Analysis of Financial Statements Investment & Evaluation of Capital Market: Cash Flow- LATEST VIEWS

IFAC has published an article THE ROLE OF CFO IN 2010 .This contains interviews of leading CFOs of international companies. One of the interviews is of CFO of SEIMENS Mr Heinz-Joachim whose observation is as follows: ACCOUNTING

IS GOING TO BE LESS RELEVENT, BUT TO KEEP A COMPANY AFLOAT IN DIFFICULT TIMES , TREASURY AND CASH ARE THE IMPORTANT THINGS , NOT BOOK PROFIT.

A. R. Suriya & Co.

Chartered Accountants

Investment & Evaluation of Capital Market: Investment and risk management Approaches to invest through Capital market Valuation of Shares Consideration to non-financial aspects in the process and Impact of Auditors Report and Directors Report on analysis results.
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VALUATION OF SHARES

Impact on EPS in case Company issues

Bonus share and Right shares

Number of shares are increased when the company issue Bonus Shares or offer Right shares. As result of increase in number of shares ,EPS is reduced because more shareholders participation in the same profits of the Company.

Practical example impact on Market Prices of shares in case Company issues Right shares Example 1 The MV of Century Papers shares was Rs.97.50 having face value of Rs.10 per share when shareholders were offered to subscribe for 100% Right shares at premium of Rs.30 per share. Revised Market price will be = Rs. 68.75 (97.50 + 40) / 2

Practical example impact on Market Prices of shares in case Company issues

Bonus shares

Example 2 Rs. 48.50 per share was market value of High noon Laborites. The Company issued 15% Bonus shares to its shareholders. Revised Market price Rs. 42.17 per share = (48.5 / 115)

Pricing of Shares when a company De-list from Stock Exchange

Price determined for buy-back of shares by the sponsors will be the highest of the benchmark price based on any of the following : a) Current Market Price b) Average Market Price (Annualized) c) Break-up Value based on historical cost d) Earnings Multiplier approach (for Profitable Companies) e) The Maximum price at which the Sponsors had purchased these shares from the open market in the preceding one year

Pricing of Shares when Delisting from Stock Exchange

Earning Multiplier approach for profitable companies.
A profitable company is a company that declares an after tax profit for the last three years. Fair value = Estimated Earnings * P/E ratio Estimated earnings should be arrived at using the weighted average earning per share of the last three years audited accounts. For this purpose, higher of, weights of 45%, 35% and 20% assigned to preceding three years respectively or latest earning per share should be used. The P/E ratio is calculated by dividing the current price by the actual earning per share. To determine the value of shares, both the earnings and the P/E ratio will have to be estimated.

a) One common task for the accountant in practice (and in exams) is to value a holding of shares, either being 100% of the issued shares in a company or a smaller proportion. b) For example, your company may be considering acquiring another company as part of its strategic plan; our job would be to calculate the highest price that should be offered for the target company.

VALUATION OF SHARES

VALUATION OF SHARESNeed for valuation Business and share valuations in both public and private companies are needed for several purposes by companies and investors, as follows. a) for a balance sheet valuation for a company. b) for determining a value of a company being acquired by another company. c) To establish terms of takeovers and mergers, etc; d) To be able to make buy and hold decisions in general;

VALUATION OF SHARESBases of valuation Shareholding may be valued in two essentially different ways either

asset based value or income based value.

The investors at Stock Market prefer earning yield method whereas in situation like Merger, Delisting or Privatizations breakup value (with revised assets and liabilities valuation) is preferred.

Value of shares by earning yield method = EPS x PE RATIO

VALUATION OF SHARES

What PE ratio is applied to EPS is a matter of judgment, and that depends on various factors - type of organization multinational future profitability - market scenario - economic policy etc

Other factors affecting analysis of financial statements

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Available in the Annual Report

Other factors affecting analysis of financial statements

Auditors Report Directors Report Post balance events Contingent liabilities Capacity utilized Un availed financing facilities
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Other factors affecting analysis of financial statements

Not available in annual report

NRL, PSO, PTC

Privatization

De-listing

Gillett, Siemens, Spencer, SAPL, MFTM Textile, Banking Sector

Foreign Exchange Policies Change in Govt Fiscal policy

Withdrawal of duty on import of sugar , tractors, car, cement

Economic and political condition of the country Capacity utilization

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Other factors affecting analysis of financial statements

