Analysis of Corporate Reports
Inhoudsopgave
Week 1............................................................................................2
Chapter 1: A framework for business analysis and valuation using financial
statements.................................................................................................................. 2
Chapter 2: Strategy Analysis.......................................................................................4
Week 2............................................................................................5
Chapter 3: Accounting analysis: The basics.................................................................5
Chapter 4: Accounting analysis: Accounting adjustments...........................................8
Week 3..........................................................................................10
Chapter 5: Financial analysis.....................................................................................10
Week 4..........................................................................................16
Chapter 6: Prospective analysis: Forecasting............................................................16
Week 5..........................................................................................19
Chapter 7: Prospective analysis: Valuation theory and concepts...............................19
Chapter 8: Prospective analysis: Valuation implementation......................................21
Week 6..........................................................................................23
Chapter 9: Equity security analysis...........................................................................24
Chapter 10: Credit analysis and distress prediction...................................................26
Literature list.................................................................................29
,Week 1
Chapter 1: A framework for business analysis and valuation
using financial statements
Internal environment: the company
Microenvironment: competitors, marketing intermediaries, other
stakeholders, consumers, suppliers
Macro environment: competitive factors, technological factors,
geographical and environmental factors, cultural and social factors,
political and legal factors, economic factors
Funding business ideas with the highest prospects first is complicated
because:
- Information asymmetry: the one party has more information than
for example outsiders
- Incentive problems: (agency theory): principal and agent have
different incentives and opinions
- Expertise asymmetry: different levels of skills and expertise from
the users from the reports
Financial intermediaries: collect the savings, help with the expertise
asymmetry because they are highly skilled
Information intermediaries: provide more information to better identify
the risk, help also with the expertise asymmetry
These intermediaries help investors to get more relevant and reliable
financial information
The market for lemons: the bad ideas crowd out good ideas.
The financial statements reflect all the decisions that the company makes
(the business activities and accounting system), and they are being
influenced by the (business and accounting) environment and strategy of
the company.
Influence of the accounting system on information quality
Feature 1: Accrual accounting: recording an expense that was incurred in
one accounting period but not paid until a future accounting period (report
with a transaction)
Feature 2: IFRS: accounting standards that are principal based (or US
GAAP: has more rigid rules, there is also a Dutch GAAP)
Differences between US GAAP and IFRS
- Focus on investors
- Improved transparency of financial reporting
- Better access to foreign capital markets and investments
- Improved comparability of financial information among global
competitors, but differences still exist
- Rules-based vs. principles-based
- Relevance vs. reliability trade-off
Accounting standards influence the different results/outcomes
, Feature 3: Management’s responsibility for reporting financial
information: accrual accounting requires estimates (for example: expected
customer defaults), the management has the responsibility of these
numbers, and the incentives can influence these (contractors or
reputation).
Feature 4: External auditing of financial statements: auditing improves
the quality of information because it has been checked, it is required for
publicly traded companies and some private firms within the EU. Auditing
has its limitations, because they cannot check it all; it is backed up by
legal liability and public enforcement
Public enforcement: review compliance and take actions to correct
noncompliance (ESMA coordinates enforcement activities in the EU)
Alternatives forms of management to investor communication (besides
financial reports)
- Analyst meetings: meeting with analysts release information to
intermediaries (analysts follow the firm), material information
released to analysts must also be publicly disclosed
- Voluntary disclosure: management has the discretion to voluntarily
disclose information to get more credibility
- Non-financial reporting
o Present other important resources and obligations: trust
relationships with stakeholders, skilled workforces,
investments in environmental pollution reduction and good
governance
o ESG reporting (environmental, social and governance)
Greatest challenge of non-financial reporting is its strong industry
dependence
o Important frameworks and standards that improve the quality
of non-financial reporting: GRI (Global Reporting Initiative),
IIRC (International Integrated Reporting Council) and European
Union Non-Financial Reporting Directive (and CSRD)
Business analysis and valuation (that business intermediaries do)
1. Business strategy analysis: identify key profit drivers and business
risks and assess the company’s profit potential at a qualitative level
2. Accounting analysis: evaluate the degree to which a firm’s
accounting captures the underlying business reality
3. Financial analysis: use financial data to evaluate current and past
performance from the firm and assess its sustainability
4. Prospective analysis: forecast the firm’s future
Case Chapter 1
ESG: environmental, social and governance
Factors that motivate ESG data
- Risk: investors can estimate the risk by the data because of the
transparency and the investment returns
