ACC 380K.7 Financial Statement Analysis

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ACC 380K.7Financial Statement Analysis

• Objectives
• Develop a framework for conducting business
  analysis with a focus on the role of financial
  information
• Learn how to apply the framework
• Security valuation
• Credit analysis
• Competitive intelligence
• Corporate communication
• MA

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Palepu, Bernard, Healy

• The bottom line is that valuation of firms is a
  difficult and uncertain business, and no
  technique can alter that underlying reality.
• The analyst can only apply the techniques as
  intelligently as possible, so that estimation
  error results only from the underlying economic
  uncertainties and not from avoidable misjudgments
  in applying the valuation model.

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Doing F/S analysis

• It would be great if all the information were
  certain, but
• The information is distorted because
• GAAP gives us rules about what is measured and
  how
• Managers have incentives to bias the data
• There are lots of relevant events that are tough
  to measure
• Analysts try to deduce managements inside
  information (and try to avoid being influenced by
  the noise and distortion in the F/S) by looking
  at other sources of information

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FrameworkMajor Types of Analysis

• Industry analysis Competitive strategy
• Accounting analysis
• Financial analysis
• Prospective analysis

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Business Strategy analysis

• Purpose
• Identify key profit drivers
• Assess profit potential at a qualitative level
• Involves
• Industry analysis
• Analysis of the firms competitive and corporate
  strategy to create a sustainable competitive
  advantage
• Hows the firm staying alive and prospering?

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Essential first step for

• Accounting analysis
• Key success factors and business risks needed to
  identify key accounting policies
• Financial analysis
• Comprehensive strategy needed to assess
  sustainability of current / past performance
• Prospective analysis
• Needed to make sound assumptions

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Accounting analysis

• Purpose
• Evaluate the degree to which a firms accounting
  captures underlying business reality
• Involves
• Identifying where there is accounting flexibility
• Evaluating the appropriateness of accounting
  policies and estimates
• Assessing the degree of distortion in disclosures
• Undoing (if necessary) distortions
• Improves
• Financial analysis

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Financial analysis

• Purpose
• Evaluate current and past performance
• Assess sustainability of current and past
  performance
• Skills
• should be systematic and efficient
• should allow the use of financial data to explore
  business issues
• Tools
• Cash flow analysis
• Ratio analysis
• Common-size F/S
• Index-number trend series

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Financial Analysis Framework
Taxes Operations
Leverage Interest
Efficiency
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Prospective analysis

• Purpose
• forecast a firms future
• Techniques
• F/S forecasting
• Valuation
• Asset-based models
• price and book value
• Cash-flow-based models
• dividends
• earnings
• (free) cash flows

• Need to consider
• business strategy analysis
• accounting analysis
• financial analysis

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For next class

• Read text chapter 2
• Read Dell 10-K pages 1-12, skim MDA Financial
  Statements
• Skim same items in Gateway 10-K
• Be prepared to discuss Dell Competitive Strategy