华中科技大学：《财务报表分析》（英文版）CHAPTER 12 Equity Analysis and Valuation

Equity Analysis and valuation CHAPTER

Equity Analysis and Valuation 12 CHAPTER

Earnings persistence Recasting and Adjusting Earnings persistence is a key to effective equity analysis and valuation Analyzing earnings persistence is a main analysis objective Attributes of earnings persistence include: Stability predictability Variability Trend Earnings management Accounting methods Analyze

Earnings Persistence Recasting and Adjusting • Earnings persistence is a key to effective equity analysis and valuation • Analyzing earnings persistence is a main analysis objective • Attributes of earnings persistence include: Stability Predictability Variability Trend Earnings management Accounting methods Analyze

Earnings persistence Recasting and Adjusting Two common methods to help assess earnings persistence ☆ Recasting of income statement ☆ Adjusting of income statement

Earnings Persistence Recasting and Adjusting Two common methods to help assess earnings persistence: ❖ Recasting of income statement ❖ Adjusting of income statement

Earnings persistence Recasting and Adjusting Information for Recasting and Adjusting Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative effect of changes in accounting principles Other financial statements and notes Management commentary in financial statements Management's Discussion and Analysis Other: product-mix changes, technological innovations, work stoppages, and raw material constraints

Earnings Persistence Recasting and Adjusting Information for Recasting and Adjusting ➢ Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative effect of changes in accounting principles ➢ Other financial statements and notes ➢ Management commentary in financial statements ➢ Management’s Discussion and Analysis ➢ Other: product-mix changes, technological innovations, work stoppages, and raw material constraints

Earnings persistence Recasting and Adjusting Objectives of Recasting 1. Recast earnings and earnings components so that stable, normal and continuing elements comprising earnings are distinguished and separately analyzed from random, erratic, unusual and Nonrecurring elements 2. Recast elements included in current earnings that should more properly be included in the operating results of one or more prior periods Recasting and adjusting earnings also aids in determining earning power

Earnings Persistence Recasting and Adjusting Objectives of Recasting 1. Recast earnings and earnings components so that stable, normal and continuing elements comprising earnings are distinguished and separately analyzed from random, erratic, unusual and nonrecurring elements 2. Recast elements included in current earnings that should more properly be included in the operating results of one or more prior periods Recasting and adjusting earnings also aids in determining earning power

Earnings persistence Recasting and Adjusting General Recasting Procedures o Income statements of several years(typically at least five)are recast l2 Recast earnings components to yield meaningful classifications and a relevant format for analysis 3 Components can be rearranged, subdivided, and tax effected 4 Total recasted components must reconcile to reported net income

General Recasting Procedures  Income statements of several years (typically at least five) are recast  Recast earnings components to yield meaningful classifications and a relevant format for analysis  Components can be rearranged, subdivided, and tax effected  Total recasted components must reconcile to reported net income Earnings Persistence Recasting and Adjusting

Earnings persistence Recasting and Adjusting Specific Recasting Procedures Discretionary expenses are segregated Distinct components are segregated(such as equity in income of unconsolidated subsidiaries) and often reported net of tax When com ponents of continuing income are separately reclassified, their pre-tax amounts along with their tax effects must be rem oved Income tax disclosures enable one to separate factors that either reduce or increase taxes such as: Deductions-tax credits, capital gains rates, tax-free income, lower foreign tax rates Additions--additional foreign taxes, non-tax-deductible expenses, and state and local taxes(net of federal tax benefit)

Specific Recasting Procedures • Discretionary expenses are segregated • Distinct components are segregated (such as equity in income of unconsolidated subsidiaries) and often reported net of tax • When components of continuing income are separately reclassified, their pre-tax amounts along with their tax effects must be removed • Income tax disclosures enable one to separate factors that either reduce or increase taxes such as: ➢ Deductions—tax credits, capital gains rates, tax-free income, lowerforeign tax rates ➢ Additions—additional foreign taxes, non-tax-deductible expenses, and state and local taxes (net of federal tax benefit) Earnings Persistence Recasting and Adjusting

