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- 1. Financial Statement Analysis Session 1 PGE L3 S2– Elective 2024 Sujesh Nambiar
- 2. Course objective • Uses a company’s financial statements as the starting point • In order to map the company’s actions to create value into meaningful financial ratios • And use the ratios to analyze past financial performance and the potential for value creation Introduce you to an analysis framework that: 2
- 3. Learning goals: financial analyst • How to read and analyze financial statements • What are the key financial drivers of value creation for a company • How strategic decisions map into a company’s financial ratios • How to benchmark financial performance of a company over time and with peers • How financial performance is linked to a company’s valuation • How to effectively communicate your ideas and their impact on company value to your future colleagues, financial executives, clients, etc. Introduce you and help you appreciate and understand: 3
- 4. Course plan 4 • Review basics of accounting • Reading financial statements • Value creation and its financial drivers: 3 tenets of value creation • Cash flow analysis and working capital • Ratio analysis: ROIC framework, solvency and liquidity ratios • Linking financial performance to company value
- 5. What we will not cover 5 • Strategic analysis of a company or industry • Forecasting and details of valuation techniques • Specialized applications of FSA
- 6. What is required of you • Hands on practice is essential both during and after class – the more the better • Class attendance is mandatory • Housekeeping: • Punctuality: be seated 5 minutes before the start • Q&A: at the start and end of class • Communication: email and Teams • No-go zone: plagiarism in your submissions or cheating in exams 6
- 7. Course evaluation 7 • Assignments: 30% • Quiz: 70%
- 8. Additional reading / reference • Valuation. Measuring and Managing the Value of Companies. Koller, Tim; Goedhart, Marc, and Wessels David. Wiley, 6th Edition. 2015. • Business Analysis & Valuation. IFRS Edition. Palepu, Khrishna; Healy, Paul, and Peek Erik. Cengage Learning, 2016. • Equity Valuation & Analysis. Lundholm, Russell, and Sloan, Richard. 4th edition, 2017. • Financial Statement Analysis and Securities Valuation. Penman, Stephen H. McGraw Hill International Edition. 5th Edition. 2013. Course not based on any particular text 8
- 9. About myself Sujesh Nambiar • Asst. Professor, Accounting, Law and Finance department at GEM • PhD in Accounting (INSEAD, France) and MBA in Finance (XIMB, India) • Research: Economic role of accounting information in banks • Industry work experience: McKinsey & Company 9
- 10. About myself Sujesh Nambiar • Asst. Professor, Accounting, Law and Finance department at GEM • PhD in Accounting (INSEAD, France) and MBA in Finance (XIMB, India) • Research: Economic role of accounting information in banks • Industry work experience: McKinsey & Company 10 Reachable on: - Email: sujesh.nambiar@grenoble-em.com (preferred, esp. if urgent) - Teams (response could be delayed) - Meeting request: by appointment & only on Teams
- 11. Today’s session plan ➢ Course overview ➢ Recap of Accounting basics ➢ Class exercise 11
- 12. Accounting Recording Reporting Analyzing Set of rules and vocabulary 12
- 13. Accounting Recording Reporting Analyzing Set of rules and vocabulary 13
- 14. Financial Accounting Recording Reporting Analyzing Set of rules and vocabulary 14 Focus of the basic accounting course in S1
- 15. Financial Accounting Recording Reporting Analyzing Set of rules and vocabulary 15 Focus of the basic accounting course in S1
- 16. Financial statement Analysis Recording Reporting Analyzing Set of rules and vocabulary 16 Focus of the current course
- 17. Financial Accounting Recording Reporting Analyzing Set of rules and vocabulary 17
- 18. Overview of financial statements 1st Jan. Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Opening Balance sheet INCOME STATEMENT 1st Jan – 31st Dec Sales Revenue Expenses Net Income / Profit less = 31st Dec Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Closing Balance sheet Cash flow statement CASH FLOW STATEMENT 1st Jan – 31st Dec 18
- 19. Balance sheet 1st Jan. Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Opening Balance sheet INCOME STATEMENT 1st Jan – 31st Dec Sales Revenue Expenses Net Income / Profit less = 31st Dec Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Closing Balance sheet Cash flow statement CASH FLOW STATEMENT 1st Jan – 31st Dec 19
- 20. Income statement 1st Jan. Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Opening Balance sheet INCOME STATEMENT 1st Jan – 31st Dec Sales Revenue Expenses Net Income / Profit less = 31st Dec Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Closing Balance sheet Cash flow statement CASH FLOW STATEMENT 1st Jan – 31st Dec 20
- 21. Cash flow statement 1st Jan. Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Opening Balance sheet INCOME STATEMENT 1st Jan – 31st Dec Sales Revenue Expenses Net Income / Profit less = 31st Dec Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Closing Balance sheet Cash flow statement CASH FLOW STATEMENT 1st Jan – 31st Dec 21 Cash & equivalents Cash & equivalents
