TOPIC 1: INDUSTRY AND STRATEGIC ANALYSIS
- Koller, Goedhart, Wessels (2010), Valuation: Measuring and Managing the Value of Companies, Wiley, 5th Edition, Ch4 Return on Invested Capital, p59-80 (Refer to as KGW)
- McGahan, How Industries Change, Harvard Business Review October 2004, p87-94
- Porter (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 2004 Export Edition, pp4-12, 36-48, 67-70
- Grinblatt & Titman, Financial Markets and Corporate Strategy, McGraw-Hill International, 1998, Ch17, How Managerial Incentives Affect Financial Decisions, p605-615
- Additional Reading: Smit and Trigeorgis (2004), Strategic Investments: Real Options and Games, Part 1, p3-33, and p39
The financial performance of any business is inextricably linked to the strategic and operating decisions of management and the industry structure in which the firm exists. This topic is designed to provide an overview of industry and corporate strategy. The aim of this topic is to review several broad frameworks of strategic analysis in order to provide context to financial analysis and forecasting.
- A framework of how management decisions translate to financial performance and corporate value will be examined.
- The subject will include an overview of Porter’s model of industry strategic analysis and Porter’s value chain analysis. However, it is often difficult to translate a Porter analysis into a detailed investment analysis.
- The subject will then review operation strategy within the context of broader industry position and how this translates into operational and financial performance. A review of the Product/Process matrix will lead into the next topic, Financial Statement Analysis, by describing the nature of operating decisions given a company’s chosen strategy.
TOPIC 2: FINANCIAL STATEMENT ANALYSIS
- Koller, Goedhart, Wessels (2010), Valuation: Measuring and Managing the Value of Companies, Wiley, 5th Edition, Ch8 Analysing Performance (p165-173)
- A. Damodaran, Leases, Debt and Value, Working Paper, Stern School of Business (April 2009)
- Sherman & Young, Tread Lightly Through These Accounting Minefields, Harvard Business Review, July-August 2001, p129-135
- Article: https://www.afr.com/brand/chanticleer/disclosure-at-heart-of-vgis-short-attack-on-corporate-travel-management-20181028-h177ul
- Additional Reading: Ross, Westerfield & Jaffe, Corporate Finance, 10th Edition, Ch 2 Financial Statements and Cashflow (p20-34) and Ch 3 Financial Statement Analysis (p44-76)
- NB. Students should possess this text from ECFS866 Corporate Finance where this chapter was covered in CF Topic 4.
- Sample Company Presentation - Western Digital Corporation.
Topic 2 will provide the basis for more detailed review of financial performance of an enterprise. Students should re-familiarise themselves with the financial statement analysis conducted in core Corporate Finance. The topic will build on prior FSA skills to be applied in case framework and across different settings in Topic 3.
- A brief refresher of cash flow analysis and financial statements will be provided.
- A detailed review of the components of the income statement (breakdown of gross margin, COGS vs SG&A, fixed and variable costs) and working capital will be conducted.
- A more detailed Du Pont review will be conducted including sensitivity of outputs to differences in operating strategy. Topic 2, paired with in-class workshop exercises in Topic 3, will be critical for the course objective in building financial analysis skills.
- Key accounting minefields will be reviewed. Accounting metrics with significant discretion in estimation or possibility of misinterpretation will be examined.
- Note: Students are encouraged to source ratio definitions from several texts as terminology may vary.
TOPIC 3: MATCHING STRATEGY TO FINANCIAL PERFORMANCE
- Chew, The New Corporate Finance: Where Theory Meets Practice, McGraw-Hill 2nd Edition, Section II. Corporate Strategy and Structure, p101-118, 127-139
- B. Henderson, Cash Traps, The Boston Consulting Group, Perspectives Reprint No. 106
- B. Henderson, The Experience Curve, The Boston Consulting Group, Perspectives Reprint No.124
- Sample blind financial statements and related ratios including one paired set from same industry
Topic 3 combines industry and competitive strategy analysis from Topic 1 and financial statement analysis from Topic 2. This is a practical, “hands-on” topic using real company information. A brief overview of Operating Strategy will be conducted followed by a series of workshop exercises using blind case examples to match financial performance across various industry groupings and company strategies.
- The aim of this topic is to help students forecast under uncertainty.
- This topic will bridge financial performance and strategy.
- The linkage between the product/process matrix and financial performance will be examined.
