Penman S Financial Statement Analysis And Security Valuation Pdf
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- Financial Statement Analysis and Security Valuation
- Financial Statement Analysis and Security Valuation
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Download Free PDF. Forecasting and Valuation Analysis. Pratap Dxt. Download PDF. A short summary of this paper. This chapter uses the financial statement analysis of Chapters 11 and 12 to develop a framework for full-information forecasting.
Link to next chapterChapter 16 begins an investigation of accounting issues that arise in forecasting and valuation. Link to Web pageLearn how to develop spreadsheet financial models to convert forecasts to valuations-visit the text Web site at www.
How is knowledge of the business incorporated in forecasting? How is financial statement analysis utilized in forecasting? How are pro forma future financial statements prepared? How is pro forma analysis used in strategy decisions? This chapterChapter Fifteen Full-Information Forecasting, Valuation, and Business Strategy AnalysisThe simple forecasting schemes in the last chapter embedded all the concepts needed for valuation.
But they did not exploit all of the information that is necessary to make the analyst feel secure about a valuation. The simple schemes focused on operating income and growth in net assets employed in operations, but they relied on current measures.
Full-information forecasting digs deeper. It forecasts the full set of factors that drive operating income and net operating assets and, from these forecasts, builds up a forecast of residual earnings and abnormal earnings growth from which a valuation can be made.
Chapters 11 and 12 outlined the factors that drive profitability and growth enabling us to analyze current financial statements. Financial statement analysis is an analysis of the present and past, to provide information for forecasts of the future.
However, you will see in this chapter that forecasting is a matter of financial statement analysis of the future. Much of this chapter takes the analysis of Chapters 11 and 12 and rolls it over to the future. The drivers of profitability and growth are themselves driven by the "real" economic factors of the business. So knowing the business is an essential first step to discovering the information for full-information forecasting. You will see here how financial statement analysis provides the means of interpreting the many dimensions of business activity in a form that can be used for forecasting.
Knowing the firm's strategy is also a prerequisite for forecasting, and you will also see how financial statement analysis interprets strategy. Moreover, you will see how the methods of forecasting are also the methods by which a manager evaluates alternative strategies. The chapter develops a formal scheme for forecasting. The scheme ensures that all relevant aspects of the business are incorporated and irrelevant aspects are ignored. It is comprehensive and orderly so that no element is lost.
By forcing the analyst to forecast in an orderly manner, the scheme disciplines speculative tendencies. The simple forecasts of the last chapter are a starting point for full-information forecasting.
They are based on current profitability and growth in net operating assets. Fullinformation forecasting asks how future profitability and growth will differ from current levels. If, through analysis of additional information, we forecast that indeed they will, then we will have improved on the simple forecasts and the simple valuations. So business activities are interpreted by their effect on ReOI.
RNOA is driven by four drivers Sales 2. Core sales profit margin 3. Turnover efficiency 4. Core other operating income 5. Unusual items Sales is the primary driver because, without customers and sales, no value can be added in operations. And as every basic economics course teaches, dollar sales is sales price multiplied by quantity sold. Both price and quantity involve analysis of consumer tastes, the price elasticity of consumer demand, substitute products, the technology path, competitiveness of the industry, and government regulations, to name a few.
But equation And sales generate positive ReOI only if these margins are greater than the turnover efficiency ratio. As a first step in organizing your business knowledge, attach economic factors to ReOI drivers. What factors drive product prices and product quantities and thus sales?
Among the answers will be competition, product substitutes, brand association, and patent protection. What factors drive margins? Among the answers will be the production technology, economies of scale and learning, and the competitiveness in labor and supplier markets. Focus on ChangeA firm's current drivers are discovered through financial statement analysis. Forecasting involves future drivers, so focus on business activities that may change ReOI drivers from their current levels.
The analysis of changes in drivers is a question of earnings sustainability, or more strictly, ReOI sustainability. Analyze change in three steps. Step A. Similar displays can be made for each industry or product sector from the historical data.
And similar displays can be developed for core profit margins, asset turnovers, and the other drivers of ReOI. These driver patterns are determined by two elements The current level of the driver relative to its typical median level for a comparison set of firms.
The rate of reversion to a long-run level. Element 1 is established by the analysis of the current financial statements and element 2 is the subject of forecasting. The rate of reversion to a long-run level is sometimes referred to as the fade rate or persistence rate.
Some analysts market their equity research as an analysis of fade rates. How long will a nontypical level persist? Economic factors affect firms in similar ways within industries, so driver pattern diagrams are best developed by industry.
Industry is usually defined by the product brought to market. There are standard classifications, like the Standard Industrial Classification SIC system, which classifies firms by nested four-digit industry codes. Within an industry firms tend to become more like each other over time, or they go out of existence. Thus analysts talk of ReOI and its drivers fading to levels that are typical for the industry. Firms may have temporary advantages, new ideas, or innovations that distinguish them from others, but the forces of competition and the ability of existing and new firms to imitate them drive out the temporary advantage.
