Lecture 4 - Reformatting
Lecture 4 - Reformatting
Lecture 4 - Reformatting
statements
The steps involved in Business Analysis
Step 5 – Application Step 4 – Prospective
analysis: Valuation
for example:
•Outside Investor •RIM
Compare Value with Price to BUY, •Alternatives
SELL, or HOLD
•Inside Investor •Sensitivity
Compare Value with Cost to ACCEPT
or REJECT Strategy
Step 3 – Prospective
analysis: Forecasting
•Profit and Loss
•Balance Sheet
Step 1 – Understanding the •Cash Flow
Business
e.g.: Step 2 - Analyzing Information
•The Product market – Accounting Analysis and
•The Competition Strategy Financial Analysis
•The Regulatory Constraints •Quality of Accounting
•Business strategies information?
•Re-formatting to uncover
business activities
•Ratio and cash flow analysis
Critical is the
The Claimants on Value
identification of
Debtholders Cash from Sale of Debt
Interest and Loan Repayments Debtholders
Operating Investment Financing
Activities Activities Activities
firm.
Statement of
Balance Income Cash Flow
Shareholders'
Sheet Statement Statement
Equity
Scenario B:
Issue 10 million shares at market price of $32/share
What happens to market capitalization
Increases
from $5,040million to $5,360 million
What happens to price per share
Drops to $41.23
The capital raised simply increases current book value through cash
and does not generate abnormal earnings (return higher than cost of
capital) if not used wisely.
22319 Financial Statement Analysis 10
Share repurchases and Dividends:
Creation of Value?
Share repurchases
A way for management to communicate to the market that it
believes the firm is undervalued.
Share repurchases are costly because of fees and price
premiums involved.
Need to do this for both the balance sheet items and profit and
loss items = reformatting the financial statements
1. Qantas 2016
CI1 = 558
d1 = -19
∆OI1 = 4
22319 Financial Statement Analysis OE1 = 3,447
18
1. Qantas 2015
Financing = ?
Operating = all others = ?
Make sure that the balance sheet still balances!
22319 Financial Statement Analysis 22
2. Separate the balance sheet into operating and
financing activities
Reformatted balance sheet 2013
Net Operating Assets
2013
Sales 8,900
Operating expenses (6,668)
Reason 1: not all financial statements items are included in the reformatted statements, or
double count items
Make sure you go item by item when doing reformatting
Make sure footnote subtotals add up to the total amount in original financial statements when
using footnote information
Even if you wrongly classify Operating and financing activities, you should still have the same
two FCF results.
Lack of disclosure
Financial footnotes include details on the components and nature
of account items.
Sometimes the disclosure may not be transparent. Depends on the
disclosure quality!
Unusual items
Earnings that can repeat in the future, and grow, are sustainable
earnings, persistent earnings, core earnings, or underlying earnings.
Earnings based on temporary factors are called transitory earnings
or unusual items.
Core earnings are the base for growth and should be the focus of
fundamental analysis.
Reformatting should be consistent