Financial Accounting

Financial Accounting

はじめに

このブログは、忘備録として、この場所をお借りして、学習内容を息子に残しておこうと思って書いています。

I am writing this blog as a reminder that I would like to borrow this place and leave my son with what I have learned.

1. Key Users of Financial Statement

• Lenders(貸し手)
• Investors
• Suppliers
• Customers
• Employees
• Competitors
• Governments
• Politicians
• News reporters

2. Part1の復習（バランスシート、ファイナンシャル?ステートメンツ、キャッシュフロー等簿記会計の基礎）

3. Financial ratio analysis

• DuPont framework (Common-size financial statements)

System approach of Identifies what's causing change of ROE

• Number of days sales in inventory (Debt-to-equity ratio)

-Financial Statement Analysis

• Relationships between statement numbers
• Trends over time

→Diagnostic(診断) Identifies problems

→Prognostic(予実) Predicts(予測) Performance

-Financial ratio

• Net income / Sales = Return on Sales → Profitability
• Net income / Stockholders equity = Return on Equity (ROE:自己資本率) 10%-20%

-Trends Analysis

• Changes from year to year
• Changes made by competitors

-Common size financial statements (percentages %)

• problem with Comparative Data (Scale, Size of numbers differ)

→ Ratio → equal to Numbers for given year / Sales for the year

(Common-size Income Statement / Revenues)

↓

Why Financial Statement Numbers Changed?

• Management
• Press release
• Financial analysis
• Industry newsletters
• Statement notes

Must analyze these items!

Common-size Balance Sheet (All items on the balance sheet / Total assets)

-Asset turnover → Efficiency (Sales / Asset)

-Assets to equity → Leverage (Assets / Equity)

ROE = Net income / Sales x Sales / Assets x Assets / Equity

(Profitability) (Efficiency) (Leverage)

-Ratios

• Current ratio = Current Assets / Current Liabilities (Measure of liquidity)

→ Bank loan contracts

• Debt = Total liabilities / Total assets (50%-60% large company)
• Debt-to-equity
• Price earnings (P/E ratio) = Market Price per share / Earnings per share (10%-30%)

4. Ratio Analysis

-Operating cycle

-Operation Cycle Ratio

• Days sales in inventory

*Inventory turnover = cost of goods sold / Average inventory for the year

*Approximate inventory throughout the year = (Beginning inventory balance + Ending inventory balance) / 2

*Days sales in inventory = 365days / Inventory turnover

• Average collection period

*Accounts receivable turnover = Sales revenue/ Average account receivables

*Average accounts receivables = (Beginning AR + Ending AR) /2

*Average collection period = 365days / Accounts receivable turnover

Operation Cycle = Days sales in inventory + Average collection period

-Days purchase in payables

• Purchases = cost of Goods Sold + Change in inventory
• Change in inventory = Ending inventory - Beginning Inventory
• Accounts payable turnover = Purchase / Average accounts payable

Days purchase in payables = 365days / Accounts payable turnover

5. The Statement of Cash Flows

-Operating cash flow matrix

• Cash Inflow and Outflow Patterns

①Young, Rapidly Growing Company (Negative)

②Steady-State Company (Positive)

• dividends

③Mature, Successful Company (Positive)

• Loan Repayment
• Share Repurchases
• Dividends

-Income statement data → Operating cash flow data

Presentation methods

• direct easy to understand
• in-direct start with income

6. Forecasting Financial Statement

-Forecast Statements

• Try out options on paper before implementing them

Ex. 20% sales up $1000 → $1200

Cost of sales up ?Need for more cash

Wages up ? ?Inventory

Utilities up ?Accounts payable

(- Loan)

(- Building space) → Depreciation

(- Income) → Tax

Assumptions

Conditions

- No new building, equipment, truck, neither employees

- No new Loans

-Forecast income statement

• Cost of goods sold $700 → $840
• Forecasted gross profit = 1200 - 840 = $360
• Depreciation Expense = $15 → $15
• Other Operating Exp. = $185 → $222
• Forecasted gross profit = $360 - $15 - $222 =$123
• Interest Exp. = $30 → $30
• Forecasted income before taxes $123- $30 = $93
• Income tax exp. =$30
• Income before taxes = $70
• Income tax rate = 30/70 = 43%
• Forecasted income taxes = $93 x 43% = $40
• Forecasted net income = 93 - 40 = $53

-Forecasted retained earnings

• Retained earnings = $60
• Dividends = $15 → $15
• Forecasted retained earnings = 60 + 53 - 15 =$98 (1)

-Forecasted assets

• Need for cash income 20% = $10 → $12
• Need for inventory inc. 20% = $400 → $480
• Need for Property, Plant, Equipment $300 → $300

Assets $792

Cash $12

Inventory $480

Property, Plant, Equipment $300

-Forecasted liabilities and equity

Liabilities and Equities $792

• Forecasted A/P(account payable) Balance = 100 x 1.2 = $120
• Loans Payable = $300 →$300
• Forecasted retained earnings = $98 (1)
• Paid-In Capital = 792 -120 -300 - 98 = $274

Real World

-A/P Balance $250 → $274 (-$26)

+$24

Real World ----- Good timing? / Bad timing?

