THIRD EDITION BUSINESS ANALYSIS AND VALUATION IFRS EDITION Krishna G Palepu Paul M Healy Erik Peek Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Business Analysis and Valuation: IFRS edition, Third Edition Krishna G Palepu, Paul M Healy & Erik Peek Publishing Director: Linden Harris Publisher: Andrew Ashwin Commissioning Editor: Annabel Ainscow Production Editor: Beverley Copland Production Controller: Eyvett Davis Marketing Manager: Amanda Cheung Typesetter: CENVEO Publisher Services Cover design: Adam Renvoize © 2013, Cengage Learning EMEA ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners The publishers and author/s make no claim to these trademarks The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material For product information and technology assistance, contact emea.info@cengage.com For permission to use material from this text or product, and for permission queries, email emea.permissions@cengage.com British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-4080-5642-4 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire, SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed in Singapore by Seng Lee Press 10 – 15 14 13 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it BRIEF CONTENTS PART PART Frame Work BUSINESS ANALYSIS AND VALUATION TOOLS PART 45 STRATEGY ANALYSIS 47 Accounting Analysis: The Basics 88 Accounting Analysis: Accounting Adjustments 136 Financial Analysis 181 Prospective Analysis: Forecasting 239 Prospective Analysis: Valuation Theory and Concepts 278 Prospective Analysis: Valuation Implementation 330 PART A FRAMEWORK FOR BUSINESS ANALYSIS AND VALUATION USING FINANCIAL STATEMENTS BUSINESS ANALYSIS AND VALUATION APPLICATIONS 379 Equity Security Analysis 381 10 Credit Analysis and Distress Prediction 410 11 Mergers and Acquisitions 440 ADDITIONAL CASES 491 iii Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CONTENTS Preface Acknowledgements Authors Walk Through Tour Digital Support Resources PART Frame Work A FRAMEWORK FOR BUSINESS ANALYSIS AND VALUATION USING FINANCIAL STATEMENTS The Role of Financial Reporting in Capital Markets From Business Activities to Financial Statements Influences of the Accounting System on Information Quality Alternative forms of Communication with Investors From Financial Statements to Business Analysis Public versus Private Corporations Summary Core Concepts Questions, Exercises and Problems Notes Appendix: Defining Europe CASE The role of capital market intermediaries in the dot-com crash of 2000 PART BUSINESS ANALYSIS AND VALUATION TOOLS xi xv xvi xvii xix 11 13 15 16 16 17 20 22 23 45 STRATEGY ANALYSIS 47 Industry Analysis Applying Industry Analysis: The European Airline Industry Competitive Strategy Analysis Corporate Strategy Analysis Summary Core Concepts Questions, Exercises and Problems Notes 47 CASE VIZIO, Inc 65 51 53 57 59 60 61 63 v Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vi CONTENTS Accounting Analysis: The Basics 88 Factors Influencing Accounting Quality Steps in Accounting Analysis Recasting Financial Statements Accounting Analysis Pitfalls Value of Accounting Data and Accounting Analysis Summary Core Concepts Questions, Exercises and Problems Notes Appendix A: First-Time Adoption of IFRS Appendix B: Recasting Financial Statements into Standardized Templates 88 90 95 104 105 106 106 107 110 112 113 CASE Fiat Group’s first-time adoption of IFRS 118 Accounting Analysis: Accounting Adjustments 136 Recognition of Assets Asset Distortions Recognition of Liabilities Liability Distortions Equity Distortions Summary Core Concepts Questions, Exercises and Problems Notes 136 CASE Marks and Spencer’s accounting choices 173 Financial Analysis 181 Ratio Analysis Cash Flow Analysis Summary Core Concepts Questions, Exercises and Problems Notes Appendix: Hennes & Mauritz AB Financial Statements 181 CASE Carrefour S.A 223 Prospective Analysis: Forecasting 239 The Overall Structure of the Forecast Performance Behavior: A Starting Point Forecasting Assumptions From Assumptions to Forecasts 239 140 154 155 161 163 163 164 172 202 206 207 208 215 216 242 245 252 