
vertical analysis/right-sizing
Common Size BS
- Expresses the BS in % terms
- Every line items on the BS (A, L & EQ) divided by total assets
- Compare a company across 2 or more years
- Compare 2 or more companies – adjusts for size & currency differences
- Compare a company to industry or other benchmark
Common Size IS
- Expresses the IS in % terms
- Every line items on the IS divided by total revenue
- Compare a company across 2 or more years
- Compare 2 or more companies – adjusts for size & currency differences
- Compare a company to industry or other benchmark