Correspondingly, if these competitive forces are muted, we expect to see more sustained driver patterns than for a strongly competitive industry. As fade rates are driven by competition, some analysts refer to the period over which a driver fades to a typical level as the competitive advantage period. Figure They are referred to as fade diagrams. The top group contains firms with the highest 10 percent of the driver in the base year and the bottom group contains firms with the lowest 10 percent.
As you would expect, unusual items in Figure The diagrams indicate that the forces of competition are at play to drive core RNOA to common levels. We will see in Part Four that the accounting partly explains these permanent differences. Driver patterns also can be established for change drivers that were analyzed in the analysis of growth in Chapter These patterns indicate the sustainability of increases or decreases in the drivers.
Sales growth in Figure And large increases or decreases in core sales profit margins in Figure Average changes in both drivers represented by the fifth group from the top in Year 0 are close to zero, but all groups converge to this average over time.
Firms with high core RNOA currently in the upper groups tend to have declining profitability in the future; firms with low core RNOA in the lower groups tend to have increasing profitability in the future. High core other income for firms in the upper groups tends to decline subsequently as a percentage of net operating assets; low core other operating income for firms in the lower groups tends to increase.
The contrarian stock screening strategy in Chapter 3 shorts stocks with high growth in sales and profits and buys stocks with low growth.
The contrarians have these change patterns in mind but believe that the market does not. They believe that the market gets too excited with high sales and profit growth and thinks growth will continue rather than fade; and they believe the market does not understand that drops in sales and profits are often temporary. Step B. Modify the Typical Driver Pattern for Forecasts for the Economy and the IndustryHistorical industry patterns are a good starting point if the future is likely to be similar to the past.
But indications may be to the contrary. Government or trade statistics may forecast a change in the direction for the global economy or for the specific industry. Forecasts of recession or a slowdown of GDP growth may signal a change from the past. Shifts in industrywide demand for the product may be indicated by changing demographics or changing consumer tastes.
ACCY 306 FINANCIAL STATEMENT ANALYSIS S., Financial Statement Analysis and Security Valuation,...
Interest Rates in Financial Analysis and Valuation. A considerable part of the information for valuation is in the financial statements. This first Australasian adaptation of Palepu and Healy's Business Analysis and Valuation helps readers analyse any company's financial statements to reveal its true condition and value. Valuation theory is linked to the practice of investing through financial statement analysis and interpretation, analysis of business models, company valuation, stock analysis, portfolio management and value Investing. Every textbook comes with a day "Any Reason" guarantee. Wahlen, Stephen P.
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Financial Statement. Analysis and. Security Valuation. Fourth Edition. Stephen H. Penman. Columbia University. McGraw-Hill. Irwin. Boston Burr Ridge, IL.
Financial Statement Analysis and Security Valuation
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Financial Statement Analysis and Security Valuation
Prescription A critical examination of accounting and finance concepts as applied to financial statements of firms, focusing on the interests of equity investors. The course will also consider the value of financial statement analysis to capital markets and communities. Course Learning Objectives By the end of this course, students should be able to:. Explain key concepts, principles and relationships in financial statement analysis; 2. Explain the principles of valuation; 3. Undertake equity valuation; 4. Apply the concepts of risk analysis; and 5.
Fundamental risk arises from the inherent risk in the business — from sales revenue falling or expenses rising unexpectedly, for example. Price risk is the risk of prices deviating from fundamental value. Prices are subject to fundamental risk, but can move away from fundamental value, irrespective of outcomes in the fundamentals. Chapter 19 elaborates and Figure A beta technology measures the risk of an investment and the required return that the risk requires. The capital asset pricing model CAPM is a beta technology; is measures risk beta and the required return for the beta.
Financial Statement Analysis and Security Valuation by
Issues in Accounting Education 1 February ; 28 1 : — I have been using Steve Penman's Financial Statement Analysis and Security Valuation in various specialized master's courses for over ten years now. For a whole set of accounting academics initiated to the residual income model during their own advanced studies, Penman offers a natural textbook to accentuate the link between financial statements and valuation to their own students. Being an accomplished academic himself, he links in his book the rich literature on financial statement analysis research to the practical dimensions of accounting, financial, and prospective analysis. The book adopts first and foremost a fundamental equity analyst perspective, nevertheless closing off with a section on credit risk. The material covered is not light beer but the real stuff; however, I have found it is well received by those who are looking to pursue a career in accounting and finance and are wanting serious training. Nevertheless, one can easily follow different paths; I generally start with the analysis of financial statements and performance before introducing accounting in the valuation models.
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