华中科技大学：《财务报表分析》（英文版）CHAPTER 1 Overview of Financial Statement Analysis

Overview of Financial Statement Analysis CHAPTER

1 CHAPTER Overview of Financial Statement Analysis

Business Analysis Evaluate Prospects Evaluate risks Business decision Makers Equity investors Creditors Managers Merger and Acquisition Analysts External Auditors Directors Regulators Employees Unions Lawyers

Business Analysis Evaluate Prospects Evaluate Risks Business Decision Makers • Equity investors • Creditors • Managers • Merger and Acquisition Analysts • External Auditors • Directors • Regulators • Employees & Unions • Lawyers

Information Sources for Business Analysis Quantitative Qualitative Financial Management Statements Discussion Analysis Industry Statistics Chairperson's Letter Economic Vision/Mission Indicators Statement Regulatory filings Financial press Trade reports Press Releases Web sites

Information Sources for Business Analysis Quantitative • Financial Statements • Industry Statistics • Economic Indicators • Regulatory filings • Trade reports Qualitative • Management Discussion & Analysis • Chairperson’s Letter • Vision/Mission Statement • Financial Press • Press Releases • Web sites

Credit Analysis Equity Analysis Management Control Labor Negotiations Types of Business Regulation Analysis Director Oversight Financial External Auditing Management Mergers, Acquisitions Divestitures

Types of Business Analysis Credit Analysis Equity Analysis Management & Control Mergers, Acquisitions & Divestitures Director Oversight Regulation External Auditing Labor Negotiations Financial Management

Credit Analysis Creditors Trade Creditors Non-trade Creditors Provide goods or Provide major services financing Most short -term Most long-term Usually implicit interest Usually explicit interest Bear risk of default Bear risk of default

Credit Analysis Trade Creditors • Provide goods or services • Most short-term • Usually implicit interest • Bear risk of default Non-trade Creditors • Provide major financing • Most long-term • Usually explicit interest • Bear risk of default Creditors

Credit Analysis Credit worthiness: Ability to honor credit obligations (downside risk) Liquidity Solvency Ability to meet short- Ability to meet long term obligations term obligations Focus Focus Current Financial Long-term financial conditions conditions Current cash flows Long-term cash flows Liquidity of assets Extended profitability

Credit Analysis Liquidity Ability to meet short￾term obligations Focus: • Current Financial conditions • Current cash flows • Liquidity of assets Solvency Ability to meet long￾term obligations Focus: • Long-term financial conditions • Long-term cash flows • Extended profitability Credit worthiness: Ability to honor credit obligations (downside risk)

Credit Analysis Debt Characteristics Seniority -order claims are paid Collateral -asset earmarked for claims Covenants constraints on debtholders to protect creditors Other provisions -sinking fund requirements, etc

Credit Analysis • Seniority - order claims are paid • Collateral - asset earmarked for claims • Covenants - constraints on debtholders to protect creditors • Other provisions - sinking fund requirements, etc. Debt Characteristics

Credit Analysis Passive Investing Active Investing (beta strategies) (alpha strategies Aim. Aim: Diversification based Beat the market on risk propensity earn above normal investment horizon stock returns Examples: Technical Example: Indexing analysis Fundamental analysIs

Credit Analysis Passive Investing (beta strategies) Aim: • Diversification based on risk propensity & investment horizon Example: Indexing Active Investing (alpha strategies) Aim: • Beat the market -- earn above normal stock returns Examples: Technical analysis & Fundamental analysis

Intrinsic alue (or Fundamental Value) Value of Company(or stock) without reference to market value(or stock price) S Intrinsic value Market value- Buy o Intrinsic value Market value Sell a‖ Intrinsic value= Market value→Hold

Intrinsic Value (or Fundamental Value) Intrinsic value > Market value Buy Intrinsic value < Market value Sell Intrinsic value = Market value Hold Value of Company (or stock) without reference to market value (or stock price) Strategy

Business nvironment Strategy Analysis Industry Strategy Analysis Analysis Financial Analysis Analysis Accounting of Sources Prospective Analysis &Uses of Risk Analysis profitability Funds Analysis Analysis Cost of Capital Estimate (Intrinsic Value

Prospective Analysis Accounting Analysis Business Environment & Strategy Analysis Industry Analysis Strategy Analysis Financial Analysis Analysis of Sources &Uses of Funds Profitability Analysis Risk Analysis Cost of Capital Estimate Intrinsic Value