The Art of Company Valuation and Financial Statement Analysis E-Book

Nicolas Schmidlin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2014

Seitenzahl: 477

Beschreibung

The Art of Company Valuation and Financial Statement Analysis: A value investor’s guide with real-life case studies covers all quantitative and qualitative approaches needed to evaluate the past and forecast the future performance of a company in a practical manner.

Is a given stock over or undervalued? How can the future prospects of a company be evaluated? How can complex valuation methods be applied in practice? The Art of Company Valuation and Financial Statement Analysis answers each of these questions and conveys the principles of company valuation in an accessible and applicable way. 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.

The book’s unique approach is to illustrate each valuation method with a case study of actual company performance.  More than 100 real case studies are included, supplementing the sound theoretical framework and offering potential investors a methodology that can easily be applied in practice.

Written for asset managers, investment professionals and private investors who require a reliable, current and comprehensive guide to company valuation, the book aims to encourage readers to think like an entrepreneur, rather than a speculator, when it comes to investing in the stock markets. It is an approach that has led many to long term success and consistent returns that regularly outperform more opportunistic approaches to investment.

Leseprobe

Contents

Cover

Half Title page

Title page

Copyright page

Acknowledgements

Preface

Chapter 1: Introduction

1.1 Importance and Development of Business Accountancy

1.2 Composition and Structure of Financial Statements

Chapter 2: Key Ratios for Return and Profitability

2.1 Return on Equity

2.2 Net Profit Margin

2.3 EBIT/EBITDA Margin

2.4 Asset Turnover

2.5 Return on Assets

2.6 Return on Capital Employed

2.7 Operating Cash Flow Margin

Chapter 3: Ratios for Financial Stability

3.1 Equity Ratio

3.2 Gearing

3.3 Dynamic Gearing Ratio

3.4 Net Debt/EBITDA

3.5 Capex Ratio

3.6 Asset Depreciation Ratio

3.7 Productive Asset Investment Ratio

3.8 Cash Burn Rate

3.9 Current and Non-Current Assets to Total Assets Ratio

3.10 Equity to Fixed Assets Ratio and Equity and Long-Term Liabilities to Fixed Assets Ratio

3.11 Goodwill Ratio

Chapter 4: Ratios for Working Capital Management

4.1 Days Sales Outstanding and Days Payables Outstanding

4.2 Cash ratio

4.3 Quick Ratio

4.4 Current Ratio/Working Capital Ratio

4.5 Inventory Intensity

4.6 Inventory Turnover

4.7 Cash Conversion Cycle

4.8 Ratios for Order Backlog and Order Intake

Chapter 5: Business Model Analysis

5.1 Circle of Competence

5.2 Characteristics

5.3 Framework Conditions

5.4 Information Procurement

5.5 Industry and Business Analysis

5.6 SWOT Analysis

5.7 Boston Consulting Group (BCG) Analysis

5.8 Competitive Strategy

5.9 Management

Chapter 6: Profit Distribution Policy

6.1 Dividend

6.2 SHARE BUYBACK

6.3 Conclusion

Chapter 7: Valuation Ratios

7.1 Price-to-Earnings Ratio

7.2 Price-to-Book Ratio

7.3 Price-to-Cash Flow Ratio

7.4 Price-to-Sales Ratio

7.5 Enterprise Value Approach

7.6 EV/EBITDA

7.7 EV/EBIT

7.8 EV/FCF

7.9 EV/Sales

Chapter 8: Company Valuation

8.1 Discounted Cash Flow Model

8.2 Valuation Using Multiples

8.3 Financial Statement Adjustments

8.4 Overview of the Valuation Methods

Chapter 9: Value Investing

9.1 Margin of Safety Approach

9.2 Value Investing Strategies

9.3 The Identification of Investment Opportunities

9.4 Portfolio Management

9.5 Buying and Selling: Investment Horizon

9.6 Conclusion

Table and Figure Credits

Index

The Art of Company Valuation and Financial Statement Analysis

For other titles in the Wiley Finance Series please see www.wiley.com/finance

This edition first published 2014 by John Wiley & Sons Ltd © 2014 Verlag Franz Vahlen GmbH

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A catalogue record for this book is available from the British Library.

