3 Financial Statement Analysis

2023年最新考纲CFA二级财报科目，部分内容与一级重合，其中Financial statement modeling从Equity valuation中抽出

Financial Statement Analysis

• Intercorporate Investments
  • Overview
  • Financial assets(<20%): IFRS 9
    • The relationship between coupon rate and YTM
    • IFRS 9
      • Classification of Financial Assets
      • Impairment
        • The new standard moves the recognition criteria from an "incurred loss" model to an "expected loss" model
      • Reclassification
        • Equity instruments: not permitted
        • Debt instruments: is only permitted if the business model for the financial assets (objective for holding the financial assets) has changed in a way that significantly affects operations
          • AMC → FVPL: fair value with any gain or loss immediately recognized in profit or loss
          • FVPL → AMC: fair value at the reclassification date becomes the carrying amount
  • Associate(20%-50%)
    • 特点
      • 20% to 50% of the voting rights of an associate
      • Less than 20% but have significant influence
    • Equity method
      • The equity investment is initially recorded on the investor's balance sheet at cost
      • The carrying amount of the investment is adjusted to recognize the investor's proportionate share of the investee's earnings or losses and are reported in income
      • Dividends or other distributions received from the investee: return of capital
        • reduce the carrying amount of the investment
        • not reported in the investor's profit or loss
      • 公式
        • Income Statement: A gain is recognized = current year’s net profit of the investee *percentage of interest owned
        • Balance sheet: The carrying amount of investment = cost of investment + (accumulated net profit of the investee –accumulated dividends declared by the investee) * percentage of interest owned
    • Losses from Associates
      • If the investment value is reduced to zero ,the investor usually discontinues the equity method and does not record further losses
      • If the investee subsequently reports profits, the equity method is resumed after the investor’s share of the profit equals the share of losses not recognized during the suspension of the equity method
    • Purchase price
      • Excess of Purchase Price Over Book Value Acquired
        • 长期股权投资的初始投资成本大于取得投资时应享有被投资单位可辨认净资产公允价值份额的，两者之间的差额不要求对长期股权投资的初始投资成本进行调整
        • 长期股权投资的初始投资成本小于取得投资时应享有被投资单位可辨认净资产公允价值份额的，两者之间的差额应计入取得投资当期的营业外收入，同时调整增加长期股权投资的账面价值
      • Amortization of Excess Purchase Price
        • The investor must directly record these adjustment effects by reducing the carrying amount of the investment on its balance sheet and by reducing the investee's profit recognized on its income statement
    • Transactions
      • 方式
        • Upstream sale: the profit on the intercompany transaction is recorded on the associate's income (profit or loss) statement
        • Downstream sale: the profit is recorded on the investor's income statement
      • The investor company's share of any unrealized profit must be deferred by reducing the amount recorded under the equity method
      • Both IFRS and US GAAP require that the unearned profits be eliminated
    • Impairment
      • IFRS
        • The test of the entire carrying amount of investment is by comparing its recoverable amount with its carrying amount
        • 确认
          • The impairment loss: on the income statement
          • The carrying amount
            • Reduce directly
            • Allowance account
      • US GAAP
        • The decline of fair value below its carrying value is permanent
        • An impairment loss is recognized on the income statement and the carrying value of the investment on the balance sheet is reduced to its fair value
      • Both IFRS and US GAAP prohibit the reversal of impairment losses
    • Fair value option
      • The election to use the fair value option occur at the time of initial recognition and is irrevocable
      • Subsequent to initial recognition, the investment is reported at fair value with
        • Unrealized gains and losses arising from changes in fair value
        • Interest and dividends received included in the investor's profit or loss (income)
      • 是否有选择权
        • US GAAP: available to all entities
        • IFRS: restricted to venture capital organizations, mutual funds, unit trusts, and similar entities, including investmentlinked insurance funds
  • Joint ventures(50%)
    • Equity method: Both IFRS and US GAAP require this method
    • Proportionate consolidation: Only under rare circumstances will joint ventures be allowed to use this. The venturer's share of the assets, liabilities, income, and expenses of the joint venture to be combined or shown on a line-by-line basis
