Financial Statement Analysis

• 主題：Financial Business Analysis (MGMT 126)
• 目標：本學期旁聽 MGMT 126，整理吸收前半學期的範圍

Porter’s Five Forces

• Industry competition: Competition and rivalry raise the cost of doing business.
• Bargaining power of buyers: Buyers with strong bargaining power can extract price concessions.
• Bargaining power of suppliers: Suppliers with strong bargaining power can demand higher prices.
• Threat of substitution: As the number of product substitutes increases, sellers have less power to raise prices and/or pass on costs to buyers.
• Threat of entry: New market entrants increase competition and companies must develop new technologies and human capital to create barriers to entry and economies of scale.

Business Metrics

0. [成長性分析] Growth

• YoY Revenue Growth
  • (This year - Last Year) / (Last Year) * 100%
  • also used on Operating Income, Net Income, EBITDA…
  • 公司若展現好的長短期營收成長率，則具備短期和長期成長動能（當然要避開一次性的賣土地或是資產的收益狀況）

1. [獲利能力分析] Profitability: important margins re profit

• 公司是否可以穩定獲利的依據

• Gross Profit (Gross Income)
  • Revenues - COGS
  • might be (1) Revenue outperform peer companies (2) COGS less than peer companies
• Gross Profit Margin（毛利率）
  • Gross Profit / Revenue (or called Sales)
  • 較適用於製造業，一般而言，製造業毛利率若能 > 20% 就算是不錯的表現，但像是一些網路、軟體公司和 IC 設計公司其研發費用佔的是大宗，營業成本不高，所以毛利通常會比較高
  • even if the gross profit is good, but you spend so much COGS → still bad
• Operating profit
  • Gross Profit - Operating Expenses
  • Operating Expenses: mostly SG&A → generate operating costs for each sales dollar
  • NOPAT: Net Operating Profit after Tax
  • 營業費用包含了管銷費用和研發費用等，營業毛利真正扣除營業費用才是真正的本業獲利。
• Operating Profit Margin（營益率）
  • Operating Profit / Sales
  • 企業本業的賺錢能力依據，排除買別家公司股票的 unrealized gain 之類的可能
• Operating Expense Margin
  • Operating Expense / Sales
  • compare with peers
• Operating Income as a Percent of Sales
  • patent protection, create barriers
  • key factor to determining the operating profitability
• Net Profit / Net Income（淨利）
  • gross profit - fixed costs（業外損益（轉投資、買賣土地廠房收入）就是營業淨利，建議 > 10%）
  • i.e., Revenues - COGS - fixed costs
  • 尤其要避開一次性的賣土地或是資產
• Net Margin（淨利率）
  • Net Margin = Net Income / Revenue

2. [獲利效率與槓桿分析] Profitability: ROA & ROE + Financial Leverage

• ROA

  • ROA = Net Income / Average Assets
  • Profitability (Profit margin): Net Income / Sales
    • 企業的獲利能力
    • 淨利率(稅後純益率)
    • 來自稅後純益代表產品競爭力佳
  • Productivity (Asset Turnover): Sales / Average Assets
    • hold the lowest level of assets → better
    • 資產使用效率高，則代表可以使用較少的資產創造更高的獲益
  • Profitability-oriented v.s. Productivity-oriented
  • Coca Cola: High PM, low AT
  • reflects (1) company performance
  • 企業運用資產賺錢的本事，一般認為 ROA 有 8% 的才算是表現不錯

• Financial Leverage

  • FL = Average Assets / Average Equity (A = L + OE)
  • 財務槓桿
  • relative use of debt v.s. equity
  • higher debt + interest payments
  • it is an inexpensive source of capital relatively (but more risk as debt)

• Solvency (償付能力) Analysis:

  Anaylsis of FL

  • Solvency refers to a company’s ability to meet its debt obligations
    • uses balance sheet data and assesses the proportion of capital raised from creditors. → e.g., L/OE Ratio
    • uses income statement data and assesses the profit generated relative to debt payment obligations. → e.g., TIE Ratio
  • Liability-to-Equity ratio: (L / OE)
    • 負債比率，金融業的會很高，因為收入來源是借貸產生的利息
    • conveys how reliant a company is on creditor financing compared with equity financing
    • variation: “Long Term Debt / Equity” (based on assumption: current liabilities are repaid from current assets. so-called self-liquidating)
    • c.f. Debt-to-Market-Cap Ratio
  • Time interest Earned (TIE) Ratio: (EBIT / Interest Expenses)
    • i.e., Interest Coverage Ratio
    • assesses how much operating profit is available to cover debt obligations.
  • Liability-to-Asset Ratio: (L/A) → less representative but still works

• ROE（股東權益報酬率）

  • Net Income / Average Equity
  • $1 EPS / $10 stock price = 10% ROE
  • ROE = ROA * (Financial Leverage)
    • 若 ROE 來自於財務槓桿則企業營運績效並不健全
  • ROE is higher → more debt, less equity (assets is given fixed) → bad
  • larger ROE means higher risk (higher reward/loss)
  • reflects (1) company performance (2) how assets are financed
  • 一家公司長期獲利表現最好的指標，投資人多半會希望一家公司過去 5 年的 ROE 可以大於 15% 或 > 10 %
  • Repurchasing shares will increase RoE (since that Shareholder’s Equity decreases)
  • 拆解 ROE 可以透視一間公司的獲利能力、資產效率、還有財務槓桿。

3.[週轉率分析] Productivity: Cash / Conversion & Capital Intensiveness

• Cash Conversion Cycle (CCC) (Merck proposed this)
  • CCC = Days of Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding
  • another way to analyze Productivity (like Asset Turnover)
  • DIO: average time to sell inventories
  • DSO: average time to collect A/R from the sale
  • DPO (minus): average time to pay the payables incurred for puchasing inventory
  • generally prefer “low” CCC → the operating cycle is generating profit and cash flow quickly (negative CCC is viewed positively)
  • Apple:
    • low DIO → carry little inventory as the products are pre-sold
    • low DSO → quick sales
    • high DPO →(p.s. it is negative) longer time to pay suppliers
    • CCC is negative = (73.6) days
    • Apple can invest the cash it receives from product sales for 73.6 days before cash is needed to pay suppliers
• Inventory Turnover
  • Inventory Turnover 存貨週轉率
  • Inventory Turnover In Days
  • 有些公司“不適合”用存貨周轉率衡量，例如金融業、營建業
  • 金融業是因為它們最大的存貨就是錢(像是銀行、保險業等)；營建業則是因為土地即為“存貨”，存貨高、存貨周轉率低很正常
  • “適合”用存貨周轉率衡量的公司有製造業、電子業、半導體業等等，這些公司只要存貨一跌價，就會損失
  • 零售業、百貨、網購這類企業也同樣可以用存貨周轉率評估
  • 存貨周轉率低：公司存貨過多賣不出去，銷售能力衰退。存貨周轉率高：公司產品銷售順利、經營績效好。
• PPE Turnover
  • PPE Turnover = Net Sales / Average of Net Fixed PPE
  • PPE Turnover in Days = 360 / PPE Turnover
  • higher PPE turnover = low capital intensity
  • should aim for “higher” PPE turnover (but is hard)
  • High Capital Intensity v.s. Low Capital Intensity
  • TSMC: low PPE turnover, high capital intensity
• Capital Intensity
  • Capital Intensity = Total Assets / Sales = 1 / (Asset Turnover Ratio)
  • higher PPE turnover = lower capital intensity
  • refers to the weight of a firm’s assets—including plants, property, and equipment—in relation to other factors of production.
  • c.f. Labor Intensive
  • Apple and TSMC are Capital Intensive (high value)
• Asset Turnover Ratio
  • Asset Turnover Ratio = 1 / (Capital Intensity)

