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  4. Financial Statement Analysis

Financial Statement Analysis

Objectives

  • Getting familiar with companies financial statements, including understanding the main statements, how they are connected and the meaning of their main captions;

  • Using the information on the financial statements for decision-making, both from a managerial point of view and from an investment point of view, with focus given to understanding value creation based on information from the financial statements;

  • Producing a valuation about the company using the information based on the financial statements (and other relevant sources) while applying fundamental analysis techniques.

General characterization

Code

2222

Credits

3.5

Responsible teacher

Francisco Martins

Hours

Weekly - Available soon

Total - Available soon

Teaching language

English

Prerequisites

n/a

Bibliography

Valuation: Measuring and Managing the Value of Companies, Koller, T., Goedhart, M., and Wessels, D., 5th Edition, 2010, McKinsey & Company Inc. (good introduction to valuation).

Financial Statement Analysis and Security Valuation, by Penman S. H., 5th edition, 2013, McGraw-Hill.

Business Analysis and Valuation: IFRS Edition, by Palepu K., Healy P., and Peek E., 3rd Edition, 2013, South-Western.

Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, by Wahlen, J., Baginski, S., and Bradshaw, M., 8th Edition, 2014, Southwestern Publishing.

The Analysis and Use of Financial Statements, by White G., Sondhi A., and Fried D., 3rd Edition, 2004, Wiley.

Resources

Relevant materials, such as PowerPoint slides and useful spreadsheets, will be posted on Moodle during the course.

Teaching method

At home, students are expected to use the audiovisual materials prepared for the course to learn the theory they need to put in practice later. Upon finishing each set of materials, students will be asked to complete a short, simple formative quiz with some basic questions about the materials they just watched. These quizes do not count for grading purposes but, in order to advance to the next set of materials, students need to repeat them as long as it takes until they get 100%. All of this can be done at the student's pace, without a pre-set schedule, as long as it happens within a particular week. Students will meet with the instructor once a week for what will be a series of presentations and challenges to put in practice the theory they are learning, always using real examples of real companies from all over the world. These presentations and challenges will all be done in groups and students will be asked to do some preparation work prior to these on-site sessions. Participation in the discussions is expected and will be highly valued. All the work that is presented in class will be assessed not only by the instructor but also by the rest of the class, using a peer-to-peer approach.


Evaluation method

Final Exam: 50%

Challenges: 25%

Company Analysis Groupwork: 25%

Subject matter

The course has a practical content and will deal with a variety of topics pertaining to the analysis of financial statements and companies as a whole. These include: an overview of the financial statements themselves and how to read them; value creation metrics (return on invested capital and growth) as well as impacts of understanding value creation; discounted cash flow methodology with focus on reformulating the financial statements to better understand the company; and ratio analysis, both with the purpose of analyzing the current situation of the company with regards to decision making and to produce forecasts for a company’s valuation.