  • Combination(>50%)
    • Acquisition Method
      • Business Combinations
        • Merger (吸收合并) • Company A+ Company B = Company A
        • Acquisition (控股合并): Company A+ Company B = (Company A + Company B）
        • Consolidation (新设合并): Company A+ Company B = Company C
      • 合并报表编制的基本流程
        • Balance sheet
          • 基于公允价值调整子公司个别资产负债表
          • 母公司的账面价值与子公司全部的公允价值逐项相加，合并报表层面确认“少数股东权益”（<100%）
          • 将母公司长期股权投资的账面价值与子公司所有者权益的公允价值抵消，合并报表层面确认“商誉"（若有）
        • Income statement
          • 自购买日起，将子公司全部的收入、成本费用逐项与母公司相加
          • 对于母公司与子公司、子公司相互之间发生的经济业务，视同一会计主体内部业务处理，全额抵消；调整子公司公允价值与账面价值差额的摊销额
          • 在“企业合并净利润”中，扣除“少数股东损益”，计算得出“归属于母公司净利润”
    • Goodwill
      • Partial(IFRS, US GAAP)
        • goodwill = Purchase Price − X% × FV of subsidiary's NIA
        • minority interest = (1-X%) × FV of subsidiary's NIA
      • Full (IFRS)
        • goodwill = (Purchase Price /X%) − FV of subsidiary's NIA = (Partial)goodwill /X%
        • minority interest =(1 − X%) × (Assumed 100% Purchase Price ) =(1 − X%) × (Purchase Price /X%)
      • Goodwill impairment
        • IFRS
          • 企业合并所形成的商誉，至少应当在每年年终进行减值测试
          • 对于因企业合并形成的商誉的账面价值，应当自购买日起按照合理的方法分摊至相关的资产组；商誉应当结合与其相关的资产组或者资产组组合进行测试
          • 比较这些相关资产组或者资产组组合的账面价值（包括所分摊的商誉的账面价值部分）与其可收回金额，如相关资产组或者资产组组合的可收回金额低于其账面价值的，应当就其差额确认减值损失
          • 减值损失金额应当首先抵减分摊至资产组或者资产组组合中商誉的账面价值；再根据资产组或者资产组组合中除商誉之外的其他各项资产的账面价值所占比重按比例抵减其他各项资产的账面价值
        • US GAAP (two-step approach)
          • Compare the carrying amount of the reporting unit (including goodwill) to its fair value. If the carrying value of the reporting unit exceeds its fair value, potential impairment has been identified
          • Measure the amount of the impairment loss: The amount is the difference between the implied fair value of the reporting unit's goodwill and its carrying amount
    • SPE and VIE
      • SPE (Special purpose entities) can be a legitimate financing mechanism for a company to segregate certain activities and thereby reduce risk; consolidated on financial statements
      • VIE(variable interest entity): An entity that is financially controlled by one or more parties that do not hold a majority voting interest
    • Effect of methods
  • Other issues
    • Contingent Consideration
      • Contingent consideration may be negotiated as part of the acquisition price. For example, the acquiring company (parent) may agree to pay additional money to the acquiree's (subsidiary's) former shareholders if certain agreed upon events occur
      • 会计处理 (IFRS and US GAAP)
        • Initially: measured at fair value
        • In subsequent periods
          • Changes in the fair value of liabilities: recognized in the consolidated income statement
          • Do not remeasure equity classified contingent consideration
    • Contingent Assets and Liability
    • In-Process R&D
      • Initial:as a separate intangible asset and measure it at fair value (if it can be measured reliably)
      • In subsequent periods
        • Amortization if successfully completed (a marketable product results)
        • Impairment if no product results or if the product is not technically and/or financially viable
    • Restructuring Costs: Do not recognize restructuring costs that are associated with the business combination as part of the cost of the acquisition. Instead, they are recognized as an expense in the periods the restructuring costs are incurred
• Employee Compensation: Post-Employment and Share-Based
  • Overview
  • Measuring DB
    • PBO: the actuarial present value of all future pension benefits earned to date, based on expected future salary increases
    • Estimated annual payment after retirement = estimated final salary *benefit formula * estimated years of service
    • 过程
    • Actuarial Assumptions to Estimate PBO
      • Future compensation increase and levels: salary growth rate, length of service, employee turnover
      • Life expectancy for post-employment
      • Expected vesting: If the employee leaves the company before meeting the vesting criteria, he may be entitled to none or a portion of the benefits earned up until that point
      • Discount rate is the interest rate used to calculate the present value of future benefits
    • Pension obligation (PBO)
    • Current service cost
      • Definition: the amount by which a company's pension obligation increases as a result of employees' service in the current period
      • Projected unit credit method: Annual unit credit = value at retirement date / years of service
  • Presentation of financial statements
    • Balance sheet presentation
