Framework For Business Analysis and Valuation
Framework For Business Analysis and Valuation
Framework For Business Analysis and Valuation
Quantitative Qualitative
Financial statements MDA
Industry stats. Letter from Chairman
Economic Indicators Press notes
Regulatory filings Financial press
Web site
Users of Fin. Stmt. Information
Equity Investors Litigants
Investment analysis Disputes over value in the firm
Management performance evaluation Customers
Security of supply
Debt Investors
Probability of default Governments
Determination of lending rates Policy making
Covenant violations Regulation
Taxation
Management Government contracting
Strategic planning Competitors
Investment in operations
Evaluation of subordinates
Employees
Security and remuneration
Fin. Statements: Answer many Qs
Equity analyst
How well is the firm Im following performing?
Did the firm meet my performance expectations?
What is the value of the firms stock given my assessment of the firms
current and future performance?
Credit analyst
What is the credit risk involved in lending a certain amount to a firm?
How well is the firm managing its liquidity and solvency?
What is the additional risk created by the firms financing and dividend
policies?
Fin. Statements: Answer many Qs
Corporate manager
Is my firm properly valued? Is our investor communication program
adequate on this?
Is this firm a potential takeover target? How much value can be created if
we acquire this firm?
Management consultant
What is the structure of the industry in which the firm is operating?
What strategies are pursued by various players?
What is the relative performance of different firms?
Capital Mkts and Financial Reporting!
Savings
(Investors)
Business Ideas
1. Have better information (Entrepreneurs)
than Savers
What if half the
2. Info disclosed may not be business Ideas are
credible BAD?
Financial Reporting in Capital Mkt.
Information & Incentive problem: Lemons problem
Emergence of intermediaries to help investors: 2 types
1. Fin. Intermediaries use these information
To analyze investment opportunities
Supplement these information with other sources of information
2. Info. Intermediaries add value
Enhancing credibility of financial reports
Analyzing the information in the financial statements
Efficiency in Capital Mkt?
Savings
(Investors)
Financial Information
Intermediaries Intermediaries
Business Business
Business Activities
Environment Strategy
- Operating
- Investment
- Financing
Accounting
Accounting
Strategy
Environment
Accounting Systems
- To present
business
activities in
monetary forms
Fin. Stmts provide
Fin. Statements raw data
for valuation
Financial Statements Reflect Business Activities
Planning
Investing Financing
Current: Operating Current:
Cash Notes Payable
Sales Accounts Payable
Accounts Receivable Cost of Goods Sold
ANALYSIS TOOLS
Business Strategy
Analysis
ANALYSIS TOOLS
Business Strategy Analysis
Generate performance
expectations through industry
analysis & competitive strategy
analysis