3/3/2020

CONTACT
FINANCIAL STATEMENT
ANALYSIS AND BUSINESS
EVALUATION PHAN NGOC ANH, MBA.
Email: [email protected]

Consultation hours: by appointment

Lecturer: Phan Ngoc Anh, MBA
Resources: Room: A1.305
Business Analysis and Valuation by Palepu, Healy, Bernard
Equity Asset Valuation by J. Pinto, E.Henry, T. Robinson, J.Stowe
Damodaran on Valuation by Aswath Damodaran

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COURSE ASSESSMENT RESOURCES

Books (not strictly required):

Elements Weight  Business Analysis and Valuation by Palepu, Healy, Bernard

 Equity Asset Valuation by J. Pinto, E.Henry, T. Robinson, J.Stowe
Group project report 30%  Damodaran on Valuation by Aswath Damodaran
Written report (group): 15%
Presentation : 15% Database on annual reports (for group project):

Midterm Exam 30%  Publicly traded US firms www.sec.gov/edgar.shtml

 Publicly traded VN firms www.vietstock.com; www.vndirect.com.vn
Final Exam 40% (and some other securities companies’ websites)
 Or company websites, under “Investor Relations”
TOTAL 100%
Database on financial information:

 Yahoo Finance at www.finance.yahoo.com

 CNN at www.money.cnn.com
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 Wall Street Journal at www.wsj.com
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WHY VALUATION?

Valuation helps to answer the question: “ What is this

“Ifbusiness schools could offer just company worth?”
one course, it would not be on stock - It is the process of determining the fair value of a company,
trading, the efficient market or the price at which the company is fairly valued
hypothesis or modern portfolio Who needs valuation?
theory. Rather, B-schools should be - Business owners: commencing a sale process, business
encouraging students to learn the planning, future decision-making, access to external sources
boring, but critically important, of funding, and litigation purposes (including divorce )
discipline of business valuation.” - Investors (exisiting and potential): identify the “intrinsic
Warren Buffett value”  can set buy and sell range for the security
ex: Buy at 10% below the valuation level, or sell at 30%
above the valuation level

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THIS COURSE IS DESIGNED TO… COURSE CONTENT

Topic 1 : Business strategy analysis for developing an

understanding of a firm’s competitive positioning within its
Incorporate financial statement analysis skills to
industry, its key success factors and risks
understand how accurately the financial statements filed by
management reflect the health and value of a business Topic 2: Accounting analysis for judging how effectively a firm’s
financial statements reflect its business economics and strategy
Then Value firms and stocks using valuation techniques:
Topic 3: Financial analysis for examining ratios and cash flow
- Intrinsic valuation (Discounted Cash Flow, Dividend measures of operating and financial performance
Discount Model)
- Relative valuation (price multiples)… Topic 4: Prospective analysis for constructing meaningful
forecasts of future performance and estimating firm valuation
using valuation techniques (intrinsic and relative valuation)
Discuss the sensitivity of estimated stock values to
various assumptions Topic 5: Analysis of mergers and acquisitions and corporate
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VALUATION TECHNIQUES INVESTMENT AS A PROFESSION

METHODS THAT DO NOT METHODS THAT INVOLVE Investing in Firms: the outside analyst
INVOLVE FORECASTING FORECASTING Credit analysts: evaluate the riskiness – and thus the value – of
1. Dividend Discount Model business debt
1. The method of comparables
Value = present value of expected Ex: Standard & Poor’s; Moody’s Investment Services; Fitch
Dividends ratings ; or bank loan officers
Values stocks on the basis of
price multiples (stock price Equity analysts
2. Discounted Cash Flow Analysis
divided by earnings, book value, - Buy-side analyst: perform equity research for money managers,
sales..) that are observed for investment funds…
Value = present value of expected
similar firms Free Cash Flow Ex: investment analysts in Vina Capital, Dragon Capital, VIG…
2. Asset-based valuation - Sell-side analyst: provide the research to support retail investors
3. Residual Earnings Analysis through their brokers
Values equities by adding up the
Value = Book value + present value of Ex: equity analysts in securities companies like SSI, HSC..
estimated fair values of the assets expected Residual Earnings
of a firm and subtracting the value Investing in Firms: the inside analyst
4. Earnings growth Analysis Business analyst
of the liabilities
Value = capitalized earnings + the PV of Strategy analyst
expected Abnormal Earnings Growth
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CONVENTIONAL ACCOUNTING EQUATION CONVENTIONAL ACCOUNTING EQUATION