      • Funded status (required by both IFRS and US GAAP) = Fair value of plan assets – PBO
      • Offset disclosure (net reporting)
        • Plan assets (PA)>PBO: overfunded; net assets
        • PA<PBO(FS<0): underfunded; net liabilities
      • Asset ceiling: When a company has a surplus in a defined benefit plan, the amount of reported asset cannot be larger than this level
      • 计算
        • Plan Assets
          • Fair value at the beginning of the year +Contributions+Actual return-Benefits paid =Fair value at the end of the year
        • PBO
          • PBO at the beginning of the year +Service cost+Interest cost+Past service cost (+/- )Actuarial losses/gains Benefits paid =PBO at the end of the year
    • Income statement presentation
      • Periodic Pension Cost (PPC)
        • IFRS
          • Reported in P&L
            • Current service cost
            • Past service cost
            • Interest expense (PBO*r)
            • Interest income (PA*r)
          • Reported in OCI
            • Actuarial gains and losses
            • Actual return on plan assets -the amount included in the net interest expense/income calculation
          • 概要
        • US GAAP
          • Reported in P&L
            • Current service cost
            • Interest expense (PBO*r)
            • Expected return on plan asset (PA*re)
            • The amortization of past service costs: over the remaining service life of the affected employees
            • The amortization of actuarial gains and losses (Corridor approach)
              • max (the beginning PBO, plan assets)*10%
              • The excess amount over the "corridor" is amortized as a component of periodic pension cost in P&L
          • Reported in OCI
            • Unamortized of the past service costs
            • Unamortized of the actuarial gains and losses
              • Changes in assumptions (retirement age, mortality) result in gains or losses in PBO
              • expected return - the actual return on plan assets
          • 概要
      • Total Periodic Pension Cost (TPPC)
        • TPPC = PPC in I/S + PPC in OCI
        • TPPC = employer contributions − (ending funded status − beginning funded status) (考试常用)
  • Impact of assumptions
    • If the discount rate increases
      • PBO ↓
      • Current service cost ↓
      • Interest expenses =PBO*r
        • Int ↓, if the employee is young
        • Int ↑, if the plan is mature
      • Pension costs in I/S ↓
      • Funded status ↑
      • Plan asset no effect
      • TPPC ↓
    • If compensation growth rate decreases
      • PBO ↓
      • Current service cost ↓
      • Interest expenses ↓
      • Pension costs in I/S ↓
      • Plan asset no effect
      • Funded status ↑
      • TPPC ↓
    • If expected return on assets increases
      • Pension costs in I/S ↓
      • Others: no effect
  • Other post employment benefits (OPB)
    • 作用
      • Used to substitute the compensation growth rate
      • Inflation will decrease gradually and become constant to ultimate healthcare trend rate
    • Holding all else equal, each of the following assumptions would result in a lower benefit obligation and a lower periodic cost
      • A lower assumed near-term increase in health care costs
      • A lower assumed ultimate health care cost trend rate
      • An earlier year in which the ultimate health care cost trend rate is assumed to be reached
  • Disclosures
    • Periodic Pension Cost
      • IFRS: the components can be included in various line items
      • US GAAP
        • The entire periodic pension cost in P&L (including interest) is shown as an operating expense
        • Analysts adjust GAAP-reported income
          • +
            • the periodic pension cost in P&L
            • Interest cost → interest expense
            • Actual return on plan assets → nonoperating income
          • - only service cost in determining operating income
    • Cash Flow
      • Over contribution (repayment): contribution > total periodic pension costs
        • CFO +(Contribution - TPPC)*(1-t),
        • CFF - (Contribution - TPPC)*(1-t)
      • Under contribution (borrowing): contribution < total periodic pension costs
        • CFO -(Contribution - TPPC)*(1-t),
        • CFF + (Contribution - TPPC)*(1-t)
      • Total cash flow: remain constant
  • Share-based compensation
    • Equity settled
      • Stock options
        • 一些概念
          • Grant date: the date that the compensation approved
          • Service period: the period between grant date and vesting date
          • Vesting date: the date that employees can first exercise the stock option
          • Exercise date: employees receive the stocks
      • Stock grants
        • 特点: Based on market value of the stock on the grant date
