Financial Statement Analysis

(Lent Term)

Module tutor

Professor John O’Hanlon

Objectives

The objective of this module is to provide students with the tools for the analysis of financial statement information, in particular for the purpose of valuing businesses.

After following the module, students should be familiar with:

  1. The form and content of financial statements, from the perspective of the fundamental analyst;
  2. The distinction between operating and financial activities in the financial statements of a business;
  3. Ratio-based techniques for drawing inferences from information in published financial statements, paying particular attention to the distinction between operating and financial activities;
  4. Issues in the forecasting of financial statements.
  5. Valuation methods based on comparable firms;
  6. Dividend- and free-cash-flow-based valuation methods;
  7. The residual earnings valuation model (REVM), and its implications for the association between the profitability of a business and its value;
  8. The abnormal earnings growth valuation model (AEGM), and its implications for interpretation of the price-earnings ratio;
  9. How to write an analyst report (based in part on the experience of the coursework assignment).

Text

S. Penman, Financial Statement Analysis and Security Valuation, 5th edition, McGraw-Hill, 2013.  ISBN: 978-007-132640.

Topics

The contact time for the module comprises fifteen 90-minute sessions.  Ten of these are lectures, and five are case classes.

  • Introduction to fundamental analysis using financial statements; the form and content of financial statements
  • The reformulation of financial statements:  operating and financial activities.
  • The analysis of profitability.
  • Issues in the forecasting of financial statements.
  • Valuation methods: Use of comparables-based multiples.
  • Valuation methods: Dividend- and free-cash flow-based valuation methods.
  • Valuation methods: Accrual accounting and valuation – the residual earnings valuation model (REVM).
  • Valuation methods:  Accrual accounting and valuation – the abnormal earning growth valuation model (AEGM).

Assessment

Coursework 25% of module mark and examination 75% of module mark.

Contact hours

The contact time for the module comprises fifteen 90-minute sessions. Ten of these are lectures, and five are case classes.

For those interested in studying to become a Chartered Financial Analyst, it is worth noting that this module contributes to:

  • Equity Investments at CFA levels I and II
  • Financial Statement Analysis at CFA levels I and II