Business Analysis and Valuation
Business Analysis and Valuation
Business Analysis and Valuation
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Flashcards
Process of Accounting Analysis
Evaluating Earnings Quality:
1. Identify and Assess Key Accounting Policies
2. Assess Accounting Flexibility
3. Evaluate Accounting/Reporting Strategy
4. Evaluate the Quality of Disclosure
5. Identify and Assess Potential Red flags
Adjusting Financial Statements:
6. Undo Accounting Distortions to better serve one’s
analysis
Identify and assess key accouting policies
Analyst needs to identify :
accounting measures the firm uses to capture core business constructs
the policies that determine how the measures are implemented
the key estimates embedded in these policies
Flexibility in
capitalization of R&D
depreciation policy
restructuring charges
pension assumptions
Business Analysis and Valuation consists of
Business analysis
Accoutning and financial analysis
Forecasting and valuation
Broad balance sheet distortions
Asset distortions
Liability distortions
Equity distortions
Financial investments (subsidaries)
Ownership > 50% -> Accouting treatment: Subsidiaries accounts are consolidated
Associate: significant influence (but not control) -> Accounting treatment: equity accounting - the investment is subsequently adjusted to reflect the investor's share of the associate's profit
Investments
ownership under 20%
held-for trading (fair value)
available for sale (fair value)
held to maturity
Fair values
Level 1: For quoted instruments obtain market price at the reporting date
Level 2: For unquoted instruments, use prices for similar instruments or most
recent transactions
Level 3: For unquoted instruments without similar market prices, estimate the
value using a valuation technique
Objectives of Financial Ratio Analysis (FRA)
1. Operating management
2. Investment management
3. Financing strategy
Difference between models
Analyst's focus: analysts generally forecast earnings
FCF and AE models: require more structure – less structural inconsistencies
Difficulties in forecasting dividends for non-dividend paying firms
Dividend payout not related to value
Terminal value implications: RI valuation model uses book value of equity as
“anchor” less weight on (uncertain) terminal value
Competitive Equilibrium Assumption (CEA)
competition restricts the firm’s ability to
generate abnormal returns