4. [高估或低估分析] Valuation Rank (Overvalued / Undervalued)

• EPS
  • (net income - preferred stock dividend) / WASO
  • $1 EPS / $10 stock price = 10% ROE
• P/E Ratio (本益比)
  • current market price / EPS
• P/B Ratio (股價淨值比)
  • current market price / book value per share
  • book value = Owner’s Equity = A - L
  • 適用於資本密集公司，energy, manufacturing, financial business
  • e.g., 通常銀行會用 P/B Ratio 衡量，因為帳面上的 asset 比較明確。
  • 軟體公司不適合 P/B Ratio 因為很多 intangible assets (company’s brand name, goodwill, patents, and other intellectual property)
• Earning Multiples
  • $10 stock price / $1 EPS = 10x Earning multiple
  • buy stock with high multiples!
• EBITDA
  • Earnings Before Interest, Taxes, Depreciation & Amortization
  • 倒著算回去，Net Income + I + T + D + A
  • firm’s overall financial performance
• Enterprise Value (EV)
  • Market Cap + Debt (financial leverage) - Cash (idle cash)
  • Debt is a subset of Liability e.g., total liabilities = 230m, which includes 155m of debt
  • exclude the effect of financial leverage and idle cash
• EV / Revenue
  • helps compares a company’s revenues to its enterprise value. The lower the better, in that, a lower EV/R multiple signals a company is undervalued.
  • often used during acquisition
• EV / EBITDA
  • helps compares a company’s revenues to its enterprise value. The lower the better, in that, a lower EV/R multiple signals a company is undervalued.
  • a low EV/EBITDA ratio could mean that a stock is potentially undervalued
  • As of Jan. 2020, the average EV/EBITDA for the S&P 500 was 14.20.
• Dividend Yield
  • Annual Dividend / Purchase Stock Price
  • depends on the price you bought

5. [流動性分析] Liquidity Analysis

• Net Working Capital (NWC，營運資金)
  • 了解公司規模多大，推斷規模經濟、市場佔有率
  • Current Assets (high liquidity assets) - Current Liabilities
  • relevant to Operating Cycle (Cash Cycle)
• Current Ratio 流動比率
  • Current Assets / Current Liabilities，越大越好
  • more commonly used than NWC (ratios tells more)
  • prefer higher Current Ratio
  • However, an excessively high current ratio indicates inefficient asset use
  • a current ratio less than 1.0 is not always bad
    • Walmart: A cash-and-carry company with comparatively fewer accounts receivable can have potentially few current assets (and a low current ratio), but consistently large operating cash inflows ensure the company will be sufficiently liquid.
    • Apple: A company can efficiently manage its working capital by minimizing receivables and inventories and maximizing payables.
• Quick Ratio
  • Quick Assets (the quickest one in Current Assets) / Current Liabilities
  • Cash, Marketable securities, Accounts Receivable
• Free Cash Flow
  • Operating Cash Flow (Cash From Operations) - Investing Cash Flow (Capital Expenditures)
  • FCF > 0
• Free Cash Flow Yield (FCFY)
  • Free Cash Flow / Market Cap
• Free Cash Flow Margin
  • Free Cash Flow / Revenue

Valuation Methodology

1. Discounted Cash Flow Analysis

   • Income Approach
   • More free cash flow → more investment → grow more
   • Forecast the free cash flow of the company in 3-5 years, and also predice the growth rate for free cash flow.
   • Use discount rate to calculate Intrinsic Value
   • Market Value v.s. Intrinsic Value

2. Selected Public Company Analysis →

   what I will use!

   • Public Market Approach
   • Determines the value based on a comparison of the Company’s financial performance to that of observed market values and multiples of publicly traded companies deemed similar
   • consideration size, growth, profitability, and outlook
   • Company’s prior year and/or estimated next year’s EBITDA, EPS, NOPAT…→ measure income and cash flow