AFM 212 Week 2 Lecture -post PDF

AFM 212 Week 2 professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 2 Framework for Analysis and Valuation Porter’s 5 forces Indus...

AFM 212 Week 2 professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 2 Framework for Analysis and Valuation Porter’s 5 forces Industry Analysis Economic Cycle Business Model Competitive Business Analysis advantage Business Cycle Financial Ratio Analysis Statement Common Size Statement Analysis Analysis Financial Forecasting and modeling Valuation/Credit DCF/Multiple Analysis Collateral professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Item 1 – Business § Regulation S-K § Requires a description of the general development of the business of the registrant during the past five years, or such shorter period as the registrant may have been engaged in business. § Requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant’s dominant segment or each reportable segment about which financial information is presented in its financial statements. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Who is this? § They say that they are (from S-1): § Our Story § We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness. We have built a worldwide platform that supports growth, shared experiences and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure. We believe our company has the power to elevate how people work, live and grow. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Who is this? § They actually are: § Fundamentally, this company engages in “rent arbitrage” by signing long term leases, generally 15 years, at one rate and subleasing the space to SMEs and Enterprise members at with shorter durations. While the cost per desk is lower for the member, the aggregate rent this company receives is higher for the space due to the density. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Understand the business § Using plain English § Articulate how the company makes money § Identify the type of economic frictions the company addresses in the economic system professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Understand the business – from FS § What is McDonald’s business? § Not fries, not burgers, but real estate! professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Understand the business – from FS § What is the airlines’ business? § Profit/value is mostly from the loyalty programs professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Understand the business – from FS professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE ©Cambridge Business Publishers SWOT Analysis 10 professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 11 Analyzing Competitive Advantage § Does the company actually have a competitive advantage, and, if so, what factors explain it? § Is the competitive advantage sustainable? § If the company has no competitive advantage, does its management have a plan to develop a sustainable competitive advantage that can be implemented in an acceptable period of time and with a reasonable amount of investment? professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 12 Achieving Competitive Advantage Barriers to entry § Patents, copyrights and other legal protections § Regulatory and licensing barriers § Scarce resources Product / Service differentiation § Technological innovation and Product design § Marketing, distribution, and after-sale customer support § Market segmentation Cost leader § Access to low-cost raw materials or labor § Manufacturing or service efficiency § Manufacturing scale efficiencies § Greater bargaining power with suppliers § Sophisticated IT systems professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE BUSINESS MODEL Product Governance Business and/or and Description Competition Customers Supplier Ownership Service Management Board of Major Major Key Suppliers Product profile Owners Directors Competitors Customers INDUSTRY Management Credit Terms and Directors' Background and Experience Customer Market share Sales driver Owner structure concentration Bargaining Compensation Power Life cycle stage Marketing Competitive Life cycle strategy Alternative Owners advantage Distribution involvement process source of Successor Plan supplier professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 14 Framework for Analysis and Valuation Porter’s 5 forces Industry Analysis Economic Cycle Business Model Competitive Business Analysis advantage Business Cycle Accounting Financial Adjustment Statement Ratio Analysis Analysis Common Size Financial Forecasting and modeling Valuation/Credit DCF/Multiple Analysis Collateral professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Ratio comparison § Time-series comparison (Horizontal Analysis) § Comparing ratios with the levels in prior periods § Normal versus abnormal: Identifying changes in performance and detecting the underlying cause § Triangulate the ratios with structural changes § Cross-sectional comparison § Comparing a firm’s ratios with competitors § Also called comparative analysis (or comps for short) § Triangulate the ratios with corporate strategy professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Ratio comparison § Remember one purpose is to forecast future § Ratios tend to mean-revert § If they are unusually high à tend to fall § If they are unusually low à tend to rise § Caveat: this is a general empirical pattern for many ratios in a large sample of firms § The speed and completeness depend on the ratio and the specific firm. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Common Size Analysis § Common Size (Vertical) Statements § All F/S accounts expressed a % of one account § POLL 1 § Which should be used as the common denominators for common-size I/S and B/S, respectively? § Revenue, Assets § Revenue, Equity § Net income, Assets § Net income, Equity professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Common Size (Vertical Statements) § Advantages: § Allows meaningful comparisons over time while “controlling” for changes in firm size (measured as either sales or total assets). § Allows meaningful comparisons for firms using different currencies § Allows meaningful comparisons between firms. § Caution – changes in expenses may not be directly related to changes in sales. § Need to dig deeper to understand reasons underlying changes. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Percentage change (Horizontal) Statements § Horizontal Financial Statements § Amounts are expressed as a percentage of a base year (fixed or rolling) § Focus is on growth in each item over time § Caution – small (immaterial) accounts, especially on the balance sheet, can often be associated with huge percentage changes. § That doesn’t mean they are important. professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Discussion: best practices § How to calculate ratios: § With both B/S and I/S accounts, such as ROA (R = NI)? § With only B/S accounts, such as debt to equity ratio? § With only I/S accounts, such as profit margin? § Three options for B/S accounts: § Using only beginning balance § Using only ending balance § Using both beginning and ending balance professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Discussion: best practices § If the purpose is to evaluate the performance in a period of time (e.g., year or quarter): § Using I/S accounts in that period § Using time-weighted B/S – a shortcut is to average the beginning and ending balance § Arguments for using ending balance § With long time-series, it does not matter much if used consistently § One more year of data § Easier to calculate § More timely professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Caveats of ratio analysis § No “correct” way to compute many ratios § How to calculate ROE? Leverage? § Ratios do not provide answers – just tell you where to look for answers § Rule of thumbs do not always work § Managers know that investors use ratios. § “Window-dressing” professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE © Cambridge Business Publishers, 2021 23 Framework for Analysis and Valuation Porter’s 5 forces Industry Analysis Economic Cycle Business Model Competitive Business Analysis advantage Business Cycle Financial Ratio Analysis Statement Common Size Statement Analysis Analysis Forecasting and Financial Valuation/Credit modeling Analysis DCF/Multiple professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Forecasting Financial Numbers Forecasting involves formalizing our predictions and stating them as financial projections. Quality of our forecasts depends on two factors: 1. Quality of our prior analysis § How well we understand the company’s business § How thoroughly we examined and adjusted the company’s financial statements 2. Realistic and achievable assumptions § Objectively examine what evidence supports, or challenges, the forecast assumptions 24 professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE Forecasting Order 1. Income statement 2. Balance sheet 3. Statement of cash flows Why this forecasting order? BECAUSE each statement uses information from the preceding statement(s). 25 professionals go #beyondideas SCHOOL OF ACCOUNTING AND FINANCE