- 22. Overview of key financial statements 1st Jan. Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Opening Balance sheet INCOME STATEMENT 1st Jan – 31st Dec Sales Revenue Expenses Net Income / Profit less = 31st Dec Equity Long term liabilities Current liabilities Non-current assets Current assets Cash & equiv. Assets Liability & Eq. - Closing Balance sheet Cash flow statement • Balance sheet: At a point in time • Income Statement: Over a period • Cashflow Statement: Over a period 22
- 23. Equity LIABILITIES & EQUITY ASSETS = Overview of a typical balance sheet Liabilities What the company OWES What the company OWNS • Owner’s / shareholder’s investment in the business • No guarantee of interest or principal • No ownership in the company • Need to be repaid as per an agreed schedule • There may or may not be an interest payment required • Anything the company owns that can be used to generate income in the future 23
- 24. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS • Anything the company owns that can be used to generate income in the future • Owner’s / shareholder’s investment in the business • No guarantee of interest or principal • Payable after 1 year • Payable within 1 year 24
- 25. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS • Anything the company owns that can be used to generate income in the future • Owner’s / shareholder’s investment in the business • No guarantee of interest or principal Bank borrowings Pension liabilities • Payable within 1 year 25
- 26. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS • Anything the company owns that can be used to generate income in the future • Owner’s / shareholder’s investment in the business • No guarantee of interest or principal Bank borrowings Pension liabilities Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 26
- 27. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS • Anything the company owns that can be used to generate income in the future Bank borrowings Pension liabilities Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 27 Share capital / Paid up capital Retained earnings
- 28. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 28 Share capital / Paid up capital Retained earnings
- 29. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Cash & equiv. Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 29 Share capital / Paid up capital Retained earnings
- 30. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Cash & equiv. • Long term investments with a useful life of more than a year Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 30 Share capital / Paid up capital Retained earnings
- 31. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Cash & equiv. • Long term investments with a useful life of more than a year • Assets that will be used up and converted to cash within a year Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 31 Share capital / Paid up capital Retained earnings
- 32. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Cash & equiv. • Long term investments with a useful life of more than a year • Assets that will be used up and converted to cash within a year • Cash or quickly convertible to cash Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 32 Share capital / Paid up capital Retained earnings
- 33. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Non-current assets Current assets Cash & equiv. • Assets that will be used up and converted to cash within a year • Cash or quickly convertible to cash Land and building Machinery and equipment Patents & trademarks Financial investments Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan 33 Share capital / Paid up capital Retained earnings
- 34. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan Non-current assets Current assets Cash & equiv. • Cash or quickly convertible to cash Land and building Machinery and equipment Patents & trademarks Financial investments Accounts / trade Receivables Tax receivables Inventory Other current assets 34 Share capital / Paid up capital Retained earnings
- 35. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Bank borrowings Pension liabilities Accounts / trade Payables Tax payable Salary payable Short term loan / short term portion of long-term loan Non-current assets Current assets Cash & equiv. • Cash or quickly convertible to cash Land and building Machinery and equipment Patents & trademarks Financial investments Accounts / trade Receivables Tax receivables Inventory Other current assets 35 Share capital / Paid up capital Retained earnings
- 36. Equity LIABILITIES & EQUITY ASSETS = What is a Balance sheet Long term liabilities Current liabilities What the company OWES What the company OWNS Non-current assets Current assets Cash & equivalents • Long term investments with a useful life of more than a year • Assets that will be used up and converted to cash within a year • Cash or quickly convertible to cash 36 • Owner’s / shareholder’s investment in the business • No guarantee of interest or principal • Payable after 1 year • Payable within 1 year
- 37. Financial view of business performance 37 Equity Debt Source of capital
- 38. 38 Equity Debt Source of capital Liability & Eq. Financial view of business performance