Labour Policies
power to fire HBL, Steel Mills

Competitors news Future expansion plan

CEPB, LUCK, MLCF OGDC, POL

Discoveries of reserves
(Indian Government has banned expert of other countries)

Policies of other countries

cement to

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INFORMATION AVAILABE IN PRINT MEDIA

A)Business Recorder, Karachi 1-Brief recording of a public listed company is published daily. It generally covers: Nature of business Group information Market price trends Plant capacity and production achieved Demand of the products Capital commitments and contingencies Profitability Key Ratio Dividend payout trend Management of the company

Other factors affecting analysis of financial statements

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Other factors affecting analysis of financial statements

INFORMATION AVAILABE IN PRINT MEDIA 2-Stock market daily prices with price history of last 52 weeks and P/E ratio. 3-Main 5 Companies gainer and loser per share price 4-Information about Board Meeting dates and profit and dividend announced by all companies are published.

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Other factors affecting analysis of financial statements B)DAWN) Daily share prices are quoted with high law and total volume C)Business Recorders website Go to link of Search Archive to find Brief recordings of any company published in this newspaper in last 3 years. D)KSE Website : kse.net.pk E)Arif Habib Securites E)AMZ Securities (Private) Ltd F)Shezad Chamdia
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CASE STUDY : ASSET-BASED MEASURES

page 151
The following is an extract of the balance sheet of Shaheen Ltd., as at June 30 ,2004 : Rs000 Fixed assets (net book value) 45,000 Net current assets 10,000 55,000 Represented by: Rs.100 ordinary shares 20,000 Reserves 25,000 Long Term Loans 10,000 55,000 You ascertain that : a)Market value of good will ( not recorded in the books) is Rs..5m. b)Current market value of freehold property exceeds book value by Rs.3m c)All assets, other than property, are estimated to be realizable at their book value.

Required:
basis

to value an 80% holding of ordinary shares on a n assets

CASE STUDY : ASSET-BASED MEASURES

CASE STUDY SOLUTION Calculation of value of shares on an assets basis, as at June 30, 2004 Rs000 Fixed assets per balance sheet 45,000 Add : Unrecorded goodwill 5,000 Undervalued freehold property 3,000 8,000 Adjusted value of fixed assets 53,000 Net current assets 10,000 Net assets 63,000 Less : Long Term Loans 10,000 53,000 Valuation of 80% holding = (80 / 100) x 53m 42,400

Value per share = Rs. 265

Case Study Income based

DECISION FOR BUYING SHARES
CASE STUDY The data extracted from Century Paper & Board Mills Ltd for the year ended June 30, 2000 are as follows : Rs 000s Share capital issued & paid up (no of shares31421300 ), shares at face value of Rs.10 each 314,213 Reserves 401,104 Current Assets 521,703 Non Current Assets 838,970 Non Current Liabilities 176,108 Profit after taxation 95,459 Dividend per share Rs 2 Required : Decision to buy share at Rs.15/= each from Stock Exchange

Case Study- Income based

SOLUTION Break Up Value

DECISION FOR BUYING SHARES

= 715317000 31421300 15 3.04 2 15 2 3.04

= Rs.22.76 per share

Price Earning Ratio

= Rs.4.95 say Rs.5/-

Dividend Yield

= 13.33%

Dividend Payout =

66%

Case Study- Income based

DECISION FOR BUYING SHARES

COMMENTS Based on above Ratios one can recommend to buy shares @ Rs.15/- per share from Stock Market, based on the following results : the Break up value is higher by 50% then market rate. Dividend Yield is 13.33% which is better then PLS deposit rates and Dividend Payout is good 66%. PE ratio is also seems low leaving lesser risk of price down fall.
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Case Study: Valuation of Shares Other Factors As per History the rate of this Shares is ranging between 13 to 18 for last two to three year and Dividend per share has also increased from 15% to 20%. Further this company is owned by a very big giant group handling many other well known companies and the company is run by independent Professionals is another positive point. In the light of the present Economic condition of the country this company is showing a better progress.

Other Factors The Companys sales trend showing growth and Plant expansion is also under progress The other group companies are big users of corrugated cartons and paper products. Its price and quality is competitive with imported items and well accepted by users in this industry.
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Case Study :Valuation of Shares

. Decision We should buy shares of Century Papers @ Rs. 15/- per share. Sum up Beside results of ratios ,one should also look at other items like Auditors Report, Directors Report ,Contingent Liabilities, Competitors information and acceptability of this companys product by the users.