        • Types
          • Stock without conditions
          • Restricted stock
          • Performance stock
        • Weakness
          • The receivers have limited influence over the companys market value(market declines)
          • Lead managers to be risk averse or excess risk seeking
          • May dilute the shareholders' interests
    • Cash settled
      • Stock appreciation rights
        • Employees have the right to receive the profit of price increase at a predetermined quantity
        • Have limited downside risk, a right not obligation, however, require an cash outlay now
      • Phantom stock
        • 特点
          • Based on the performance of hypothetical stock
          • Suitable for illiquid stock or privately held firm
        • Strengths: No shares are issued, no dilution to existing shareholders
• Multinational Operations
  • Foreign currency transactions
    • 使用情况
      • Makes an import purchase or export sale.
      • Borrows or lends funds where the amount to be repaid or received is dominated in a foreign currency
    • 计算
      • Settlement before balance sheet date
      • Settlement intervening balance sheet date
      • Transaction gain or loss →I/S→RE
    • Gain or loss
  • Translation of foreign currency FS
    • Analytical Issues and Disclosure
      • The two most common treatments
        • other operating income/expense
        • non-operating income/expense
      • Disclosure of the line item
        • IFRS: amount of exchange rate differences recognized in profit or loss
        • U.S.GAAP: the aggregate transaction gain or loss included in determining net income for the period
    • Currency
      • Presentation currency: (reporting currency) the currency in which financial statement amounts are presented
      • Functional currency: the currency of the primary economic environment in which an entity operates
      • Local currency: the currency where the company operates
    • 定义: translate the entity's financial statements to presentation currency (reporting currency)
    • Translation
      • 选择标准
      • Different exchange rate
        • Current rate: the exchange rate on the balance sheet date
        • The average rate is the average exchange rate over the reporting period
        • The historical rate is the actual rate that was in effect when the original transaction occurred
      • 方法
        • Current rate method
          • 图解
            • I/S
            • B/S
          • 科目关系
            • Nl − Dividend = △RE
            • A (NI× Average Rate) − Div × Historical Rate I = B
        • Temporal method
          • 图解
            • B/S
            • I/S
          • 关系
            • RE1 − RE0 = △RE A − RE0 = B
            • △RE + Dividend = Nl B + Div × Historical Rate = C
          • Inventory and COGS
      • Exposure (local currency)
        • Current method
        • Temporal method
      • Ratios analysis after translation
        • Current method
          • Pure means from the same source of financial report, B/S or I/S
            • Pure B/S ratios
            • Pure I/S ratios
          • Mixed B/S and I/S ratios
            • 假设
              • Foreign currency appreciates
              • Only for end of time figures to calculate the ratios
            • 关系
        • 比较（假设H<A<C）
  • Translation of entity's FS in a hyperinflationary economy
    • 定义: Cumulative three-year inflation rate exceeds 100%, requires an average of approximately 26% per year
    • 会计处理
      • IFRS
        • Principles
          • Restate the foreign currency financial statements for inflation
          • Translate the financial statements using the current exchange rate
        • Procedures of IAS 29
          • B/S
            • Monetary assets and liabilities: not restated
            • Non-monetary assets and liabilities* ending price index/beginning price index
            • Equity (other than retained earnings)* ending price index/beginning price index
          • I/S
            • Revenue*ending price index/average price index
            • Expense*ending price index/average price index
          • Purchasing power gain/loss
            • I/S, a plug for NI to be the right number
            • Based on net monetary assets or liability(e.g., an inflationary environment for net monetary asset, a loss)
            • Adjust PPGL with current exchange rate
      • US GAAP: Do not allow restatement for inflation ,but instead require using temporal rate method
  • Tax Implications of Multinational Operations
  • Revenue Growth Issue and Foreign Exchange Risks
    • Disclosures about foreign currency effect on sales growth in the MD&A
    • Growth in sales that comes from changes in volume or price is more sustainable than from changes in exchange rates