↓

Must be changed the forecast!

Forecasted Financial Statements

• Use the accounting equation
• See if plans are practical and consistent

7. Introduction to Business Valuation

☆Asset Valuation Techniques

• Market approach Use data from market price of similar assets
• Income approach
• Cost approach

-Overview of market approach using multiples

-Overview of the cost approach (Depreciated replacement coast)

Cost Approach

Based on the replacement cost of asset

-Depreciation Formula (Straight-line:定額法)

(vs. Declining balance method:定率法)

-Overview of the income approach (Discounted cash flow)

8. Valuation : Using Multiples

Price estimated = P/E Ratio industry standard x earnings per share (*1)

Market-Based Price Multiple

-Values assets

-Earnings multiples

-Equity multiples

Ex. Apple P/B Ratio XX year

-Sales multiples

Price-to-Sales Ratio (for new company ...)

Market value of company / Sales = P/S ratio

Market value of company = Sales x P/S ratio

-Other Multiples (Ex. WhatsApp)

WhatsApp Financials (2014)

Sales $10 million

Net income -$138 million → P/B, P/E no make sense

Book value of equity -$430 million

WhatsApp P/S ratio

$22 billion / $10 million = 2,200 → also no!

Market Value Sales P/S ratio

Google, Apple no more than 5

?

x Balance sheet value → Negative equity

x Profits → Negative income

x Sales → Tiny, relative to purchase price

Facebook, Instagram, WhatsApp → number of users

Price-to-User multiple

Purchase price / Total users = Price per user

WhatsApp : $22 bil. / $400 mil. = $55

Facebook : $200 bil. / $1.39 bil. = $144

9. Valuation : Free Cash Flow

Discount Cash Flow (DCF) Analysis

Start with the sales forecast?

Ex. $1,300 savings at the end of each year

transport public amount timing of cash flows

-Basic idea : Cash flows, timing, and risk

Business Valuation

-Look at similar businesses

-Use price multiples

-Discounted cash flow (DCF) analysis

• How large will future cash flows be?
• When will cash flows occur?
• How risky are flows?

→ Size of future cash flows

→ Timing of future cash flows

→ Adjust for risk with interest rate

-Risk and interest rates

Variability in potential future outcome

General interest rate 5% (Ex.)

• Risk premium (operating risk) +5% (outline retail 5% - 10%)
• Valuing a Private Business - Liquidity risk (no need public comp.) +5%
• Other risk factor (Owner involvement) +5%

= 20%

-Forecasting cash flows

Preparing Projected Financial Statements

• Starting point? → Start with sales forecast
• Increases in assets and liabilities? → Inc. in asset and liabilities
• Increases in expenses?

-Natural Increases in Assets and Liabilities

• Sales volume 40% (Ex.)
• More cash 40%

Increased activity = Need for more cash

-Increases in Assets and Liabilities

• Long- term planning

-Increases in Expenses

• Cost of goods sold
• Other operating expenses

→related to volume of sales (変動費)

• Depreciation
• Interest
• Income tax

Reliability of a Free Cash Flow Forecast

• Longer track record
• Details
• Stable economic environment

-Simple discount cash flow

Cash flow $1,000 (Ex.) Next year

$1,050 Tow tears

$1,100 Three years

Beyond three years → Terminal year

Cash flow forecast + Risk - adjusted interest rate (20%)

Present Value of Cash Flow

10. Valuation : Comparing Models

-McDonald's history

First 10 years : Spent $3 million to perfect their French fries

-McDonald's : The numbers

Risk-adjusted discount rate 15%

• Interest rate used in a DCF analysis is important
• Use a price multiple in business valuation

1.Constant Future Dividends (model)

Business is valued as if the current cash dividend amount is a fixed payment to be received each year.

Price = Dividends / r (Interest rate)

$16.87 (*1) $2.53 0.15

2.(Growth model) Constant Dividend Growth

Dividends are assumed to grow at a constant rate, forever. This model is also known as the Gordon growth model.

