The Basics: Fundamentals of financial statements ............................................................. 4
Introduction .............................................................................................................. 4
Financial statements ................................................................................................. 4
Balance Sheet (BS) ............................................................................................. 4
Assets:........................................................................................................ 4
Equity and liabilities ..................................................................................... 6
Income Statement .............................................................................................. 6
The principles of Accrual Accounting ............................................................ 7
Equity Statement ................................................................................................ 8
Comprehensive Income statement ...................................................................... 8
Cash Flow Statement (CF) ................................................................................... 9
The Core 1: Financial Statement Analysis ......................................................................... 11
Profitability analysis................................................................................................. 11
Operating return: .............................................................................................. 11
Nonoperating return ......................................................................................... 13
Credit risk analysis .................................................................................................. 14
Solvency ratios: ................................................................................................ 14
Static ratios: .............................................................................................. 14
Dynamic ratios: ......................................................................................... 15
Covenants ....................................................................................................... 16
Operating income .................................................................................................... 18
Income statement by nature of expense ...................................................... 18
Income statement: Items overview .................................................................... 18
1.Revenues ............................................................................................... 18
2.Research & Development ........................................................................ 20
3.Selling, General & Administrative expenses ............................................... 21
Cost Analysis: ........................................................................................... 22
4.Noncontrolling Interests (NCI) ................................................................. 23
5.Earnings per Share (EPS) ......................................................................... 23
Current assets and liabilities .................................................................................... 24
1.Inventories (+COGS) ...................................................................................... 24
Accounting in inventories ........................................................................... 24
Analysis: Inventory turnover........................................................................ 26
1
, 2.Accounts receivable ...................................................................................... 26
Analysis: accounts receivable turnover ....................................................... 27
3.Operating current liabilities ............................................................................ 28
Analysis: Accounts payable turnover ........................................................... 28
Liquidity analysis ..................................................................................................... 28
Need for Working Capital and Net Cash Position ................................... 29
Long-term assets..................................................................................................... 30
Property, Plant and Equipment (PPE) .................................................................. 30
Sale of LT asset: example ........................................................................... 31
Intangible Assets .............................................................................................. 31
Goodwill .......................................................................................................... 32
Joint Ventures ................................................................................................... 33
Fair value assets ............................................................................................... 33
Fair value of Historical cost: example .......................................................... 33
Leased Assets .................................................................................................. 34
Accounting for leasing: carrefour ......................................................... 35
The Core 2: Valuation ...................................................................................................... 35
Securities Valuation process ............................................................................. 35
Valuation basics ...................................................................................................... 35
1.Accounting adjustments ................................................................................ 35
2.Forecasting Financial Statements ................................................................... 36
Forecasting revenues ................................................................................. 37
Forecasting other items.............................................................................. 37
3.Concepts of valuation .................................................................................... 37
Miller Modigliani ........................................................................................ 38
Betas ........................................................................................................ 39
Cash Flow Based valuation (DCF) ............................................................................. 39
Dividend discount model .................................................................................. 39
Discounted Cash Flow model (DCF)................................................................... 40
5-steps: .................................................................................................... 40
Free Cash Flow .......................................................................................... 41
How to measure? ................................................................................ 41
Parsimonious forecasting ........................................................................... 42
2
, Effects of changing variables: ..................................................................... 42
Income-based valuation (ROPI) ................................................................................ 43
Residual operating income model (ROPI):........................................................... 43
ROPI-valuation: 5-steps ............................................................................. 44
Effect of changing variables ........................................................................ 44
Implied cost of capital (implied WACC ........................................................ 44
Market-based valuation (Mutiples) ............................................................................ 45
How to select comparable companies? ................................................ 45
Earnings multiples ............................................................................................ 46
Book Value multiples ........................................................................................ 48
Conclusions of the market-based valuation analysis: ................................... 49
Valuation in Practice ................................................................................................ 49
3
, Financial Statement Analysis
The Basics: Fundamentals of financial statements
Introduction
Financial information:
- Demand by:
o Shareholders
o Investment analysts
o Lenders and bondholders (they want to know the credit risk and solvency)
o Employees (want to know how healthy company is)
o Customers, suppliers and other partners (JV)
o Regulators and tax authorities
- Supply of fin.info. for reasons:
o Compliance with public market regulation
o Benefits of disclosure: lower cost of equity, lower cost of debt
o Disclosing information also involves costs:
▪ Preparation and dissemination (verspreiding)
▪ Competitive disadvantages : bv Heineken is naar oost-europa getrokken en de
concurrent zagen dat ze daar veel success hadden dus zijn ze ook naar daar
getrokken, hierdoor verloor Heineken een groot deel van hun markt
Financial statements
Balance Sheet (BS)
Assets = Liabilities + Equity
Alles waar bedrijf in heeft geinvesteerd = hoe al die assets betaald zijn: eigen geld en leningen
De vraag is altijd: does the structure relate to how you think the BS will look?
- Do we expect a lot of long-term assets? When producing cars, yes bcs you need factories.