    • Analysts will consider the foreign currency effect on sales growth both for forecasting future performance and for evaluating a management team's historical performance
• Analysis of Financial Institutions
  • The difference between financial institutions and non-financial institutions
    • Difference with other companies
      • Systematic risk
        • A risk of disruption to financial services
        • Financial contagion
      • Regulated
      • Mainly financial assets
    • Global Organizations for regulations
      • Basel Committee on Banking Supervision
        • The purposes of the measures contained in Basel III
          • Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
          • Improve risk management and governance
          • Strengthen banks' transparency and disclosures
        • Basel III framework
          • Minimum required capital
          • Minimum liquidity: banks must hold enough high-quality liquid assets to cover its liquidity needs in a 30-day liquidity stress scenario
          • Have a minimum amount of stable funding relative to the bank's liquidity needs over a one-year horizon
      • International Association Insurance Supervisors(IAIS)
      • International Organization of Securities Commissions (IOSCO)
      • Financial Stability Board(FSB)
      • Individual jurisdictions' Regulatory Authorities
      • US National Association of Insurance Commissioners (NAIC)
  • CAMELS model
    • CAMELS
      • Capital adequacy
        • Calculation
          • Risk-weighted assets: more risky assets require higher level of capital
          • Risk-weighting is specified by individual regulators
        • 资本类型
          • Tier 1 capital
            • Common Equity Tier 1 capital (the most important component): Common stock, additional paid-in capital, retained earnings, OCI, certain adjustments including the deduction of intangibles and deferred tax assets
            • Other Tier 1 capital: subordinated instruments with no specified maturity and no contractual dividends (e.g., preferred stock with discretionary dividends)
          • Tier 2 capital: Subordinated instruments with original (i.e., when issued) maturity of more than five years
        • Requirements of Basel III (a bank must meet all of them)
          • Common Equity Tier 1 Capital must be at least 4.5% of risk-weighted assets
          • Total Tier 1 Capital must be at least 6.0% of risk-weighted assets
          • Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 8.0% of risk-weighted assets
      • Asset quality
        • Loans (largest portion)
          • Depend on the creditworthiness of the borrowers and the corresponding adequacy of adjustments for expected loan losses
          • Investments in securities issued by other entities
        • At amortized cost (net of allowances)
      • Management capabilities: successfully identifying and exploiting appropriate profit opportunities while simultaneously managing risk
      • Earnings sufficiency
        • Ideally be high quality and trending upward
          • Accounting estimates are unbiased
          • The earnings are derived from sustainable
        • Composition of banks' earnings
          • Net interest
          • Service income
          • Great portion of net interest income and service income is more sustainable
          • Trading income
        • Fair value hierarchy
          • Level 1: inputs are quoted prices for identical financial assets or liabilities inactive markets
          • Level 2: inputs are observable but are not the quoted prices for identical financial instruments in active markets
          • Level 3: inputs are unobservable. The fair value of a financial instrument is based on a model (or models) and unobservable inputs
      • Liquidity position
        • Liquidity coverage ratio (LCR)
          • Calculation
          • Requirements of Basel III
            • Expected cash flows are the estimated one-month liquidity needs in a stress scenario
            • The standards recommend a minimum LCR of 100%
        • Net stable funding ratio (NSFR)
          • Calculation
          • Requirements of Basel III: The standards recommend a minimum NSFR of 100%
        • Others
          • Concentration of funding: the proportion of funding that is obtained from a single source
          • Contractual maturity mismatch
      • Sensitivity to market risk
        • The sources of market risk: interest rates; exchange rates; equity prices; commodity prices
        • Mismatches in the maturity of banks' loans and deposits, repricing frequency, reference rates, or currency of banks' loans and deposits create exposure to market movements
