Certificate in Financial Statements Analysis and Valuation for Equity Analysts

Introduction

This course will provide a combination of financial statement analysis with the key focus to use it for valuation purposes. The course will start with an understanding of the business model, leading to International Financial Reporting Standards (IFRS) financial statement analysis, projections of the financials and then the valuation.

Key business benefits

Understand the various concepts and tools which can be used to assess an investor’s valuation decisions and risks;
Obtain an appreciation of the concept of shareholder value and why this is more related to discounted cash flow measures than to accounting measures of performance;
Develop a sound knowledge of the methods of valuing companies, how to select appropriate techniques in different situations and the principal value drivers;
Understand some new valuation methodologies which are particularly useful in valuing new economy companies;
Learn how actual market participants value companies and how this influences their investment style.

Skills Acquired

Design a business model;
Interpret financial statements;
Project financial statements using well thought out assumptions;
Value a corporate entity using professional tools.

Learning objectives

Assess a company’s “business model”;
Establish emerging market risk and companies in a changing industry environment, and the terminal growth rate;
IFRS accounting standards and domestic accounting standards;
Understand how to establish quality of earnings;
How to treat off balance sheet liabilities in the valuation process;
Ability to create a model and compute value using DCF and Residual Income Statement;
Ability on compute return on invested capital, EV/EBIT and Economic Profit;
Understanding drivers of value - ROIC, WACC, Growth rate.

Agenda

Day 1

Session 1: Business Model

Understanding the business in terms of a business model;
The generic business model;
Deriving the revenue drivers and cost drivers of the business;
Critical success factors;
How does the business generate cash?
Understanding management and shareholder relationships.

Session 2: Business Model - Case Study

Establish the business model for the course case study, using a retail company in the consumer staple sector.

Session 3: Income Statement

Horizontal versus vertical income statement;
Revenue model;
Revenue volatility;
Revenue and receivables quality;
Compound annual growth rate (CAGR);
Cost structure;
Fixed and variable costs;
Break-even analysis;
Defining expenses;
Reading the footnotes in conjunction with the income statement;
Segment reporting;
Profitability;
Gross margins;
Operating margins;
Growth margins;
Analysing the income statement;
Sustainable and comprehensive income;
Benchmarking;
Key analysis question formation and list from the income statement;
Financial Statement Adjustments for Analysis;
Non - core operations;
Equity accounting;
Non-recurring.

Session 4: Income Statement - Case Study

Review income statements of the retail company highlighting potential exceptions and red flags. Put through adjustments to normalise the income statement and project the income statement.

Session 5: Balance Sheet

Structure of the balance sheet and salient features;
The accounting equation;
Non-current assets;
Investments;
Current assets;
Inventory – slow moving;
Receivables – ageing, provisions, collections, working capital cycle and working investment cycle;
Non-current;
Liabilities;
Current - short-term;
Non-current - long-term;
Accruals and provisions;
Equity;
Consolidations and goodwill;
Reading the footnotes in conjunction with the balance sheet;
Special situations and red flags;
Understanding working capital within the balance sheet;
Positive and negative working capital cycle;
Cash gap;
Requirements;
Structure;
Shortfalls;
Analysing the balance sheet;
Key analysis question formation and list from the balance sheet;
Financial Statement Adjustments for Analysis;
Off balance sheet financing and the impact on value;
Fair value of assets;
Goodwil

Session 6: Balance Sheet - Case Study

Review the balance sheet of the retail company looking for special situations and red flags. [The focus will be on the working capital of the company]. Make adjustments to normalise the balance sheet and then project the balance sheet.

Session 7: Accounting Standards and Creative Accounting

Use of IFRS for domestic reporting;
Review of major IFRS pronouncements;
Comparison of IFRS and domestic accounting rules, specifically “Brunei Darussalam Accounting Standards”;
Impact of IFRS on domestic annual reports;
Creative Accounting;
Recording revenue before it is earned;
Shifting current income to a later period;
Creating fictitious revenue;
Shifting future expenses to an earlier period;
Shifting current expenses to a later period;
Inappropriate depreciation policies;
Boosting profits with nonrecurring transactions;
Failing to record or disclose liabilities.