Earning Persistence Recasting and Adjusting--Illustration ■■圆■■■圆■■■圆 Campbell Sou ■■■■■圆■■■■题■■ oup compan Recast Income Statements(s mil. Year 11 Year 10 Year Year8 Year 7 Year 6 13 Net sales 6,204.156,205.8$5,6721$4,868.9$4,4904$4,2868 a 19 Inte rest income Total revenue 6 $6,223455,710.4$4,9021$4,519.9$4,314 Costs and expenses Cost of products sold (see Note 1 below) 3,727.153,8935$3,651.8$3077.8$2,897.8$2820.5 Marketing and selling expenses(see Note 2 below) 760.8 760.1 6059 514.2 4227 363.0 145 Advertising(see Note 2 below) 195.4 220 212.9 219.1 203.5 181.4 144 Repairs and maintenance(see Note 1 below) 173.9 148.8 144.0 17 Research and opment expenses 3063203283125 s 102 Stock price related incentive programs(see Note 3 below) 15.4 (0.1) 17.4 (2 8.5 Foreign exchange adjustmen Other, net (seeno Note i below) 19312915912139128 Amortization of intangible and other assets(see Note 3 below) 16.4 18 Interest expense Total costs and expenses $57127$52660$44802$ 51.7 $39300 23 Earnings before equity in earnings of affiliates min interes s67225510.7$444.4$421.953877$384.2 24 Equity in earnings of affiliates 26 Income before taxes Income taxes at statutory rate Income from continuing operations 432232"3s3s" m 135 State taxes(net of federal tax benefit (6.6) (11.8) (8.0) Investment tax credit 11.6 a 137 Nondeductible amortization of intangibles (4.0)(1.6)(1.2)(2.6)(1.4) 138 Foreign earnings not taxed or taxed at other than statutory 15.2 139 Other: Tax effects (17.0) (3.7) 4.7) Alaska Native Corporation transaction 22 Divestitures, restructuring and unusual charges (339.1)(343.0) 40.6) Tax effect of est,restructuring unusual charges(Note 4) 13.9 (Continued on next page)

Recasting and Adjusting -- Illustration Earning Persistence Campbell Soup Company Recast Income Statements ($ mil.) Item Year 11 Year 10 Year 9 Year 8 Year 7 Year 6 13 Net sales $ 6,204.1 $ 6,205.8 $ 5,672.1 $ 4,868.9 $ 4,490.4 $ 4,286.8 19 Interest income 26.0 17.6 38.3 33.2 29.5 27.4 Total revenue $ 6,230.1 $ 6,223.4 $ 5,710.4 $ 4,902.1 $ 4,519.9 $ 4,314.2 Costs and expenses: Cost of products sold (see Note 1 below) $ 3,727.1 $ 3,893.5 $ 3,651.8 $ 3,077.8 $ 2,897.8 $ 2,820.5 Marketing and selling expenses (see Note 2 below) 760.8 760.1 605.9 514.2 422.7 363.0 145 Advertising (see Note 2 below) 195.4 220.4 212.9 219.1 203.5 181.4 144 Repairs and maintenance (see Note 1 below) 173.9 180.6 173.9 155.6 148.8 144.0 16 Administrative expenses 306.7 290.7 252.1 232.6 213.9 195.9 17 Research and development expenses 56.3 53.7 47.7 46.9 44.8 42.2 102 Stock price related incentive programs (see Note 3 below) 15.4 (0.1) 17.4 (2.7) — 8.5 20 Foreign exchange adjustment 0.8 3.3 19.3 16.6 4.8 0.7 104 Other, net (see Note 3 below) (3.3) (2.0) (1.4) (4.7) (0.4) (9.0) 162A Depreciation (see Note 1 below) 194.5 184.1 175.9 162.0 139.0 120.8 103 Amortization of intangible and other assets (see Note 3 below) 14.1 16.8 16.4 8.9 5.6 6.0 18 Interest expense 116.2 111.6 94.1 53.9 51.7 56.0 Total costs and expenses $ 5,557.9 $ 5,712.7 $ 5,266.0 $ 4,480.2 $ 4,132.2 $ 3,930.0 23 Earnings before equity in earnings of affiliates & min. interests $ 672.2 $ 510.7 $ 444.4 $ 421.9 $ 387.7 $ 384.2 24 Equity in earnings of affiliates 2.4 13.5 10.4 6.3 15.1 4.3 25 Minority interests (7.2) (5.7) (5.3) (6.3) (4.7) (3.9) 26 Income before taxes $ 667.4 $ 518.5 $ 449.5 $ 421.9 $ 398.1 $ 384.6 Income taxes at statutory rate* (226.9) (176.3) (152.8) (143.5) (179.1) (176.9) Income from continuing operations $ 440.5 $ 342.2 $ 296.7 $ 278.4 $ 219.0 $ 207.7 135 State taxes (net of federal tax benefit) (20.0) (6.6) (3.8) (11.8) (8.6) (8.0) Investment tax credit — — — — 4.4 11.6 137 Nondeductible amortization of intangibles (4.0) (1.6) (1.2) (2.6) (1.4) — 138 Foreign earnings not taxed or taxed at other than statutory rate 2.0 (2.2) (0.2) 3.2 11.1 15.2 139 Other: Tax effects (17.0) (2.2) (0.1) (3.7) 7.5 (4.7) Alaska Native Corporation transaction — — — — 4.5 — 22 Divestitures, restructuring and unusual charges — (339.1) (343.0) (40.6) — — Tax effect of divest., restructuring & unusual charges (Note 4) — 13.9 64.7 13.9 — — (Continued on next page)