        • Calculation: Value -at -risk (VaR)
    • Purposes
      • Evaluate the bank on a CAMELS basis
      • Equity or debt investment analysis of banks
  • Analytical Considerations Not Addressed by CAMELS
    • Government support
      • Size of the bank
      • Status of the country’s banking system
    • Government Ownership
    • Mission of banking entity
    • Corporate culture
    • Competitive environment
    • Off-balance-sheet items
    • Segment information
    • Currency exposure
    • Risk factors
    • Basel III disclosures
  • Insurance company
    • Property and casualty (P&C)
      • Distribution
        • Direct: have their own sales and marketing staff
        • Agency writers use independent agents, exclusive agents, and insurance brokers
      • ratios in analyzing companies' profitability
        • Loss and loss adjustment expense ratio = (Loss expense + Loss adjustment expense)/Net premiums earned
        • Underwriting expense ratio = Underwriting expense/Net premiums written
        • Combined ratio = Loss and loss adjustment expense ratio + Underwriting expense ratio
        • Dividends to policyholders (shareholders) ratio = Dividends to policyholders (shareholders)/Net premiums earned
        • Combined ratio after dividends = Combined ratio + Dividends to policyholders (shareholders) ratio
    • Life and health (L&H)
• Evaluating Quality of Financial Reports
  • The quality of financial reports
    • Reporting quality
    • Earning quality
  • Potential problems
    • Amounts and Timing of Recognition
    • Classification
    • Mergers and Acquisitions Issues
    • Financial Reporting that Diverges from Economic Reality
  • Evaluating the quality
    • Beneish Model
      • 公式: M-score = −4.84 + 0.920 (DSR) + 0.528 (GMI) + 0.404 (AQI) + 0.892 (SGI) +0.115 (DEPI) − 0.172 (SGAI) + 4.679 (Accruals) − 0.327 (LEVI)
      • 评价
        • A higher M-score indicate higher level of earning manipulation
        • Beneish considered that the likely relevant cutoff for investors is a probability of earnings manipulation of 3.8% (an M-score exceeding −1.78)
      • 各部分计算
      • LImitations
        • Relies on accounting data, which may not reflect economic reality
        • The predictive power is decreasing because it is known by people
    • Altman Model
      • 公式: Z-score=1.2A+1.4B+3.3C+0.6D+1.0E
      • 各部分计算
        • A = Net working capital/Total assets
        • B = Retained earnings/Total assets
        • C = EBIT/Total assets
        • D = Market value of equity/Book value of liabilities
        • E = Sales/Total assets
      • 评价: Higher Z-score, lower probability of bankruptcy
        • Z<1.81: a high probability of bankruptcy
        • Z>3.00: a low probability of bankruptcy
        • 1.81<Z<3.00: not clear indicators
      • LImitations
        • One-period static model
        • Depends on accounting data, not market data
    • Quantitative tools to evaluating earning quality
      • High-quality earnings:
        • Sustainable
        • Adequate
      • Gauge earnings persistence
        • Higher accruals mean less reliability
      • Mean reversion in earnings
        • Earnings at extreme levels tend to revert back to normal levels over time
        • Earnings are largely comprised of accruals, mean reversion will occur faster
  • Evaluating the quality of the financial statements
    • Cash flow statement
      • Indicators of Cash Flow Quality (typically on OCF): charactristics of high-quality cash flow)
        • Positive OCF
        • OCF derived from sustainable sources
        • OCF adequate to cover capital expenditures, dividends, and debt repayments
        • OCF with relatively low volatility (relative to industry participants)
      • Manipulation cash flow
        • Large differences between earnings and OCF or increases in such differences can be an indication of earnings manipulation
        • Timing issues
          • Selling receivables to a third party
          • Delaying paying account payables
        • Classification issues: Shifting positive cash flow items from investing or financing activities to operating activities to inflate OCF
    • Balance sheet
      • Completeness
        • Off-balance-sheet obligations
          • Take-or-pay contracts
          • Operating lease
        • Intercorporate investment methods
      • Unbiased Measurement
        • Value of the pension liability (actuarial assumptions)
        • Value of investment in debt or equity of other companies for which a market value is not readily available
        • Goodwill value (subjectivity in impairment testing)
        • Inventory valuation (subjectivity in testing for impairment).