Inhoudsopgave
Week 1............................................................................................2
Chapter 1: A framework for business analysis and valuation using financial
statements.................................................................................................................. 2
Chapter 2: Strategy Analysis.......................................................................................4
Week 2............................................................................................5
Chapter 3: Accounting analysis: The basics.................................................................5
Chapter 4: Accounting analysis: Accounting adjustments...........................................8
Week 3..........................................................................................10
Chapter 5: Financial analysis.....................................................................................10
Week 4..........................................................................................16
Chapter 6: Prospective analysis: Forecasting............................................................16
Week 5..........................................................................................19
Chapter 7: Prospective analysis: Valuation theory and concepts...............................19
Chapter 8: Prospective analysis: Valuation implementation......................................21
Week 6..........................................................................................23
Chapter 9: Equity security analysis...........................................................................24
Chapter 10: Credit analysis and distress prediction...................................................26
Literature list.................................................................................29
,Week 1
Chapter 1: A framework for business analysis and valuation
using financial statements
Internal environment: the company
Microenvironment: competitors, marketing intermediaries, other
stakeholders, consumers, suppliers
Macro environment: competitive factors, technological factors,
geographical and environmental factors, cultural and social factors,
political and legal factors, economic factors
Funding business ideas with the highest prospects first is complicated
because:
- Information asymmetry: the one party has more information than
for example outsiders
- Incentive problems: (agency theory): principal and agent have
different incentives and opinions
- Expertise asymmetry: different levels of skills and expertise from
the users from the reports
Financial intermediaries: collect the savings, help with the expertise
asymmetry because they are highly skilled
Information intermediaries: provide more information to better identify
the risk, help also with the expertise asymmetry
These intermediaries help investors to get more relevant and reliable
financial information
The market for lemons: the bad ideas crowd out good ideas.
The financial statements reflect all the decisions that the company makes
(the business activities and accounting system), and they are being
influenced by the (business and accounting) environment and strategy of
the company.
Influence of the accounting system on information quality
Feature 1: Accrual accounting: recording an expense that was incurred in
one accounting period but not paid until a future accounting period (report
with a transaction)
Feature 2: IFRS: accounting standards that are principal based (or US
GAAP: has more rigid rules, there is also a Dutch GAAP)
Differences between US GAAP and IFRS
- Focus on investors
- Improved transparency of financial reporting
- Better access to foreign capital markets and investments
- Improved comparability of financial information among global
competitors, but differences still exist
- Rules-based vs. principles-based
- Relevance vs. reliability trade-off
Accounting standards influence the different results/outcomes
, Feature 3: Management’s responsibility for reporting financial
information: accrual accounting requires estimates (for example: expected
customer defaults), the management has the responsibility of these
numbers, and the incentives can influence these (contractors or
reputation).
Feature 4: External auditing of financial statements: auditing improves
the quality of information because it has been checked, it is required for
publicly traded companies and some private firms within the EU. Auditing
has its limitations, because they cannot check it all; it is backed up by
legal liability and public enforcement
Public enforcement: review compliance and take actions to correct
noncompliance (ESMA coordinates enforcement activities in the EU)
Alternatives forms of management to investor communication (besides
financial reports)
- Analyst meetings: meeting with analysts release information to
intermediaries (analysts follow the firm), material information
released to analysts must also be publicly disclosed
- Voluntary disclosure: management has the discretion to voluntarily
disclose information to get more credibility
- Non-financial reporting
o Present other important resources and obligations: trust
relationships with stakeholders, skilled workforces,
investments in environmental pollution reduction and good
governance
o ESG reporting (environmental, social and governance)
Greatest challenge of non-financial reporting is its strong industry
dependence
o Important frameworks and standards that improve the quality
of non-financial reporting: GRI (Global Reporting Initiative),
IIRC (International Integrated Reporting Council) and European
Union Non-Financial Reporting Directive (and CSRD)
Business analysis and valuation (that business intermediaries do)
1. Business strategy analysis: identify key profit drivers and business
risks and assess the company’s profit potential at a qualitative level
2. Accounting analysis: evaluate the degree to which a firm’s
accounting captures the underlying business reality
3. Financial analysis: use financial data to evaluate current and past
performance from the firm and assess its sustainability
4. Prospective analysis: forecast the firm’s future
Case Chapter 1
ESG: environmental, social and governance
Factors that motivate ESG data
- Risk: investors can estimate the risk by the data because of the
transparency and the investment returns