Case Study :Valuation of Shares

Case Study
Group Discussion on Pumps KSB

Participants are requested to go through all relevant pages like 121 to 135 c And answer the following questions:
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Question No 1 based on vertical and horizontal analysis

a)

b) c) d) e) f)

What the sales trend suggest ? Is the GP improving ? Are all cost under control ? Is capital structure still ok? What is dividend policy ? What is cash management

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Question No 2

Why P/E ratio is so up down since 2005

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Question No 3

Break up value in 2010 increased to Rs 62 per share over last six year from 28

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Question No 4

Is it worth buying KSB Pumps shares at Rs 25 per share ? Reply based on necessary ratios and consider other factors within financial statements, annual report and factors outside annual report
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What are other factors i which are already available in the annual report Look at page 127 for Risk Management SWOT analysis at 128

Question No 5

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Case Study

You being business executive wants to invest in a company to preserve saving as well as earn profit and also would like to avoid interest based earnings ,suggest in which company you would prefer investment . On next slide some data are given . You may consider any other company of your choice.
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Key market ratios for investment prepared in Oct 2010

FFCL MV EPS 105 13.00 Ogdcl 140 12 11.5 9% Kotadu Hubco 47 7 6.7 30 3 10 Glaxo 124 11 11.27

P/E ratio 7.92 Dividend 15% yield

12.7% 6.66% 6.4%

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Discussion : Shares of companies privatized

Question :

Why shares of companies like PTCL and NRL privatized by the Government of Pakistan were sold at a price much higher then market ?
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Group Case Study

Refer page 142- 143 and comment on ratios of chemical companies

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professional woman as my wife When I told my mom that I wanted a professional woman as my wife, she got me one; a Chartered Accountant.She uses LIFO method while taking out the refrigerated food. She thinks I am no good at figure work. Fine with me, for now she handles the budget of the house. Initially she used to send me a bill at the month end, but when I told her that I am not her client but her husband, she asks for the money in advance. The expenses had been rising steadily over the months, so one day I snooped into the papers maintained in a current file.
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No wonder! She was charging conveyance and overtime to the house budget. She is crazy, I tell her but she corrects me. No my darling, I am the auditor. I fail to see the light. Every scrap of the paper in our house is filed. She tells me as per some Ordinance she must keep a copy of every thing for at least ten years before destroying it. I am worried. The other day we had an hour-long fight. Later, I got to know that she had charged that hour to a client of hers, in the time sheet. My time was put down as unoccupied.
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She says that she says that she loves me and I tell her that I love her too. However, she never believes me. She says that there is susceptibility of it being a misstatement. Duh! She wants my representation on this! Last year our house accounts got a qualified opinion I had not kept the supporting etc. of my purchases. Not a long time back my brother's wedding was to be solemnized. Wedding cards had been sent. After some time I started receiving a steady trickle of letters. I was puzzled until my wife was explained that external evidence was more reliable. She had called for confirmations from all those to whom cards were sent.
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When she cooks, my wife at times does not go by recipe. Where the recipe says add half-teaspoon vinegar, one tsp black salt or one teacup of water, she ignores them. She says that they are not material when taken in context of whole meal being prepared. She is crazy, I tell you. Surprisingly everybody calls her an auditor, instead. I checked the dictionary and it did not state that auditor is a synonym for crazy. The dictionary must be outdated. When we got married, she had given me an Engagement Letter and I Had said how cute-how sweet.Now she gives it to me every year saying that her standards state that it must be sent anew if there is any indication
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Apart from sending me the engagement letter once again she says I can't get rid off her just like that. She says that she has the right of being heard before I appoint some one else. it seems I must keep reading one local and another English newspaper published and circulated in the vicinity of our house for more details. Phew! For a minute, I thought that we had jeopardized our going concern status. Duh! Dare I say so?? i am told by one of my female colleagues who is married to a CA that the scenario is even worse when the guy is a CA.

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Apparently he capitalised the wedding expenses as preliminary expenses and is writing it off every year.Also the time he spent dating his wife before marrying her is still under consideration for valuation under AS-26...valuation of intangible assets. So guyz please think twice....should u really marry a CA? and yes please discount it by the appropriate rate to arrive at the present value of the risk of doing so !!!!!!!

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