        • Impairment of PP&E and other assets
      • Clear Presentation
  • Sources of information about risk
    • Financial statements
    • Auditor's report
    • Notes to financial statements
    • Management Discussion and Analysis (MD&A)
    • SEC Form 'NT' (unable to file required reports timely)
    • Financial press
    • Researchers' report
• Integration of Financial Statement Analysis Techniques
  • Framework
  • DuPont analysis
    • Three steps
    • Five steps
      • NI: not include equity income
      • Asset turnover: 总资产中无长期股权投资
      • Leverage: 长期股权投资加回总资产
  • Capital Allocation Decisions: If ratio of proportional capex to proportional assets is greater(less) than 1, firm is allocating more (less) resources to the segment
  • Accrual ratio
    • Balance sheet approach
      • Operating assets = total assets – cash, cash equivalents and marketable securities
      • Operating liabilities = total liabilities – total debt
      • NOA(net operating assets) =Operating assets – operating liabilities
    • Cash flow statement approach
      • Accruals of cash flow=NI–CFO-CFI
  • Cash Flow Analysis
    • Operating cash flow deducts interest and taxes while operating income does not, so adding-back cash interest and cash taxes to CFO. If the company is reporting under IFRS and choses to classify interest expense as a financing cash flow, the only necessary adjustment is for taxes
    • Cash basis ratios
      • Cash flow to operating income = CFO before interest and taxes/EBIT
      • Cash return on total assets = CFO before interest and taxes/average total assets
      • Cash flow interest coverage = CFO before interest and taxes/cash interest paid
      • Cash flow to total debt = CFO before interest and taxes/total debt
      • Cash flow to reinvestment = CFO before interest and taxes/capital expenditures
• Financial Statement Modeling
  • Process
    • Income Statement Modeling
      • Revenue Forecast Approaches
        • Top-down approach
          • Growth relative to GDP growth
            • First forecasts the growth rate of nominal GDP
            • Then considers how the growth rate of the specific company being examined will compare with nominal GDP growth
          • Market growth and market share
            • First forecasts growth in a particular market
            • Then considers the company's current market share, and how it is likely to change over time
        • Bottom-up approach
          • Time series
          • Returns-based measure: forecasts based on balance sheet accounts
          • Capacity-based measure: forecasts based on same-store sales growth (for stores that have been open for at least 12 months) and sales related to new stores
        • Hybrid approach
      • 利润表科目关系: 见CFA一级 Financial statement analysis
      • Economies of Scale
        • Characteristics
          • Average costs per unit of a good or service produced fall as volume rises
          • Gross and operating margins tend to be positively correlated with sales levels
        • 出现情况: include high fixed costs, higher levels of production, greater bargaining power with suppliers, and lower per unit advertising expenses
        • Evidence
          • Lower proportion of COGs
          • Lower proportion of SG&A
      • 预测项目
        • COGs
          • 公式
            • Forecast COGS = (historical COGS/ revenue) (estimate of future revenue)
            • Forecast COGS = (1-gross margin) (estimate of future revenue)
          • Competitors' gross margins
            • Gross margin differences among companies within a sector should logically relate to differences in their business operations
            • Differences in competitors' gross margins could simply reflect differences in business models
          • Analysts' consideration
            • A small error in this item can have a material impact on the forecasted operating profit
            • Whether an analysis of these costs can improve forecasting accuracy
            • The impact of hedging strategy
        • SG&A expenses