- A number of real-world industry case studies of FMCG (Fast Moving Consumer Goods), transport, industrial and other companies will be reviewed.
- Participation in workshop discussion will be essential for students to consolidate the investment analysis skills required for this course.
TOPIC 4: ROBUST FINANCIAL MODELLING
- Beninga & Sarig, Corporate Finance: A Valuation Approach, McGraw-Hill 1997, Ch4-5, p109-132, 134-154
- Australian Bureau of Statistics, Statistical Language, http://www.abs.gov.au/ websitedbs/a3121120.nsf/home/statistical+language .
- Fama & French, Forecasting Profitability and Earnings, Journal of Business Vol 73 No.2 (2000), p161-175
- Supplementary Revision: Ross, Westerfield & Jaffe, Corporate Finance, 10th Edition, Ch 4 DCF Valuation (p87-134)
- NB. Students should possess this text from Corporate Finance.
- Additional Recommended: Introductory text in econometrics or statistics.
DCF modelling is an often underappreciated tool due to its dependency on key inputs. Modelling involves more than extrapolating past historical performance and financial relationships. In addition to industry and strategic factors, advanced, reliable modelling requires identification of key value drivers and extrapolation of those relationships. This topic is designed to take students beyond static modelling to encompass a more dynamic - realistic - industry and company environment.
Topic 4 will cover:
- Advanced financial projections and modelling of key relationships
- Macroeconomic top down forecasting
- Understanding the modelling process and importance of the integrated financial model
- Value Driver Trees
- Improving the robustness of the model and reality checks
TOPIC 5: EQUITY VALUATION ANALYSIS
- Chew, The New Corporate Finance, McGraw-Hill 2nd Edition, reprint of Stern Stewart Roundtable on Relationship Investing and Shareholder Communication, New York, p73-100
- Chen, Harford, and Lin, Do financial analysts play a monitoring role? Evidence from Natural Experiments, Working Paper, The Chinese University of Hong Kong and University of Washington
- Gu and Wu, Earnings skewness and analyst forecast bias, Journal of Accounting and Economics 35, 5-29
- Available on Web: Muddy Waters Research, Sino-Forest Corporation Report, 2 June 2011
DISCLAIMER: A number of equity broker reports will be used in this topic. These are not to be construed as investment recommendations and are for illustrative purposes only.
This topic will look at the functions of an equity analyst with a focus on applying the checks and balances discussed in Topic 4 on a financial model. The topic will review the components of actual analysts’ reports by way of example.
- Review components of an equity valuation analysis.
- Link in use of DCF vs market multiples between short term trading and long term investment valuation focus.
- Examine ROIC over time under sensitivity and scenario analysis.
- Discuss funding risks and link back to capital structure strategy from Corporate Finance.
TOPIC 6: RISK TO CASHFLOWS AND CREDIT ANALYSIS
- Hull, J., Predescu, M., White, A. The relationship between credit default swap spreads, bond yields, and credit rating announcements, Journal of Banking and Finance, Vol. 28, 2789-2811
- Penman, Financial Statement Analysis and Security Valuation, 3rd Ed, p720-737
- M. Grinblatt & Sheridan Titman, Financial Markets and Corporate Strategy, McGraw-Hill International, 1998, Ch16, Capital Structure and Corporate Strategy, p577-597 and Ch17, How Managerial Incentives Affect Financial Decisions, p615-629
- Standard & Poors, 2008 Corporate Criteria: Analytical Methodology, April 15, 2008, 983195 | 301932338
- Standard & Poors, Methodology: Business Risk/Financial Risk Matrix Expanded, September 18 2012, 1012975 | 301932338
- Moody's, Rating Methodology: Global Regulated Electric Utilities, March 2005, Report Number: 91730
- Moody's, Rating Methodology: Global Manufacturing Industry, December 2010, Report Number: 129387
Topic 6 examines analysis of risk to cashflows and how credit policy impacts operating performance. The topic examines particular ratios related to debt covenants and measures of potential credit risk or default. A review of rating agency methodology and credit protection mechanisms will be provided. A discussion on the balance between equity and credit demands, and the impact on strategy and industry structure will round out the topic.
- Financial ratios, default prediction and credit scores and ratings.
- Credit related concept of risk and calculation of credit specific ratios.
- Role and background of rating agencies.
- Discuss some of the protections to debt capital.
- Linkages between credit risk, strategy and industry framework.