· Difference in depreciation methods and assumptions
· Difference in inventory cash flow assumptions and methods
· Difference in the treatment of the effect of exchange rate changes
· Difference in classification of investment securities
· Sales of receivable with recourse
· Operating lease
· Take-or-pay contracts
· Capitalization decisions
· Goodwill
Showing posts with label Financial Statement Analysis: Applications. Show all posts
Showing posts with label Financial Statement Analysis: Applications. Show all posts
Monday, November 24
General screening criteria for potential equity investments
· Low P/E,P/CF,P/S
· High ROE, ROA, growth rate of sales and earnings
· Low leverage
· High ROE, ROA, growth rate of sales and earnings
· Low leverage
Role of financial statement analysis in assessing credit quality
Credit analysis
Character – firm’s management reputation and history of debt repayment
Collateral – ability to pledge collateral can reduce lender’s risk
Capacity – for debts longer than 30 days, need to monitor the financial statement closely
Credit rating agencies
· Moody’s
· Stand and Poor’s
Categories to assess firm creditworthiness
· Scale and diversification – the greater, the better
· Operational efficiency – the larger, the better
· e.g. ROA, operating margin, EBITDA margin
· Margin Stability – indicate the probability of debt repayment
· Leverage – The greater earnings relative to debt and interest expense, the better credit risk
Character – firm’s management reputation and history of debt repayment
Collateral – ability to pledge collateral can reduce lender’s risk
Capacity – for debts longer than 30 days, need to monitor the financial statement closely
Credit rating agencies
· Moody’s
· Stand and Poor’s
Categories to assess firm creditworthiness
· Scale and diversification – the greater, the better
· Operational efficiency – the larger, the better
· e.g. ROA, operating margin, EBITDA margin
· Margin Stability – indicate the probability of debt repayment
· Leverage – The greater earnings relative to debt and interest expense, the better credit risk
Forecast Financial Performance of a Firm
Usually based on top-down approach.
Single period forecast:
1. Forecast GDP growth (supplied by in-house or outside party)
2. Use historical relationship to estimate relationship between GDP growth and the growth of industry sales
3. Determine the firm's market share and multiply by industry sales to forcast the firm's sales
4. Forcast earnings by using simple forecasting model - historical average or trend-adjusted measure of profitability, e.g. operating maring, EBT maring or net margin. Or, forcast earnings by using complex forecasting models - each financial statment items are estimated on separate assumptions.
Multi-period forecast:
· Usually employ a single estimates of sales growth which is expected to continue indefinitely
Estimate cash flow:
· Make assumptions on future source and use of cash, especially on the changes in working capital, capital expenditure on new fixed assets, issuance or repayment of debts, stock issuance and repurchase.
· Assumption on noncash working capital as a % of sales remain constant
Single period forecast:
1. Forecast GDP growth (supplied by in-house or outside party)
2. Use historical relationship to estimate relationship between GDP growth and the growth of industry sales
3. Determine the firm's market share and multiply by industry sales to forcast the firm's sales
4. Forcast earnings by using simple forecasting model - historical average or trend-adjusted measure of profitability, e.g. operating maring, EBT maring or net margin. Or, forcast earnings by using complex forecasting models - each financial statment items are estimated on separate assumptions.
Multi-period forecast:
· Usually employ a single estimates of sales growth which is expected to continue indefinitely
Estimate cash flow:
· Make assumptions on future source and use of cash, especially on the changes in working capital, capital expenditure on new fixed assets, issuance or repayment of debts, stock issuance and repurchase.
· Assumption on noncash working capital as a % of sales remain constant
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