Professional Documents
Culture Documents
Revisiting Financial
Statement Analysis
Topic 5.1
Week 9
Learning Objectives
Memorising not
required…
Who uses financial statement analysis?
Qantas
Cathay
Pacific
Singapore
airlines
Yes!
If you calculate the PE ratio from price and
earnings per share which are both in the same
$AUD $SGD currency, the currency unit cancels out and you
get a number that has no unit scale. As such,
P/E = AUD5.80 P/E = SGD10.34 you can compare the PE ratios of companies
AUD0.46 SGD0.29 from different countries.
= 18.47 = 35.655
Comparative Analysis
Which competitors would be best?
20
Think about Apple
What is the comparable firm for Apple AAPL?
• Desktops /Laptops/ Tablets : computing devices
• Mobile phones: telephony devices
• Portable music: consumer electronic devices
• Music, Apple store: online retail
21
What is the Comparable Firm for Apple ?
22
Peer comparison – past exam question (from 2011s2)
Question 2: Give One (1) reason why your choice of peer comparison
company may not be appropriate.
Hints:
Would depend on choice of peer comparison
Should be along the lines of that AAPL has a broad product/
service range that other companies do not match well
AAPL vs HPQ: Understand the Business Model
Why is AAPL not a good choice as a competitor for HPQ?
AAPL
• Outstanding industrial design
• Proprietary operating systems locks customers in
• Seamless integration among products/ services
• Has cult following
HPQ
• Products have become commoditised
• Customers switching to convergence devices, cloud based
computing?
Analysis of the Business Model is part of a complete business analysis method
Fiat vs Ferrari
30
AAPL vs HPQ: Special Circumstances
31
Past exam question: Session 2, 2011 Final (Supplementary)
33
Ratio formulas are provided in the exam, as in
workshop/tutorial questions
They are not important to memorise, because we are only
interested in application and interpretation
There are many acceptable versions of the same ratio
• For example, ROA may be EBIT/ASSETS, or
NPBT/ASSETS, or NPAT/ASSETS
• Need to be flexible in applying ratios appropriate
to the context
Ratio Analysis: Profitability Ratios
40
PER
Historical
• Most recent completed financial year
• ttm: trailing 12 months
Forward
• Current financial year
Forecast
• Some financial period in future
• Usually 3 or 5 years out
Past Exam Question - Session 2, 2011 Final (Supplementary)
Question:
You are considering the investment in Apple Inc. (AAPL). What would
be your price target for AAPL? Show your calculations and round to
nearest cent. (2 marks)
Answer:
Using price & PE ratio as at 23 November 2011:
$366.99 x 19.43 (GOOG PE) /13.26 (AAPL PE) = $537.75
Recommendation: BUY
42
Past Exam Question - Session 2, 2011 Final Exam
(Supplementary)
(a) You are considering the investment in Apple Inc. (AAPL). What
would be your price target for AAPL? Show your calculations and
round to nearest cent. (2 marks)
Answer:
Using price & PE ratio as at 23 November 2011:
$366.99 x 6.05 (HPQ PE) /13.26 (AAPL PE) = $167.44
Recommendation: SELL
Can’t just apply valuation analysis blindly, need to think about future
43
growth prospects
Price Earning Growth Ratio
PEG Ratio = PE / Earning’s Growth %
• PEG > 1: Overvalued (expensive)
• PEG < 1: Undervalued (cheap)
23/11/2011 AAPL GOOG HPQ RIMM Industry
Price US$ 366.99 570.11 25.78 16.20 N/A
P/E (ttm): 13.26 19.43 6.05 2.96 13.55
PEG (5 yr
0.57 0.82 0.88 0.67 1.44
expected):
Look at this
now
Next week’s
lecture
Macroeconomics
• Impact of Global Financial Crisis on global economic growth, and as such
individual company’s growth prospects
Question:
In financial statement analysis, it is important to consider special
situations or context that may affect your analysis. Give two (2)
reasons from the information provide or from your general
knowledge that may affect your decision. (4 marks)
Suggested answer (at the time):
The Global Financial Crisis may make consumers more cautious
about spending discretionary income, and thus limit the demand for
AAPL’s products, and the company’s growth
49
Trend Analysis/ Sensitivity Analysis: “What if”
What if?
1. Comment on the company’s profitability, asset management, liquidity and financial structure.
2. Why could ROE and ROA move in different directions?
3. What caused the fall in ROA?
4. What caused the fall in asset turnover?
5. What caused the increase in the current ratio?
Limitations of financial statement ratios
• The quality of ratios is sensitive to any lack of consistency
in the accounting methods used by a company over time.
• Ratio comparisons across companies can be misleading if
the companies use different
accounting methods.
• Ratio comparisons across companies can be misleading if
the companies operate in different industries or are
substantially different in other ways.
Limitations
• The usefulness of ratios is based upon the
belief that past relationships are useful in
forecasting future performance.
• Failure to adjust for inflation or market values
results in current dollar amounts often being
compared to past dollar amounts.
Limitations
• Year end data may not be reflective of the typical
situation of the company. Furthermore, management
may attempt to improve certain ratios by, for example,
using cash to pay off short term borrowings (improves
the current ratio).
• Ratios tell only part of the story. To understand the full
story requires a deeper understanding of a company
and its industry.
Example: Company PQZ has the following data
ROA = 10% Current ratio = 2 : 1
What is the effect of each of the following transactions on the above ratios?
Transaction Effect on ROA Effect on Current Ratio
Borrowed $200 000 from the bank, repayable Decrease Increase
in two years