FROM ACCOUNTING PERSPECTIVE FROM A FINANCIAL PERSPECTIVE

Assets Liabilities & Equity Assets Liabilities

Existing investments
Current assets Current liabilities
Generate Cash Flows today Assets Fixed claims on Cash Flows
Includes long-lived (fixed) & in Debt Fixed maturity
short-lived (working place Tax deductible
capital) assets
Fixed assets - tangible Long-term liabilities

Expected value that will be Residual claims on Cash Flows

Growth Equity
created by future assets Perpetual lives
Fixed assets - Intangible Equity investments

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MINI-CASE 1: DOT-COM CRASH OF 2000

1990’s: witnessed a global technology revolution that started

with the personal computer (PC) and then Internet era
Why, in the first place, do
investors need valuation skills
while there are intermediaries
(brokers, investment bankers)
who do the job for them?

Sell-side analyst’s incentives and

investors’ incentives are not fully aligned!

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MINI-CASE 1: DOT- COM CRASH OF 2000 MINI-CASE 1: DOT-COM CRASH OF 2000

This gave rise to a “new economy”: companies that base
How market responded?
their business model around exploiting the Internet, as
opposed to the “old economy” (manufacturing, retail, - The capital market seemed to think similarly: “new economy”
commodities) was the future and old economy companies would become
less relevant”
- Analysts insisted that traditional financial analysis was no
longer relevant. “The “new economy” demands new ways of
thinking.”
As a result…
From July 1999 to February 2000 (7 months)
NASDAQ COMPOSITE INDEX (heavily weighted with
technology and internet stocks) : up by 74.4%
DOWN JONES INDUSTRIAL AVERAGE (composed mainly of
old economy stocks): fell by 7.7%
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MINI-CASE 1: DOT-COM CRASH OF 2000 MINI-CASE 1: DOT-COM CRASH OF 2000

What happened next? Because it is a bubble, it has to burst!!!

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In February 2001, all these stocks were trading at one-digit number!!! 18

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MINI-CASE 2: FPT IN VN STOCK MARKET MINI-CASE 2: FPT IN VN STOCK MARKET

How did the company reach this peak?

…It was possible, given the company’s growth in Revenues,
Net Income over years before the IPO, echoed by the macro
conditions and investor expectations that time…

(in ‘000s) 2006 2005 2004 2003 2002

Revenue 21,339,751 14,100,792 8,734,781 4,148,298 1,514,960

Net Income 450,436 301,378 174,818 43,894 17,979

Investors were paying too much for growth!!!

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HOW BUBBLE WORKS WISDOM TOLD…

In a bubble, investors behave as if they are joining a Some golden rules for valuing a business
chain letter.
- They adopt speculative beliefs that are then fed on • One does not buy a stock, one buys a business
to other people • Value depends on the business model, the strategy
- These speculative beliefs are facilitated by talking
heads in the media, by analysts and poor financial reporting • Good firms can be bad buys: avoid the risk of
paying too much for a stock (ex. paying too much for
- Each person believes that he will benefit from more growth, “new knowledge”, etc..)
people joining the chain, by buying the stock and pushing
prices up
• Don’t mix what you know with speculation

 Bubble forms, only to burst…as speculative beliefs are • Stick to your beliefs and be patient, prices gravitate
not fulfilled to fundamentals, but that can take some time

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SUMMARY OF VALUATION PROCESS

SOME FINAL THOUGHTS… THE TYPICAL FLOW

Key point in investment: Understand not only what the

value is, but the sources of the value
Understanding Forecasting
A good valuation does NOT mean a precise estimate of the business the future Valuation
the value 1. Information 1. Structured
collection forecasting 1. Cost of Capital
Since valuation involves making assumptions (uncertainties) 2. Income 2. Valuation
2. Industry and
strategies Statement models
analysis forecasts 3. Valuation
3. Balance ratios
A well-down valuation is NOT timeless: Value will change 3. Accounting
analysis Sheet 4. Complications
as new information is revealed.. 4. Financial forecasts
analysis 4. Financial
analysis

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TUTORIALS

NOT YET !!!

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