Chapter 11 Equity Analysis and Valuation

Earnings persistence is a key to effective equity analysis and valuation

Analyzing earnings persistence is a main analysis objective
Attributes of earnings persistence include:
Stability
Predictability
Variability
Trend
Earnings management
Accounting methods

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Chapter 10. Credit Analysis

Liquidity and Working Capital

1.Liquidity - Ability to convert assets into cash or to obtain cash to meet short-term obligations. 2.Short-term - Conventionally viewed as a period up to one year.
3.Working Capital - The excess of current assets over current liabilities.

Current Assets - Cash and other assets reasonably expected to be (1) realized in cash, or (2) sold or consumed, during the longer of one-year or the operating cycle.

Current liabilities - Obligations to be satisfied within a relatively short period, usually a year.

Working Capital - Excess of current assets over current liabilities

Widely used measure of short-term liquidity
Constraint for technical default in many debt agreements

Current Ratio – Ratio of Current Assets to Current Liabilities
Relevant measure of current liability coverage, buffer against losses, reserve of liquid funds.

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Chapter 9. Prospective Analysis

Importance of Prospective Analysis

Security Valuation - free cash flow and residual income models require estimates of future financial statements.

Management Assessment - forecasts of financial performance examine the viability of companies’ strategic plans.

Assessment of Solvency - useful to creditors to assess a company’s ability to meet debt service requirements, both short-term and long-term.


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Chapter 8 Return on Invested Capital and Profitability Analysis

Return on Invested Capital

Importance of Joint Analysis
1. Joint analysis is where one measure is assessed relative to another

2. Return on invested capital (ROIC) or Return on Investment (ROI) is an important joint analysis

3.ROI relates income, or other performance measure, to a company’s level and source of financing.
4.ROI allows comparisons with alternative investment opportunities
5.Riskier investments expected to yield a higher ROI
6.ROI impacts a company’s ability to succeed, attract financing,repay creditors,and reward owners.

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Ch 7 Statement of Cash Flows - Financial Statement Analysis

The important of Cash flow analysis
1.Cash is the most liquid of assets.
2.Contrast: Accrual accounting and Cash basis accounting.

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Ch 3 Analyzing Financing Activities-Financial statement Analysis

Liabilities
Important Features in Analyzing Liabilities

1. Terms of indebtedness (such as maturity, interest rate, payment pattern, and amount).
2. Restrictions on deploying resources and pursuing business activities.
3. Ability and flexibility in pursuing further financing.
Obligations for working capital, debt to equity, and other financial figures.
4. Dilutive conversion features that liabilities are subject to.
Prohibitions on disbursements such as dividends.

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ch 6 Analyzing Operating Activities- Financial statement Analysis

Income Measurement
1. Economic Income
Equals net cash flows + the change in the present value of future cash flows
Includes both recurring and nonrecurring components— rendering it less useful for forecasting future earnings potential

2. Permanent Income
Also called sustainable earning power, or sustainable or normalized earnings
Estimate of stable average income that a company is expected to earn over its life
Reflects a long-term focus
Directly proportional to company value

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Chapter 5 Analyzing Investing Activities

Analyzing Investment Securities

Two main objectives:
1.To separate operating performance from investing (and financing) performance
Remove all gains (losses) relating to investing activities
Separate operating and nonoperating assets when determining RNOA
2.To analyze accounting distortions from securities
Opportunities for gains trading
Liabilities recognized at cost
Inconsistent definition of equity securities
Classification based on intent

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Chap 4, Analyzing Investing Activities,

Current Asset Introduction
1.Current (Short-term) Assets
Resources or claims to resources that are expected to be sold, collected, or used within one year or the operating cycle, whichever is longer.

2.Noncurrent (Long-term) Assets
Resources or claims to resources that are expected to yield benefits that extend beyond one year or the operating cycle, whichever is longer.

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Ch 2 Financial statement Analysis, Environmental of financial analysis

Environmental Factors
1.Independent, quasi-judicial government agency
2.Administer securities regulations & disclosures
3.Can modify & set GAAP, if necessary
4.Rarely directly challenges FASB
5.Major player in global accounting

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Chapter 1 Analisa Laporan Keuangan,

Overview of Financial Statement Analysis

Information Sources for Business Analysis
1.Qualitative
2.Quantitative.

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