ISBN 9781118843093 (hardback) ISBN 9781118843055 (ebk) ISBN 9781118843048 (ebk)

Everything should be made as simple as possible, but not simpler.

Albert Einstein

Acknowledgments

This book could not have been written without the help of my investment partner and friend Marc Profitlich. Oscar Erixon, Karim Hmoud, Rutger Mol, Matthew Smith, and Frida Suro were extremely supportive, both through the writing process as well as away from the desk, during the creation of the English version. I would also like to thank Rabab Flaga, Carl-Christoph Friedrich, Ann-Katrin Göpfert, Julian Gruber, Dirk Heizmann, Markus Herrmann, Dominik Hügle, Thomas Junghanns, Fabian Kaske, Sven Kluitman, Lars Markull, Lukas Mergele, Simon Vogt, Philipp Vorndran, and Steffen Zollondz. Thomas Hyrkiel from Wiley and Dennis Brunotte from Vahlen did a great job supporting me throughout the project. Thank you also to Sigrid Mikkelsen for helping me with the translation. Last but not least, thank you to my parents Fritz and Lioba for always having supported me. Errors and shortcomings belong to me alone.

The author’s email address is: [email protected]

Preface

We all know that Art is not truth. Art is a lie that makes us realize the truth, at least the truth that is given to us to understand.

Pablo Picasso

This book looks at the valuation and financial statement analysis of listed companies. Another suitable title could have been ‘Not another book on company valuation!’ Amazon.com displays more than 5,000 hits for this topic and a further 4,000 hits for financial statement analysis. Why do we need another book on this subject? Maybe you have noticed that the introductory quotation stems not from a famous economist, entrepreneur or investor, but from an artist. Company valuation is more art than science.

The figures and ratios that we obtain from any fundamental analysis do give us an overview, but figures are not everything. If pure calculation and comparison of key figures and ratios were sufficient for identifying undervalued or promising enterprises, this book would be superfluous and a computer could carry out all the necessary work in seconds. This is not the case. The findings that we derive from fundamental analysis only let us draw conclusions about how a company has developed thus far. Factors from a variety of areas, especially qualitative ones, will contribute to its future development. Financial market theory struggles with this fact. Most of today’s textbooks consist of abstract formulae, are full of Greek letters, and tend to be difficult to understand. This book, however, attempts to convey company valuation and fundamental analysis in a pragmatic, lively and case study-oriented style. It aims to give comprehensive and practical insight into company analysis and valuation in particular by considering alternative approaches in addition to established methods.

The analysis described in this book is carried out with an entrepreneur in mind. It is analysis intended for shareholders who understand that they own shares in a real company, with real employees, real products and (hopefully) real cash flows. The aim of this book is to be a tool that aids the analysis and decision making of such an enterprising investor, rather than a short-term-oriented speculator. Pure figures are one thing, evaluating them reasonably altogether another. Together they form pieces of the puzzle that will reveal a picture of the intrinsic value of a company.

In contrast to other textbooks on company valuation, this book largely dispenses with complicated mathematical formulae and abstract explanations. It aims to be a guide to practical and pragmatic company valuation instead of conveying dry, overly complex and often impractical theory.

Looking at the contents, it is noticeable that only one chapter deals explicitly with company valuation. In fact, each chapter builds upon the previous ones to allow the reader to gain a full picture of the inherent value of a company. Hence the valuation case study described in Chapter 8 builds upon the preceding chapters and can therefore not be understood, or at least correctly applied, without them.

Valuation itself is a technical process; the investor’s actual value-adding activity lies within the process of understanding the business and its prospective value drivers.

This book contains over 110 examples interspersed throughout the various chapters. Each example strives to illustrate the practical application of a certain aspect of valuation practice and its link to the topic being covered. Since the majority of investors are still focusing on North American and European equity markets and both regions use comparable accounting systems, this book mainly employs case studies from these markets. There are, however, also examples of companies in emerging markets to take into account this growing market segment. For authenticity and to familiarize the investor with different types of notation, the country-specific use of digits and presentation has been maintained within the cases. The reader can therefore trace the examples directly to the original underlying financial statements should he wish to do so. In the running commentary and formulae the numbers employ the standard English notation in order to ensure that the narrative itself is coherent.

