Financial Statement Analysis
||Dr Isaac Tabner
||The module will be delivered by means of lectures and smaller group seminars (for case studies, group presentations and numerical problem-solving).
||Assessment will comprise a group-work assignment (40 per cent of the module grade) and a final examination (60 per cent of the module grade) of two hours duration. The group-work assignment requires the students to perform a company analysis and stock recommendation for an existing UK-listed company. The groups are assessed on a 20 to 25 minute presentation of their finding. This presentation and feedback are then used as the basis for a group written report (2,500 to 3,000 words) further detailing their analysis. The weight of the presentation grade for the final module grade is 15% and the weight of the report is 25%. The final exam will contain both numerical and discursive questions and will enable students to demonstrate their knowledge of the module material and the application of key concepts to practical problem-solving.
This module will enable students to develop skills in the interpretation and use of financial statements. For example, to aid in the decision as to whether to buy, hold, or sell a particular firm’s stock, students will learn how to set up an in-depth analysis of the firms strategic capabilities, market environment, financial and operating performance and accounting policies as well as use various valuation techniques. The module includes a project in which student groups of four to five students work together to write, and present, an investment analysis report on a UK quoted company based on the company financial statements and other publicly-available information. The module will benefit students who are interested in pursuing careers in the City as investment managers, stock brokers, bankers, accountants or consultants. Upon completion of the module students will have met learning outcomes from levels I, II and III of the CFA® Program Candidate Body of Knowledge in respect of Financial Reporting and Analysis.
Knowledge and Understanding of:
- Evaluate a firm’s corporate strategy, competitive strength and management capability
- Identify the five competitive forces of Michael Porter and explain how they might be applied to the analysis of firms in different industries
- Apply PEST and SWOT analysis based upon the financial statements of a publicly listed firm
- Explain the importance of the business cycle and how structural economic changes such as demographics, technology, politics and regulation may effect the returns available from different industry sectors
- Explain and identify the stages of the industry life cycle and the evolution of competitive forces over the life cycle
- Evaluate a firms operating performance and financial characteristics using key ratios derived from the balance sheet, income statement and cash-flow statement
- Evaluate the effect on the above key ratios if off-balance sheet liabilities and assets such as operating leases and employee benefit obligations are brought onto the balance sheet
- Evaluate the importance of a firm’s financing policy, both short and long term, upon the firm’s ability to take advantage of investment opportunities and the firm’s financial risk
- Explain the limitations of ratio analysis
- Identify and explain the different sources of cash-flow
- Identify and explain the factors used to determine whether or not cash-flows are sustainable
- Forecast a firm’s sales, profit margins, cash-flows and earnings
- Identify the most common types of retirement plan and explain how they differ in terms of the benefits and risks to the employer, employee and potential investors
- Explain how changes in employee and retiree life expectancy are likely to change a firm’s defined benefit pension liability
- Explain how changes in employee and retiree life expectancy are likely to change the pension income expected from an employees’ accrued defined contributions and the level of saving required to maintain a given defined benefit obligation
- Explain the role of annuities in defined benefit and defined contribution pension plans
- Explain how changes in investment returns and changes in discount rates, respectively are likely to change a firm’s defined benefit pension liability
- Appraise the extent to which changing regulations for employee benefit provision obligations and disclosure may affect the buy, hold, or sell decision regarding a firm’s stock
- Explain how the underlying principles of the basic dividend discount model (DDM) can be extended to value a firm using discounted free cash flows (DCF) and discounted abnormal earnings (EVA)
- Identify the sources of inputs to the DCF and EVA models from a firm’s financial statements
- Explain the process involved in determining an appropriate discount rate and a realistic growth rate over the various stages of the forecast valuation
- Explain how DDM, DCF and EVA models can be used in conjunction with the market price, market discount rates and forecast growth in dividends, cash-flow and abnormal earnings to derive an estimate of an implied market forecast of growth rates
- Explain the relationship between EVA and price to book value and price to earnings multiples
- Identify situations in which the valuations arrived at by EVA, DDM and DCF may diverge in practice
- Identify, explain and describe examples of accounting practices and techniques that might require an analyst to adjust reported sales, earnings, or assets and liabilities
- Explain why some accounting practices result in a sustained divergence between reported cash flows and reported profits and determine the implications of such divergence for financial statement analysis
- Explain the relationship between legitimate variations in financial reporting practices, legal but aggressive accounting practices and outright illegal fraud
- Describe, explain and apply the key principles and motivation of credit analysis
- Describe, explain and apply the key principles and motivation of financial distress analysis including the Altman & Taffler Z score methods, including their limitations.
- Describe and explain the underlying drivers of bond ratings and bond ratings’ impact on the performance on both stock and bond prices.
- Explain, classify and identify the main principal agency issues in firms.
- Describe the main behavioural finance theories and approaches relevant to security analysis and stock selection.
- Describe the main role of different groups of security analysts (sell side and buy side) and their typical behavioural patterns and performance.
- Communication skills: delivering coherent arguments, oral communication and report writing.
- Self-management: meeting deadlines, working under pressure and time management.
- Inter-personal skills: team work, listening and reading skills.
- Academic skills: researching and evaluating information, analytical and logical thought, decision making, interpreting qualitative and quantitative information, condensing information and working methodically.
- Numerical skills, through the manipulation and interpretation of financial statement data, and application of valuation concepts
- Analytical skills, through the analysis of information in order to solve structured problems and perform accounting and financial analyses
- The ability to identify arguments and think critically
Division: Accounting & Finance
This module information is representative of what is included in the module in a given year. Details of actual reading, lectures and coursework may vary year to year and will be available at the beginning of the semester.