Price = Forecasted dividend next year / (r - g)

r : Interest rate

g : Future dividend growth rate (Ex. Mc:0.11)

Price = ($2.53 x (1 + 0.11)) / (0.15 - 0.11) = $70.21 (*2)

-McDonald's : Earnings multiple

Market Prices

• Expectation about future earnings growth
• Required rates of return

P/E Ratio Price = Earnings x Price / Earnings

2011/12/31

Brinker Int. 16.4

Darden Restaurant 14.7 Red lobster

Starbucks 27.6

Yumi Brands 21.5 KFC, Pizza hat

McDonald's Price per share = $5.27 x 20.1 = $105.93 (*3a)

Implied Price per share = $5.27 x 21.5 = $113.31 (*3b)

(暗黙の）

-McDonald's : Discounted cash flow valuation

Free cash flow = Cash from operating activities - Cash paid for capital expenditures

-Discounted Free Cash Flow Model

• Future growth rates

→2009 - 2010 10.7%

2010 - 2011 5.1% → 7.9% (Avg.)

• Forecasting horizon

→Three years

• Terminal year

→ +No new innovative ideas

+Ignore valuation impact of growth

Free Cash Flow for McDonald's (stands at the end of 2011)

2011 Number of stocks : 1,021 billion shares

Price per share : $36,030 / 1,021 = $35.29 (*4)

-McDonald's : Lessons from a comparison of the models

Model1 (constant future dividends) $16.87

Model2 (constant dividend growth) $70.21

Model3a (average price earnings multiple) $105.93

Model3b (closest competitor price-earnings multiple $113.31

Model4 (discounted free cash flow) $35.29

Actual share price of 2011 $98.86

Estimates $16.87 ～ $113.31

Lessons

1. Equity valuation is different.
2. Price-Earnings valuation is simple and often relatively accurate.
3. The most useful part of equity valuation is what investors must believe about a stock in order to give it its current market price.

?

Use price multiples when possible.

Don't rely completely on any valuation.

Next steps

Be sure data comes from a reliable source!

*DCF法について　（インカム　アプローチに区分される）

定義：「将来稼ぐはずの利益を現在価値に換算するための割引を行ったもの」

• 大賞企業お将来の収益を事業年度単位で予測する。
• その予測収益を現在価値に割り引く。
• 現在価値＋余剰資産ー有利子負債の計算によって株主価値を求める。

Wikipedia より

ネットアセットアプローチによる清算価値をもとにした評価法である。

簿価純資産法や修正簿価純資産法、マーケットアプローチによる類似資産の市場価値を用いる。マルチプル法とは異なり、将来キャッシュフロー計画が高い確度で計算可能で客観的に妥当な割引率を算出、適用できた場合には、他の方法では得られない個別資産の特殊性を踏まえた評価が可能。

フリーキャッシュフローとは、

In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) is a way of looking at a business's cash flow to see what is available for distribution among all the securities holders of a corporate entity. This may be useful to parties such as equity holders, debt holders, preferred stock holders, and convertible security holders when they want to see how much cash can be extracted from a company without causing issuers to its operations.

Free Cash Flow

= earnings before interest and taxes (EBIT)-(1-tax rate)

(Current income statement)

+ Depreciation & Amortization

(Current income statement)

- Changes in working capital

(Prior & Current Balance Sheets : Current Assets and Liability accounts)

- Capital expenditure (CAPEX)

(Prior & Current Balance Sheets : Property, Plant and Equipment accounts)

= Net Profit

(Current Income Statement)

+ Interest expense

(Current Income Statement)

- Net Capital Expenditure

(Current Income Statement)

- Net Changes in Working Capital

(Prior & Current Balance Sheet : Current Assets and Liabilities accounts)

- Tax shield on interest Expense

(Current Income Statement)

= Profit after tax (PAT)

(Income Statement)

- Changes in Capital expenditure x (1-d*)

(Balance Sheet, Cash Flow Statements)

- Depreciation & Amortization x (1-d*)

(Prior & Current Balance Sheet)

- Changes Working Capital x (1-d*)

(Balance Sheet, Cash Flow Statements)

*d = debt / equity ratio

Cash Flow Operations

= Net Income

(Income Statement)

+ Depreciation & Amortization

(Income Statement)

- Changings in Working Capital

(Prior & Current Balance Sheet)

Levered Free Cash Flow

= Cash Flows from Operations

(Statement of Cash Flows : Section 1, from Operations)

- Investment in operating capital

(Statement of Cash Flows : Section 2, from Investment

That's all!