Samenvatting- Advanced Financial Statement Analysis (Y50724)

Advanced Financial Statement Analysis
LECTURE 1
1.1 FUNCTION OF FINANCIAL STATEMENTS
Problem: firm need money
- Investors can provide money to the firm
 Firm can issue shares and investor become a part owner and get dividends
 Firm can work with loans (investor is not a owner), they pay back the loan and interests

Informa on asymmetry between management and shareholders/debtholders
- Management knows considerably more about the condi on and the ac vi es of the firm
- Efficient trading is very difficult

Lemon problem: imagine a used car market. The buyer doesn’t know anything about cars, so he take
a look at the average price and that is what the buyer wants to pay. If the seller knows that the car is
underpaid, they will not sell their car at the average price. But if everyone don’t want to sell at that
price, the average price will go down. The market will follow this dynamic, but that is not good.

FSMA: Financial Services and Markets Authority --> financial regulator body in Belgium

- Firms: give more informa on to show that they are healthy and that there will be profit
- Financial statements: part of it is mandatory and part is voluntary
 Core of everything + mandatory + checked
- Regulators tells you how to report (make it comparable)
- Auditors: independent ins tu ons: make sure all rules from regulators are followed
- Analysts: look at financial statements and based on it they make an investment
recommenda on
- Informa ve for
 Trading partners: suppliers who you want to know if they can be
 Employees: trade unions
 Prospec ve members from above
 Regulators: use it to make new rules
 Third par es

1.2 OUR ROLE: EXTERNAL ANALYIST
- Credit analyst: interested in liquidity and solvency in short term --> to value debt
- Equity analyst: interested in profitability (long term) --> value crea on
- Value of the firm: value of debt + value of equity




1.3 EQUITY ANALSIS
- Market capitaliza on: current price of a stock x amount of stock outstanding
 Higher than book value
- Value of equity ≠ book value of equity

1

, - Value of the equity = market value of the equity
 In perfectly efficient markets because all the informa on is ‘priced in’
- CAPM = capital asset pricing model
 = risk free rate + beta x (risk premium – risk free rate)
 CAPM: 𝑅 = 𝑅 + 𝛽 (𝑅 − 𝑅 )
- ‘Abnormal returns’ are possible through careful analysis of the available informa on
- Asset value may be misrepresented by accoun ng standards
- Assets may have synergies
- Firm may have unique value crea on poten al (intangible)
- Intrinsic or fundamental value = true value

- Market Premium = Market Value – Book Value
- Price-to-book ra o = Market Value / Book Value
- Intrinsic Premium = Intrinsic Value – Book Value
- Intrinsic Price-to-book ra o = Intrinsic Value / Book Value

1.3.1 BASIC VALUATION TASK
Determine value
- Start with anchor and make adjustments
 Challenge: which anchors

1.3.2 FIRST METHOD: COMPARABLES OR MULTIPLES
- Iden fy ‘comparable’ firms
- Iden fy measures that drive valua on
 Determine mul ples for these measures based on comparable firms market values
 Mul ple: market value firm / value driver
 Average values over comparable firms
- Apply mul ples to the measures of the target firm
 Value = value driver x mul ple
- P/S = price over sales
- P/E = price over earnings
- P/B = price over book value
- P/C = price over cashflows

 Problems
o Find good comparable firms
o Find good measures as mul ples
o Extreme values
o Weigh ng mul ple mul ples and mul ple firms
o Assumes efficient pricing for the comparable firms
 O en used for IPO’s, private equity
 Advantage: easy, simple to understand and communicate

1.3.3 APPLICATION: SCREENING
- Trading strategy
 Buy stocks with low mul ples
 Sell stocks with high mul ples
- Screen more than one mul ple
- Popular, fashionable mul ples --> explain past performance well
- Some ac ons (high or low) are happening for a reason, that is why you have to do analysis

2

, - Mul ples: simple to compare
 Technical analysis: you have compared the value and you have done some analysis

1.3.4 ASSET BASED VALUATION
- To reflect market value of firm
 Market-to-market of exis ng assets
 Iden fy omi ed assets
 Problems
o Mark-to-market requires a market
o Es ma ng value requires efficient markets
o Synergies (or even discounts)
o Omi ed assets

1.4 FUNDAMENTAL ANALYSIS




- Mul ple depends on the strategy of the firm
 Strategic analysis: what is their strategy, value proposi on, how do they make money…
- Business (strategy) analysis
 Iden fy key profit drivers and business risks
 Analysing a firm’s industry and its strategy to create a sustainable compe ve advantage
 Enables the analyst to make assump ons in forecas ng a firm’s future performance
- Accoun ng analysis
 Evaluate the degree to which a firm’s accoun ng captures the underlying business reality
- Financial analysis
 To use financial data to evaluate the current and past performance
- Prospec ve analysis
 Focuses on forecas ng a firm’s future by making predic ons

1.4.1 BUSINESS STRATEGY
Industry analysis
- Compe on among exis ng firms depends on:
 Industry growth rate
 Concentra on and balance of compe tors
 Excess capacity and exit barriers
 Degree of differen a on and switching costs
 Scale/learning economies and the ra o of fixed to variable costs
- Threat of new entrants depends on:
 Scale of the company
 First mover advantage
 Access to channels of distribu on and rela onships
 Legal barriers
- Threat of subs tute products or services
 Depends on price and performance of the products or services and on the customer’s
willingness to subs tute



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