- 39. 39 Equity Debt Use of capital Source of capital Liability & Eq. Assets Financial view of business performance
- 40. 40 Equity Debt Non- current assets Current assets Cash & equiv. Use of capital Source of capital Liability & Eq. Assets Financial view of business performance
- 41. 41 Equity Debt Non- current assets Balance sheet Use of capital Source of capital Liability & Eq. Assets Current assets Cash & equiv. Financial view of business performance
- 42. 42 Revenue generation Equity Debt Non- current assets Balance sheet Use of capital Source of capital Liability & Eq. Assets Current assets Cash & equiv. Financial view of business performance
- 43. 43 Revenue generation Costs / expenses Profit Equity Debt Non- current assets Balance sheet Use of capital Source of capital Liability & Eq. Assets Current assets Cash & equiv. Financial view of business performance
- 44. 44 Revenue generation Costs / expenses Profit Return on Investment = Profit / Invested capital Equity Debt Non- current assets Balance sheet Use of capital Source of capital Liability & Eq. Assets Current assets Cash & equiv. Financial view of business performance
- 45. 45 Revenue generation Costs / expenses Profit Revenue 20 Raw material cost - 4 Salary expense - 2 Depreciation - 4 Interest expense on loan - 1 Income tax - 3 Net income / profit 6 EBT (Earnings before tax) 9 EBIT (Operating income) 10 Income statement Equity Debt Non- current assets Balance sheet Use of capital Source of capital Liability & Eq. Assets Return on Investment = Profit / Invested capital Current assets Cash & equiv. Financial view of business performance
- 46. Analyzing business performance Economic reality Accounting system Financial reports Balance sheet Income statement Cash flow statement Notes to accounts 46 Analyze financial performance
- 47. Performance from who’s perspective? Economic reality Accounting system Financial reports Balance sheet Income statement Cash flow statement Notes to accounts 47 Analyze financial performance • Shareholder/ Investor • Prospective investors/ Acquirers • Banks/ debt holder • Government • Regulators • Suppliers/ Customers
- 48. Investors look for value creation Economic reality Accounting system Financial reports Balance sheet Income statement Cash flow statement Notes to accounts 48 Analyze financial performance • Shareholder/ Investor • Prospective investors/ Acquirers • Banks/ debt holder • Government • Regulators • Suppliers/ Customers
- 49. Questions? 49
- 50. Today’s session plan ➢ Course overview ➢ Recap of Accounting basics ➢ Class exercise 50
- 51. 51 Let us get to some ‘detective business’ BALANCE SHEET Company 1 Company 2 Company 3 Company 4 Company 5 Cash and marketable securities 43% 30% 26% 15% 48% Receivables 7% 14% 10% 0% 9% Inventories 0% 1% 11% 0% 0% Other current assets 2% 4% 0% 23% 2% PPE 27% 11% 37% 2% 26% Goodwill 17% 0% 9% 0% 8% Other intangibles 2% 0% 3% 57% 1% Investments and financial assets 0% 30% 0% 0% 6% Other assets 2% 10% 4% 3% 0% Total Assets 100% 100% 100% 100% 100% Accts Payable + Current Liabs 7% 25% 31% 22% 14% Unearned Revenue 0% 2% 6% 3% 1% Debt 1% 31% 30% 40% 2% Other non-current Liabilities 6% 15% 7% 15% 7% Common Stock 44% 13% 16% 9% 20% Retained Earnings 43% 14% 12% 11% 57% Other Equity -1% 0% -2% 0% -1% Total Liabilities and Equity 100% 100% 100% 100% 100% INCOME STATEMENT Company 1 Company 2 Company 3 Company 4 Company 5 Revenue 100% 100% 100% 100% 100% Cost Of Goods Sold 17% 61% 60% 65% 42% Selling General & Admin Exp. 20% 7% 23% 19% 17% R & D Exp. 18% 6% 12% 8% 16% Net Interest Expense 1% 1% 0% 0% 1% Other Items 0% 0% 0% 0% 1% Income Tax Expense 6% 4% 1% 0% 2% Net Income 38% 21% 4% 8% 21%
- 52. 52 Let us get to some ‘detective business’ BALANCE SHEET Company 1 Company 2 Company 3 Company 4 Company 5 Cash and marketable securities 43% 30% 26% 15% 48% Receivables 7% 14% 10% 0% 9% Inventories 0% 1% 11% 0% 0% Other current assets 2% 4% 0% 23% 2% PPE 27% 11% 37% 2% 26% Goodwill 17% 0% 9% 0% 8% Other intangibles 2% 0% 3% 57% 1% Investments and financial assets 0% 30% 0% 0% 6% Other assets 2% 10% 4% 3% 0% Total Assets 100% 100% 100% 100% 100% Accts Payable + Current Liabs 7% 25% 31% 22% 14% Unearned Revenue 0% 2% 6% 3% 1% Debt 1% 31% 30% 40% 2% Other non-current Liabilities 6% 15% 7% 15% 7% Common Stock 44% 13% 16% 9% 20% Retained Earnings 43% 14% 12% 11% 57% Other Equity -1% 0% -2% 0% -1% Total Liabilities and Equity 100% 100% 100% 100% 100% INCOME STATEMENT Company 1 Company 2 Company 3 Company 4 Company 5 Revenue 100% 100% 100% 100% 100% Cost Of Goods Sold 17% 61% 60% 65% 42% Selling General & Admin Exp. 20% 7% 23% 19% 17% R & D Exp. 18% 6% 12% 8% 16% Net Interest Expense 1% 1% 0% 0% 1% Other Items 0% 0% 0% 0% 1% Income Tax Expense 6% 4% 1% 0% 2% Net Income 38% 21% 4% 8% 21% Facebook? Apple? Amazon? Netflix? Google?
- 53. Home assignment 1- for next session 53 • Prepare the common size balance sheet and income statement for the following 5 companies for the year 2021: • Facebook • Apple • Amazon • Schneider Electric • ABB Group • Use consolidated financial data • Show both the actual values and the common size (percentages) • Please prepare the answers in MS Excel file • To be submitted before the start of session 3 • Individual submission • Mode of submission: will be informed later