Financial Reporting and Analysis (Steve Madden)
Conduct fundamental analyses to estimate intrinsic value of the firm.
As a part of the valuation process, you need to analyze the companies' financial statements and examine other sources of information, such as articles, books, accounting pronouncements, and industry literature to gain an understanding of the significant strategy, accounting and financial issues. You can obtain financial statements from the SEC filings (10-K, 10-Q etc.) of your company and its competitors. Besides, you can use a number of online services such as LEXIS/NEXIS-Universe, CEOexpress.com, Dow Jones News/Retrieval Service, Global Disclosure, Zack's Investment Research, and Fortune 500 to gather information about the company, its industry, competition, and its economic environment in general.
A. Table of Contents
B. Executive Summary
a) Strategy Analyses
b) Accounting Analyses (and adjustments)
c) Financial Analyses
d) Prospective Analyses—Forecasting
e) Prospective Analyses—Valuation
D. References and footnotes as appropriate
E. Appropriate graphs and/or tables
First, you need to understand the environment and competitive forces within an industry, which will help evaluating a particular firm’s competitive and corporate strategy. You then assess the quality of reported financial statements, identify potential red-flags and accounting distortions and undo accounting distortion.
Identify close competitors and provide explanation for the choices;
Industry Analyses (i.e., Porter’s Five forces)
Corporate Strategy Analyses
Provide your assumptions, if any, in making accounting adjustments;
Prepare standardized financial statements;
Provide restated financial statements after making adjustments
Six steps analyses
o Identify principal accounting policies
o Assess accounting flexibility
o Evaluate accounting strategy
o Identify red flags
o Accounting distortion
o Undo those distortions
o Original financial statements
o Restated financial statements (i.e., statements that undo distortions)
o Standardized financial statements
Next, you will employ various tools for financial analyses to evaluate operating efficiency, investing performance and financing strategy. Output from these financial analyses will be used as a basis of prospective analyses. Following are few tips for your financial analysis:
Follow the sustainable growth rate framework to organize ratio analyses
ROE decomposition should be done
Trend analyses (i.e., historical pattern of key ratios) over last 5 years
Provide common-sized income statements for 3 years and those of the competitor for 3 years to facilitate intra-company and inter-company comparison (in appendix)
Do cash flow analyses and provide your comments on all key issues
Highlight any differences in ratios due to adjustment done in your accounting analyses
Then, you will conduct forecasting to find intrinsic (fundamental) value of your company based on previous steps (i.e., strategy analyses, accounting analyses and financial analyses). Prospective analyses should include the following information:
a. Prospective analyses (Forecasting) should provide projected statements/numbers that will provide all essential projected variables so that you can estimate the value of the company based on the valuation models
b. Provide key forecasting assumptions
c. Prospective Analyses (Valuation) – show the calculation of valuation models (Abnormal earnings, Abnormal ROE and Free cash flows to equity
d. Provide your comments about the intrinsic value of the stock (on the day of last available 10-K publication) and how the value would differ under more optimistic and pessimistic scenarios.
a. Original financial statements as reported, restated financial statements based on accounting adjustments of distortions, standardized financial statements
b. Table showing ratios that further amplify our understanding on four components of ROE (NOPAT margin, Operating Asset Turnover, Spread and Financial Leverage) in line with the sustainable growth rate framework
c. Trend analysis – show historical performance (at least past 5 years) of key ratios.
d. Provide common-sized income statements for 3 years and those of the competitor for 3 years
e. Forecasting assumptions
f. Sensitivity analysis: Provide projected numbers (only prospective analysis part) with more optimistic and pessimistic assumption and show how intrinsic value would differ under those scenarios.
g. Any other supporting information or calculation you think appropriate to support your analyses.
SHOO-2014.12.31-10K (Steve Madden).pdf