1 an introduction investing and valuation

8/9/2019 1 an Introduction Investing and Valuation

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INTRODUCTION TOINVESTING

AND VALUATIONFinancial Statement Analysis

and Security ValuationStephen H. Penman


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THE AIM OF THE COURSETo develop and apply technologies for valuingfirms and for planning to generate value withinthe firm using financial statement analysis.


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WHAT WILL YOU LEARN FROMTHE COURSE

How intrinsic values are calculated What determines a firms value How financial analysis is developed for strategy and planning The role of financial statements in determining firms values How to pull apart the financial statements to get at the

relevant information How ratio analysis aids in valuation How growth is analy ed and valued The relevance of cash flow and accrual accounting

information How to calculate what the P!" ratio should #e How to calculate what the price$to$#oo% ratio should #e How to do #usiness forecasting How to assess the &uality of the accounting


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USERS OF FIRMS FINANCIALINFORMATION (DEMAND SIDE) Equity Inve t!"

'nvestment analysis(anagement performance evaluation

De#t Inve t!"Pro#a#ility of default)etermination of lending rates*ovenant violations

M$n$%e&ent

Strategic planning'nvestment in operations"valuation of su#ordinates

E&' !yeeSecurity and remuneration


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Liti%$nt)isputes over value in the firm

Cu t!&e"Security of supply

G!ve"n&entPolicy ma%ing+egulationTa,ation-overnment contracting

C!&'etit!"

Inve t!" $n &$n$%e&ent $"e t*e '"i&$"yu e" !+ +in$n,i$ t$te&ent


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INVESTMENT STYLES Intuitive inve tin%

+ely on intuition and hunches no analysis -$ ive inve tin%

Accept mar%et price as value no analysis S,"eenin%/se a few pieces of information and no forecastingminimal analysis

Fun $&ent$ inve tin%)iscover the value in an investment throughanticipations of payoffs

An$ y.e in+!"&$ti!nForecast payoffs from information


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COSTS OF EACH A--ROACH )anger in intuitive approach

Self deception0 ignores a#ility to chec% intuition )anger in passive approach

Price is what you pay1 value is what you get )anger in screening

'gnores information a#out the future Fundamental analysis

+e&uires wor% 2 Prudence re&uires analysis a defense against paying the

wrong price 3or selling at the wrong price4The )efensive 'nvestor

Activism re&uires analysis an opportunity to find mispricedinvestmentsThe "nterprising 'nvestor


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THE FIRM/ ITS CLAIMANTS/AND THE CA-ITAL MAR0ET

Cash from Loans

The Capital Market:Trading Value

BalanceSheet

IncomeStatement

Cash FlowStatement

Statement ofShareholders'

Equity

Cash from Share Issues

Dividends and Cash fromShare Repurchases

Interest and Loan RepaymentsCash from Sale of De t

!he Investors"!he Claimants on #alue

The Firm:The Value Generator

SecondaryDe tholders

SecondaryShareholdersCash from Sale of Shares

De tholders

Shareholders

$peratin%&ctivities

Investment&ctivities

Financin%&ctivities

The Financial Statements:Information on Value

Value of the firm 5 Value of Assets 5 Value of )e#t 6

Value of "&uity

Ty'i,$ y v$ u$ti!n !+ e#t i $

"e $tive y e$ y t$ 12


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VALUE34ASED MANAGEMENT Test strategic ideas to see if they generate value

a. )evelop strategic ideas and plans#. Forecast payoffs pro forma analysisc. /se pro forma analysis to discover value creation

Applications *orporate strategy(ergers 7 ac&uisitions8uy outs 7 spinoffs+estructurings

*apital #udgeting (anage implemented strategies #y e,amining decisions

in terms of the value added +eward managers #ased on value added


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INVESTING WITHIN A 4USINESS5INSIDE INVESTORS

8usiness 'deas 3Strategy4

'nvestment Funds Value 'n

Apply 'deas with Funds

Value -enerated Value 9ut


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THE -ROCESS OF FUNDAMENTAL ANALYSIS

Ste' 6 3 0n!7in% t*e4u ine The Products The :nowledge 8ase The *ompetition The +egulatory *onstraints

Ste' 8 3 An$ y.in%In+!"&$ti!n 'n Financial Statements 9utside of FinancialStatements

Ste' 9 3 F!"e,$ tin%-$y!++ (easuring Value Added Forecasting Value Added

Ste' : 3 C!nve"t

F!"e,$ t t! $ V$ u$ti!n

Ste' ; 3 T"$ in% !n t*e V$ u$ti!n 9utside 'nvestor

*ompare Value with Price to 8/;1S"


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0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

Dividends CashFlows

ResidualEarnings

Dividends CashFlows

ResidualEarnings

Forecast Period 8eyond theHori on

< : Ye$"

V a

l u a

t i o

n "

r r o r

3 A 4

/sed toestimateimplicit

price

Forecastsavaila#lefor ne,t? ;ears


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63.30%

176.20%

10.30%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

Dividends CashFlows

ResidualEarnings

Dividends CashFlows

ResidualEarnings

Forecast Period 8eyond theHori on

: Ye$"

V a

l u a

t i o

n "

r r o r

3 A 4

1 an introduction investing and valuation

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