- Do we expect a lot of inventories? When producing produce/fresh food, no bcs it goes bad
relatively fast. When producing cars, yes
Assets:
To be reported on a BS, an asset must:
- Be owned (or controlled) by the company
- Possess expected future economic benefits
4
Introduction .............................................................................................................. 4
Financial statements ................................................................................................. 4
Balance Sheet (BS) ............................................................................................. 4
Assets:........................................................................................................ 4
Equity and liabilities ..................................................................................... 6
Income Statement .............................................................................................. 6
The principles of Accrual Accounting ............................................................ 7
Equity Statement ................................................................................................ 8
Comprehensive Income statement ...................................................................... 8
Cash Flow Statement (CF) ................................................................................... 9
The Core 1: Financial Statement Analysis ......................................................................... 11
Profitability analysis................................................................................................. 11
Operating return: .............................................................................................. 11
Nonoperating return ......................................................................................... 13
Credit risk analysis .................................................................................................. 14
Solvency ratios: ................................................................................................ 14
Static ratios: .............................................................................................. 14
Dynamic ratios: ......................................................................................... 15
Covenants ....................................................................................................... 16
Operating income .................................................................................................... 18
Income statement by nature of expense ...................................................... 18
Income statement: Items overview .................................................................... 18
1.Revenues ............................................................................................... 18
2.Research & Development ........................................................................ 20
3.Selling, General & Administrative expenses ............................................... 21
Cost Analysis: ........................................................................................... 22
4.Noncontrolling Interests (NCI) ................................................................. 23
5.Earnings per Share (EPS) ......................................................................... 23
Current assets and liabilities .................................................................................... 24
1.Inventories (+COGS) ...................................................................................... 24
Accounting in inventories ........................................................................... 24
Analysis: Inventory turnover........................................................................ 26
1
, 2.Accounts receivable ...................................................................................... 26
Analysis: accounts receivable turnover ....................................................... 27
3.Operating current liabilities ............................................................................ 28
Analysis: Accounts payable turnover ........................................................... 28
Liquidity analysis ..................................................................................................... 28
Need for Working Capital and Net Cash Position ................................... 29
Long-term assets..................................................................................................... 30
Property, Plant and Equipment (PPE) .................................................................. 30
Sale of LT asset: example ........................................................................... 31
Intangible Assets .............................................................................................. 31
Goodwill .......................................................................................................... 32
Joint Ventures ................................................................................................... 33
Fair value assets ............................................................................................... 33
Fair value of Historical cost: example .......................................................... 33
Leased Assets .................................................................................................. 34
Accounting for leasing: carrefour ......................................................... 35
The Core 2: Valuation ...................................................................................................... 35
Securities Valuation process ............................................................................. 35
Valuation basics ...................................................................................................... 35
1.Accounting adjustments ................................................................................ 35
2.Forecasting Financial Statements ................................................................... 36
Forecasting revenues ................................................................................. 37
Forecasting other items.............................................................................. 37
3.Concepts of valuation .................................................................................... 37
Miller Modigliani ........................................................................................ 38
Betas ........................................................................................................ 39
Cash Flow Based valuation (DCF) ............................................................................. 39
Dividend discount model .................................................................................. 39
Discounted Cash Flow model (DCF)................................................................... 40
5-steps: .................................................................................................... 40
Free Cash Flow .......................................................................................... 41
How to measure? ................................................................................ 41
Parsimonious forecasting ........................................................................... 42
2
, Effects of changing variables: ..................................................................... 42
Income-based valuation (ROPI) ................................................................................ 43
Residual operating income model (ROPI):........................................................... 43
ROPI-valuation: 5-steps ............................................................................. 44
Effect of changing variables ........................................................................ 44
Implied cost of capital (implied WACC ........................................................ 44
Market-based valuation (Mutiples) ............................................................................ 45
How to select comparable companies? ................................................ 45
Earnings multiples ............................................................................................ 46
Book Value multiples ........................................................................................ 48
Conclusions of the market-based valuation analysis: ................................... 49
Valuation in Practice ................................................................................................ 49
3
, Financial Statement Analysis
The Basics: Fundamentals of financial statements
Introduction
Financial information:
- Demand by:
o Shareholders
o Investment analysts
o Lenders and bondholders (they want to know the credit risk and solvency)
o Employees (want to know how healthy company is)
o Customers, suppliers and other partners (JV)
o Regulators and tax authorities
- Supply of fin.info. for reasons:
o Compliance with public market regulation
o Benefits of disclosure: lower cost of equity, lower cost of debt
o Disclosing information also involves costs:
▪ Preparation and dissemination (verspreiding)
▪ Competitive disadvantages : bv Heineken is naar oost-europa getrokken en de
concurrent zagen dat ze daar veel success hadden dus zijn ze ook naar daar
getrokken, hierdoor verloor Heineken een groot deel van hun markt
Financial statements
Balance Sheet (BS)
Assets = Liabilities + Equity
Alles waar bedrijf in heeft geinvesteerd = hoe al die assets betaald zijn: eigen geld en leningen
De vraag is altijd: does the structure relate to how you think the BS will look?
- Do we expect a lot of long-term assets? When producing cars, yes bcs you need factories.
- Do we expect a lot of inventories? When producing produce/fresh food, no bcs it goes bad
relatively fast. When producing cars, yes
Assets:
To be reported on a BS, an asset must:
- Be owned (or controlled) by the company
- Possess expected future economic benefits
4