Session 8: Cash Flow Statement

Direct and indirect cash flow statement;
The structure and content of the cash flow statement;
Operating cash flow;
Investing cash flow;
Financing cash flow;
Analysing the cash flow statement;
How to use the cash flow statement for projections;
Cash flows and benchmarking and peer analysis;
Financial ratios and the statements of cash flows;
Alternative cash flow;
Analysis of cash flow trends;
Free cash flow (FCF);
How to use the cash flow statement to quantify debt capacity – Debt Service Cover Ratio (DSCR)

Session 9: Cash Flow Statement – Case Study

Review the cash flow statements of the retail company, reviewing accounting profit with cash from operations, investing activities and financing activities. Use the case study financial statement to project the cash flow and the free cash flow.

Day 2:

Session 10: Ratio Analysis

Ratios used in operating performance and profitability;
Ratios used in capital structure;
Leverage versus gearing;
Debt coverage ratios;
Off-balance sheet funding inclusions;
Asset Efficiency Ratios;
Credit Ratios: liquidity, solvency and fixed charge coverage;
Capital Return Ratios (Return on Capital Employed versus Return on Equity);
Du Pont Ratio Analysis (Profitability, Efficiency and Leverage);
Residual valuation techniques (RoIC versus WACC and RoE versus Cost of Equity)

Session 11: Ratio Analysis - Case Study

Use the core case study to perform a detailed ratio analysis.

Session 12: Projections

Tools for projecting financial statements;
The key cash drivers;
Looking at historical cash flows as basis for future cash flow;
Using value drivers to make decisions on future business profile;
Working capital projections;
Ratios in projections;
Defining Assumptions;
Sensitivity Analysis - adjusting critical assumptions and value drivers.

Session 13: Discounted Cash Flow Valuation

The Cost of Equity, Cost of Capital, and WACC;
Cost of capital in emerging markets;
Exercise: Calculating Cost Rates Correctly;
The Present Value of Free Cash Flow;
Exercise: Creating FCF, Using Discount Formulas and Functions;
Terminal Value: Various Methodologies and Calculations in respect of quickly changing environments;
Exercise: The Differences and Sensitivity of Terminal Value Methods;
Implied multiples;
Using balance sheet values (including impact of ‘off balance sheet finance’) as a start to the valuation process;
Application and drawbacks;
Sensitivity analysis – drivers of value (Terminal value, growth, WACC).

Session 14: Relative Valuation

Important multiples and their calculation in the model;
PE multiples
Inserting comparables into a model;
Using web queries to determine stock prices;
Exercise: web queries;
Integrating stock prices for market capitalization calculations.

Session 15: Residual Income Approach

Economic profit versus economic value added;
Abnormal earnings;
Net income less equity charge;
NOPAT less capital charge;
Forecasting residual income;
Determinants of residual income;
Continuing residual income;
Using residual income approach for valuation.

Session 16: Sum-Of-The-Parts (SOTP) Valuation

Facilitator

Andre Lanser

Credit, Corporate Finance and Financial Modelling

Andre Lanser is a consulting trainer as well as a corporate finance practitioner and he has delivered courses around the world in the areas of Credit, Corporate Finance, Valuation and Financial Modelling both for Corporates and Banks.

Andre originally qualified as a Chartered Accountant, completing articles with PricewaterhouseCoopers. He started his career with a subsidiary of Commercial Union, involved in the steel manufacturing industry.

His experience ranged from systems implementation, credit assessment of the highly risky construction industry customers, heading up the finance functions to successfully turning the business around and then selling the company through a trade sale.

Later he joined Commercial Union in the investment back-office function, reengineering the investment back office and later headed-up a team who implemented a new investment management system for both the back office and the front office.

His commercial experience includes restructuring and turning around a Steel Manufacturing operation, consulting to a Pharmaceutical company involved in medical devices for both Government and Private Hospitals and an in depth knowledge of the citrus industry, consulting to South African Airways and extensive work at Hanover Acceptances property company, Dorrington in London.

His career then spanned over 15 years in the Venture Capital and Private Equity arena, where he has gained a vast amount of experience in the corporate analysis and valuation field.

He is a specialist in developing and training finance related courses, including corporate credit related topics, credit analysis and cash flow analysis with a special focus on the banking sector, derivatives, and financial modeling courses. His training experience spans a period of more than 15 years

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