          • Selling and distribution expenses often have a large variable component and can be estimated as a percentage of sales
          • Other general and administrative expenses are less variable
        • Financing expenses
          • Net debt: gross debt Less cash, cash equivalents, and shortterm deposits
          • Net interest expense: Interest expense minus interest income
        • Income tax expense
          • Types of tax rates
            • The statutory tax rate
            • The statutory tax rate: =income tax expense/EBT
            • The cash tax rate: tax actually paid (cash tax)/EBT
          • Tax expense = Tax payable + changes in deferred tax liabilities - changes in deferred tax assets
          • Reasons for differences between the statutory tax rate and the effective tax rate: Tax credits, withholding tax on dividends, adjustments to previous years, and expenses not deductible for tax purposes
    • Balance Sheet Modeling
      • Working capital items
        • Inventories= (inventory days on hand)×(COGS/365)
        • Accounts receivable=(days sales outstanding)×(revenues/365)
        • Accounts payable=(days payable outstanding)×(COGS/365)
      • PP&E
        • Depreciation and amortization forecasts are usually based on historical depreciation, management's disclosures, and levels of long-term assets
        • Capital expenditures can be thought of as including both maintenance capital expenditures and growth capital expenditures
    • Cash Flow Statement Modeling
      • Net income (I/S)
      • Share based compensation
      • Working capital
      • Depreciation & amortization
      • CFO
      • Capital Expenditure (CapEx)
        • CFI
      • Share repurchase and issurance
      • Dividends
      • Debt issurance and repayment
      • CFF
  • Building a Financial Statement Model
    • Pro forma income statement estimation
      • Revenue (growth and future revenue)
      • COGS: % of sales (consider: business strategies or regions)
      • SG&A: Fixed or % of sales
      • Financing costs: Debt * interest rates (consider: anticipated changes in capital expenditures or financial structure)
      • Income tax expense and cash taxes
        • Effective rates and trends (changes in deferred tax segments)
        • Segment information (growth in high- and low-tax segments)
    • Pro forma balance sheet estimation
      • Working capital (i.e. A/R, A/P, and inventory): Based on estimation of the pro forma income statement
      • Depreciation and capital expenditures: % of sales (consider: align with company's growing assumption)
    • Pro forma cash flow statement estimation: Based on pro forma income statement and balance sheet
  • Behavioral Financial and Analyst Forecasts
    • Overconfidence in Forecasting
    • Illusion of Control
    • Conservatism Bias
    • Representativeness Bias
    • Confirmation Bias
  • The Impact of Competitive Factors in Price and Costs
    • Porter's Five Forces
    • The companies have limited pricing power
    • The companies face downward pressure on profitability
  • ROIC&ROCE
    • Return on invested capital (ROIC)
      • ROIC=EBIT(1-T)/Invested capital
      • Invested capital=operating assets - operating liabilities
    • Return on capital employed (ROCE)
      • ROCE=EBIT/captial employed
      • ROCE can be useful with different tax structures
  • Inflation and Deflation
    • Industry sales
      • Most increases in the cost of inputs: Commodities or labor
      • Result in higher prices for end products
    • Company sales: The impact of higher prices on volume depends on the price elasticity of demand
    • Industry costs
    • Company costs: it is often helpful to segment the cost structure by category and geography
  • Technological Developments
    • Impacts on demand curve
    • Scenario and/or sensitivity analysis
  • Long-Term Forecasting
    • The investment strategy for which the stock is being considered
    • Cyclicality of the industry
    • Company specific factors
    • The analyst's employer's preferences