Financial Analysis and Valuation: Introduction

Pages: 12 (2072 words) Published: August 25, 2013
AFC 3230 – Financial Analysis and Valuation

Lecture 1 – Introduction (6 marks – Theory)

Investment Styles:

Intuitive Investing
* Investor who relies on intuition and hunches – there is no analysis involved

Problems:
* Self-deception, ignores ability to check intuition

Passive Investing
* Investor who accepts the market price as value – there is no analysis involved – this is the “efficient market approach”

Problems:
* It is risky that you may be paying too much for an investment which is overpriced

Fundamental Investing: Challenge Market Prices

Active Investing
* An opportunity to find mispriced investments

Problems:
* Requires proper analysis

Defensive Investing
* A defence against paying for/ selling for the wrong price

Problems:
* Prudence requires analysis

Users of Accounting Information:
* Equity Investors
* Debt Investors
* Managements
* Employees
* Litigants
* Customers
* Governments
* Competitors

Capital Markets and Accounting Information:
* Fundamental analysts believe that the markets may misprice securities in the short run although the correct price will be reached over a long period of time * Profits can be made by buying/selling undervalued/overvalued securities * Once the markets realizes its mistakes and re-prices securities accordingly, the trading strategy will earn sizable gains.

Example – Newcrest Mining
* On February 8, goldminer Newcrest Mining reported a 48 per cent fall in first-half net profit after tax * Interim net profit after tax for the six months to the end of December was $320 m, down from $645 m at the same time last year * Sales revenue was down 23 per cent to $1.805 b

BUT
* Newcrest Mining's shares rose 5.01 per cent to $24.52

WHY?

* The market interpreted this half year report as good news * Analysts and management both forecast a more dire outcome for the 6 months period. * Since that information had affected the share price for the past 6 months, the stock price had dropped accordingly. * The positive news readjusted the share price according to the official half year report.

Example – JB Hi FI

* On February 10, JB Hi Fi posted first-half net profit after tax of $82m, up from $79.6m at the same time last year * Total sales grew 2.3 per cent
* Opening of new stores
* On a store-by-store basis sales down 3.5 per cent from the previous corresponding period BUT
* JB Hi Fi’s shares rose $1.71 (15.53 per cent) to $12.72

WHY?
* The increase is surprised because revenue had only increased by virtue of the increased number of stores. In terms of store by store, there was actually a decrease. * Even so, the market and its analysts had expected worse results. They were happy that there was some improvement in revenue * This was reflected in the sharp increase in stock price

Complex Issues in Financial Accounting
* Noise in accounting information
* Earnings quality
* Transaction structuring
* Techniques to keep debt off the balance sheet
* Techniques to manipulate earnings
* Information asymmetry
* Cost of capital (debt and equity)
* Undervaluation/overvaluation (mispricing)

Case Study: Asahi
* Independent Liquor engaged in channel stuffing and understating expenses so that the value of the company would be increased when selling to Asahi * Channel Stuffing
* Independent Liquor overstated earnings by forward selling stock on extended terms to retailers to bring forward the ‘revenue recognition’ so that the financial statements would look better. * Understating Expenses

* Independent Liquor reversed audit fees, sick leave payments and bonus payments to make the EBITDA higher and therefore have an increased value of the company.

Lecture 2 – Capital Market Analysis (10 Marks Theory, 5 Marks Calculations)...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • jet2 financial analysis task2 Essay
  • Financial Analysis IBM Jen Essay
  • Financial Analysis of Sobeys Inc. Essay
  • Financial Statement Analysis Essay
  • Financial Analysis Essay
  • Financial Analysis Essay
  • Financial analysis Essay
  • Financial Statement Analysis Tutorial Essay

Become a StudyMode Member

Sign Up - It's Free