This book focuses on the valuation of listed companies, but it could also be applied to privately-owned companies.

The re-evaluation and revision of one’s own valuation is part of daily business for anyone following shares listed on a stock exchange. Major political decisions and other factors that will range from macro-economic developments down to strategic management decisions impact the fair value of a company and make the art of company valuation not only one of the most intellectually challenging but also one of the most exciting activities one can undertake on the financial markets. The following chapters will attempt to convey this dynamic and rewarding side of the subject matter in addition to illustrating the technical aspects of financial statement analysis and company valuation.

The valuation of companies is an art, the inherent value of a company always unknown because constantly in flux, and yet still possible to define. Let us illuminate the darkness.

Nicolas Schmidlin, February 2014 London/Frankfurt

Chapter 1

Introduction

By means of this he can at any time survey the general whole, without needing to perplex himself in the details. What advantages does he derive from the system of book-keeping by double entry! It is among the finest inventions of the human mind.

Johann Wolfgang von Goethe

Accounting is the language of businesses. Those who wish to value companies and invest successfully in the long term have to be able to understand and interpret financial statements. The primary purpose of accounting is to quantify operational processes and to present them to stakeholders including shareholders and creditors but also suppliers, employees and the financial community. The financial statement forms a condensed representation of these processes. It delineates the assets and liabilities as well as performance indicators such as turnover, profit and cash flow. Evaluating and interpreting this data against the background of business activity is an important component of the valuation process. Developing an understanding of this ‘language of businesses’ and, at the same time, including qualitative factors in the analysis provides a solid foundation for anyone interested in valuing enterprises. Accountancy illustrates, in one snapshot, the corporate world in the past and the present. Company valuation joins in at this point and attempts to predict the future development and the risks of an enterprise with the help of data obtained from the financial statement. This chapter addresses the weaknesses and limits of modern accounting. A particular disadvantage of accountancy is that it is by nature a purely quantitative model. A sound financial statement analysis, meanwhile, while being quantitative by design, requires the combination of both quantitative facts and qualitative characteristics in order to be a reliable forecast of the future.

This chapter deals primarily with different types of accounting systems, the components of financial statements and the calculation of a first set of key financial ratios. Chapter 2 lays the foundation for further ratio-based analysis, and also for the following qualitative analyses, which are at least oriented towards the financial statement.

1.1 IMPORTANCE AND DEVELOPMENT OF BUSINESS ACCOUNTANCY

The precursors of today’s accounting rules came into being after the stock market crash of 1929, when the American Institute of Accountants’ special committee first proposed a list of generally applicable accounting principles. By 1939, the first Committee on Accounting Procedure was created in the US in order to establish a coherent and reliable system of accounting standards. This set of rules was meant to tackle the rather dubious and unreliable accounting procedures and helped to restore the trust in financial statements published by listed companies. Now the Financial Accounting Standards Board (FASB) prescribes the main accounting standards in the United States. This set of rules, the US Generally Accepted Accounting Principles, or US GAAP for short, governs the accounting principles for all companies subject to Securities and Exchange Commission (SEC) regulation.

On the other side of the Atlantic, beginning in 1973, the European Union began harmonizing the diverse accounting rules of its member countries. This process eventually culminated in the creation of the International Financial Reporting Standards. The IFRS have so far been adopted by more than 100 countries, including all the members of the European Union, Hong Kong, Australia, Russia, Brazil and Canada. Whilst there are several differences between the US GAAP and IFRS, both accounting systems are based on a similar set of principles and are, by and large, comparable. Following the previously mentioned international harmonization of accounting standards around the globe, a key future milestone is the planned full adoption of the International Financial Reporting Standards by the SEC. This adoption, when it occurs, will also require US companies to employ the IFRS, which will effectively unify the accounting standards in most developed countries. This process, which was initially aimed to be completed by 2014 but might require more time, will allow investors to directly compare financial figures and ratios between European and American companies without having to adjust them for diverging accounting treatments.