Professional Documents
Culture Documents
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Introduction
Application: Evaluating Past Financial Performance
Application: Projecting Future Financial Performance
Application: Assessing Credit Risk
Application: Screening for Potential Equity Investments
Analyst Adjustments to Reported Financials
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How do the level and trend in a companys profitability, efficiency, liquidity, and
solvency compare with the corresponding results of other companies in the same
industry? How can the differences be explained?
What aspects of performance are critical for a company to successfully compete in
its industry? How did the company perform relative to those critical performance
aspects?
What is the companys business strategy? Do the financials reflect the strategy?
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In 2009 and 2010, Apple was very liquid as indicated by the high
current ratio
War chest!
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Forecast Expenses
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Curriculum Examples
Example 3: Using historical operating profit margins to forecast operating profit
Appropriate for stable diversified firms like JNJ
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Leverage ratios
Coverage ratios
Debt / EBITDA
Free cash flow / Debt
Liquidity
See Examples 7 and 8
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P/E < 15
Assets / Equity < 2
Dividends > 0
Meeting all three criteria simultaneously
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Backtesting: Evaluate how a portfolio based on a particular screen would have performed
historically. When back-testing:
Survivorship bias exists if delisted companies are not considered
Look-ahead bias exists if database includes financial data updated for restatements;
mismatch between what investor would have actually know at the time of the investment
decision and the information used in backtesting
Data-snooping bias might exist if excessive analysis is applied to the same data set
Example 9
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Inventory
FIFO Inventory = LIFO Inventory + LIFO Reserve
Example 10: Adjustments for company using LIFO
Example 11: Adjustments to inventory values before comparing current ratios
Goodwill
Company A and Company B are identical except that A has grown through acquisition and B has
grown organically. What is the impact on goodwill and on total assets?
Use tangible book value when making comparisons
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Calculation
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Summary
Evaluate a companys past financial performance and explaining how
strategy is reflected in the financials
Project net income and cash flow
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Conclusion
Read summary
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