Earning Persistence Recasting and Adjusting--Illustration ■■■■■■■■■■■国■■■■■圆昌■■■■■■ ■国■■■■■■■■■国■口■■■■■■■■■■■■■■ oup compan Recast Income Statements(s mil. Year 11 Year 10 Year Year8 Year 7 Year 6 Gain on sale of businesses in Yr 8)and sub. in Yr 7 3.1 9.7 Loss on sale of exercise equipment subsidiary, net of tax 153A Cumma tvet e ec of latiuntinc chance tot ingcoaen exe 401. 5 4.45 131S 2473$223.2 8 Net i rted s401.5544$13.1$ 247.35223.2 法、[ of products sold $4,0955$4,2582$4,001.6$3,3928$3,180.5$3,0828 aintenance expenses 33981381528813583 liquidation gain(b) s3727.153,893.5$3,651.8$3,07 2 $2,8978$2,821.4 145 Note 2) Marketing and selling expenses Less: Advertising ■21(Note 262514.7$324$(32)$(9.5)$5.5 102 Less lated incentive (8 (16.8) 164) (8.9 Less of businesse s(Yr 8)and sub (Yr 7)= Other. net s (0 Note 4)Tax effect of divest, restruc , unusual charg s11530$116.60$13.9 136 Nondeductible divestitures, restructuring, and unusual charges s%3号一一 Statutory federal tax rate is 34% in Year 8 through Year 11, 45% in Year 7, and 46% in Year 6 atThis amount is not disclosed for Year 6 a ae assume most depreciation is included in cost of products sold 3 b /LIFO liquidation gain before tax. For example, for Year 8 this is $2.58 million, computed as $1.7/(1 0.34) ():339.122 0.34=5115.3. (d$343022 0.34=5116.6 0.565136=$101.4. 的s106.526 0.487136=$519

Recasting and Adjusting -- Illustration Earning Persistence Campbell Soup Company Recast Income Statements ($ mil.) Item Year 11 Year 10 Year 9 Year 8 Year 7 Year 6 Gain on sale of businesses in (Yr 8) and sub. in Yr 7 — — — 3.1 9.7 — Loss on sale of exercise equipment subsidiary, net of tax — — — — (1.7) — LIFO liquidation gain (see Note 1 below) — — — 1.7 2.8 1.4 Income before cumulative effect of accounting change$ 401.5 $ 4.4 $ 13.1 $ 241.6 $ 247.3 $ 223.2 153A Cumulative effect of accounting change for income taxes — — — 32.5 — — 28 Net income as reported $ 401.5 $ 4.4 $ 13.1 $ 274.1 $ 247.3 $ 223.2 14 (Note 1) Cost of products sold $ 4,095.5 $ 4,258.2 $ 4,001.6 $ 3,392.8 $ 3,180.5 $ 3,082.8 144 Less: Repair and maintenance expenses (173.9) (180.6) (173.9) (155.6) (148.8) (144.0) 162A Less: Depreciation(a) (194.5) (184.1) (175.9) (162.0) (139.0) (120.0) 153A Plus: LIFO liquidation gain(b) — — — 2.6 5.1 2.6 $ 3,727.1 $ 3,893.5 $ 3,651.8 $ 3,077.8 $ 2,897.8 $ 2,821.4 15 (Note 2) Marketing and selling expenses $ 956.2 $ 980.5 $ 818.8 $ 733.3 $ 626.2 $ 544.4 145 Less: Advertising (195.4) (20.4) (212.9) (219.1) (203.5) (181.4) $ 760.8 $ 960.1 $ 605.9 $ 514.2 $ 422.7 $ 363.0 21 (Note 3) Other expenses (income) $ 26.2 $ 14.7 $ 32.4 $ (3.2) $ (9.5) $ 5.5 102 Less: Stock price–related incentive programs (15.4) 0.1 (17.4) 2.7 — (8.5) 103 Less: Amortization of intangible and other assets (14.1) (16.8) (16.4) (8.9) (5.6) (6.0) Less: Gain on sale of businesses (Yr 8) and sub. (Yr 7) — — — 4.7 14.7 — 104 Other, net $ (3.3) $ (2.0) $ (1.4) $ (4.7) $ (0.4) $ (9.0) (Note 4) Tax effect of divest, restruc., & unusual charges — $ 115.3(c) $ 116.6(d)$ 13.9 — — 136 Nondeductible divestitures, restructuring, and unusual charges — (101.4)(e) (51.9)(f) — — — — $ 13.9 $ 64.7 $ 13.9 — — *Statutory federal tax rate is 34% in Year 8 through Year 11, 45% in Year 7, and 46% in Year 6. †This amount is not disclosed for Year 6. (a)We assume most depreciation is included in cost of products sold. (b)LIFO liquidation gain before tax. For example, for Year 8 this is $2.58 million, computed as $1.7/(1 0.34). (c)$339.1 22 0.34 = $115.3. (d)$343.0 22 0.34 = $116.6 (e)$179.4 26 0.565 136 = $101.4. (f)$106.5 26 0.487 136 = $51.9

Earnings persistence Recasting and Adjusting -lustration Objective of Adjusting Assign earnings components to periods where they most properly belong Note: Uses data from recast income statements and any other relevant information

Earnings Persistence Recasting and Adjusting -- Illustration Objective of Adjusting Assign earnings components to periods where they most properly belong Note: Uses data from recast income statements and any other relevant information