Financial Statement Analysis and Valuation Training Course

The current financial climate has put increased pressure on banks to make the right lending and investment decisions adding emphasis to the key role the analysts play in the process.  As a result, banks are starting to appreciate more and more the importance of the processes that lead to sound lending and investment decisions, therefore, realising the need for well trained people with the confidence to spot and communicate all the possible risks and exposures effectively.

The good news is that financial statement analysis skills can be learned, as a means of exploring future expectations. 

This course has been designed to address all the key areas of financial analysis from both a theoretical and practical perspective.  What makes a great analyst, however, is begin able to see the figures and then see beyond and behind them.  With this in mind, this course has been designed to give you a thorough grounding in financial statement analysis with a unique view on how to go beyond figures and see that bigger picture.

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INTRODUCTION

• Corporate, business unit and operational strategy compared with strategic vs business Planning
• Establishing the reporting entity vs legal entity
• Review of reporting standards: domestic (GAAP) vs international (IFRS)
• Transactional accounting vs economic perception worlds
• A structured approach for analysis (accounting analysis, financial analysis and prospective analysis)
• Types and purpose of financial reports and statements
• A structure for effective initial reading of the annual report / audited accounts
• The importance of strategic analysis for understanding life cycle context of financial statements

ACCOUNTING ANALYSIS

Review of fundamental accounting principles, concepts and mechanics underlying financial statements. Introduction to the structure and format of ‘core’ financial statements including consolidated or group accounts.

Exercise: Case study using the financial statement building blocks

Statement of Financial Position

Tangible Non-Current Assets (Fixed)

• Level required to support the business
• Basis of valuation
• Real value they add to the business
• Held off-balance sheet
• Charges/prior claims

Intangibles/Goodwill

• Valuation
• Liquidity
• ‘Void in bankruptcy’ issues
• How funded

Investments

• Type
• Liquidity
• Valuation

Working Capital

• Quality and efficiency
• Seasonality
• Distortions
• When is cash not really cash

Liabilities

• Relative level
• Maturity profile
• Structure, terms and conditions of debt facilities

Capital

• Quality and types
• Access to further capital
• Types of reserves

Income Statement

• Revenue volatility
• Operational costs and leverage
• Finance costs
• Sustainable vs comprehensive income
• Items picked up by comprehensive income
• Movements on reserves

Statement of Cash Flow:

• Direct vs Indirect methods
• Source and application of funds

Exercise: Case study analysing and interpreting the annual report and financial statements

The Dangers and Distortions of Creative Accounting

Management Accounts

• Difference between financial and management accounts
• Advantages and disadvantages
• How they fit with the business model and with the audited accounts
• What to look out for
• Assessing reliability

FINANCIAL ANALYSIS

Ratio Analysis

• Purpose and uses of ratios
• Key functional areas:
  - Operating management
  - Investment management
  - Financing decisions
  - Dividend policy
• Benchmarking / peer group analysis
• Identifying sustainable growth rate
• The impact of financial gearing and leverage on equity returns
• Different industry characteristics / profiles
• The tendencies of ratios over the long term
• Identifying the weak / moderate / strong company / very strong companies

Exercise: Case study interpreting the financial health of the business using ratios

Cashflow Analysis

• Review of the cash flow statement structure
• Identifying the primary cash drivers
• EBITDA in perspective
• Calculating free cash flow
• Specific cashflow ratios
• Establishing cash flow sustainability
• Calculating debt capacity

Liquidity Analysis

• Definition
• Credit Risk
• Operational liquidity
• Non-operational sources of liquidity
• Liquidity reserves
• External factors impacting a company’s liquidity

Exercise: Case study analysing the financial cash and credit position

PROSPECTIVE ANALYSIS

Financial Statement Forecasting

• Budgets vs forecasts
• Preparation approach
• Period of preparation
• Assumption setting
• Sensitivity analysis
• Accounting returns vs investment returns vs cashflow returns
• Monitoring and control

Exercise: Case study constructing financial forecasts

An Introduction to Valuation

• The importance of intrinsic fundamental valuation; price vs value
• Valuation techniques requiring or nor requiring forecasting
• Brief introduction to valuation techniques and the central concepts
• The use of Discounted Cash Flow (DCF) techniques such as Free Cash Flow
• The Investment horizon and competitive advantage period
• Discussions around top down or bottom up Weighted Average Cost of Capital (WACC) for company and project valuation
• Using relative multiples to value or check the reasonableness of DCF
• Introduction to Strategic Value Added (SVA) and the principles of economic profit

Exercise: Case study using previous financial forecasts for indicative valuation

This two-day course will enable you to:

• Appreciate the strategic context behind modern financial statement analysis
• Gain practical and intuitive insights through accounting analysis into what is going on in the accounts and how to interpret them
• Learn all about the dangers of distortion, the common areas and methods of affecting accounts and how to spot this
• Understand through practical financial analysis how to analyse accounts through ratio, cash flow and liquidity analysis
• Get to grips with the key reasons for prospective analysis - developing an ability to look into the future through financial statement forecasting and an introduction to valuation
• Gain an understanding of how all these pieces of the puzzle fit together