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CONTENTS Sensitivity Analysis Summary Core Concepts Questions, Exercises and Problems Notes Appendix: The Behavior of Components of ROE vii 255 256 257 257 261 261 CASE Forecasting earnings and earnings growth in the European oil and gas industry 264 Prospective Analysis: Valuation Theory and Concepts 278 Defining Value for Shareholders The Discounted Cash Flow Model The Discounted Abnormal Earnings Model The Discounted Abnormal Earnings Growth Model Valuation Using Price Multiples Shortcut Forms of Earnings-Based Valuation Comparing Valuation Methods Summary Core Concepts Summary of Notation Used in this Chapter Questions, Exercises and Problems Notes Appendix A: Asset Valuation Methodologies Appendix B: Reconciling the Discounted Dividends, Discounted Abnormal Earnings, and Discounted Abnormal Earnings Growth Models 279 CASE TomTom’s initial public offering: dud or nugget? 305 Prospective Analysis: Valuation Implementation 330 280 281 283 287 291 293 295 296 297 297 301 302 303 Computing a Discount Rate Detailed Forecasts of Performance Terminal Values Computing Estimated Values Some Practical Issues in Valuation Summary Core Concepts Questions, Exercises and Problems Notes 330 CASE Ryanair Holdings plc 357 339 341 346 351 352 352 353 355 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it viii CONTENTS PART BUSINESS ANALYSIS AND VALUATION APPLICATIONS 10 11 379 Equity Security Analysis 381 Investor Objectives and Investment Vehicles Equity Security Analysis and Market Efficiency Approaches to Fund Management and Securities Analysis The Process of a Comprehensive Security Analysis Performance of Security Analysts and Fund Managers Summary Core Concepts Questions Notes 381 383 384 CASE Valuation at Novartis 395 Credit Analysis and Distress Prediction 410 Why Do Firms Use Debt Financing? The Market for Credit Country Differences in Debt Financing The Credit Analysis Process in Private Debt Markets Financial Statement Analysis and Public Debt Prediction of Distress and Turnaround Credit Ratings, Default Probabilities and Debt Valuation Summary Core Concepts Questions Notes 411 CASE Getronics’ debt ratings 434 Mergers and Acquisitions 440 Motivation for Merger or Acquisition Acquisition Pricing Acquisition Financing and Form of Payment Acquisition Outcome Reporting on Mergers and Acquisitions: Purchase Price Allocations Summary Core Concepts Questions Notes 440 CASE PPR – PUMA: A successful acquisition? 466 385 389 391 392 392 393 413 414 416 421 425 427 430 431 432 433 443 447 449 452 462 463 463 464 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Text/Image removed due to copyright restrictions Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it INDEX abnormal earnings 296 discounted 281–3, 296, 303–4 growth 283–7, 291–2, 296, 303–4 terminal value 343–4 valuation 302, 356, 445–6 Accor SA 621–37 accounting adjustments 136–80 accounting analysis 14, 16, 88–106, 136–80 accounting changes 92, 93 accounting conventions accounting data 105–6, 107 accounting discretion 89–90 accounting distortions 95, 351 accounting errors 92 accounting estimates 91 accounting flexibility 91–2 accounting policies 90–1, 92, 108–9 accounting practices 105 accounting profession 31–2 accounting quality 88–90, 90–5 accounting rules, noise and bias from 88–9, 107 accounting standards 8, 16, 105 accounting strategy 92 accrual accounting 6–7, 16, 110 acquisition financing 447–9, 463 acquisition premium 443–4, 463 acquisition pricing 443–7 acquisitions 440–90 abnormal earnings 445–6 benefits 440–2, 463 capital gains tax 465 earnings multiples 444–5 entrenched target management 450–1, 463 form of payment 447–9 free cash flows 445–6 intangible assets 456–62 motivation for 440–3 other potential bidders 450 and ratio analysis 210–11 regulation 451 reporting 452–62 tangible assets 456–7 target value analysis 444–6, 463 active portfolio management 384–5, 392 Adidas 300–1, 354 AE see abnormal earnings AEA (Association of European Airlines) 62 AEG see abnormal earnings, growth aggregation 96 Air Berlin 548–68 Air France 569–90 airlines 51–3, 62–3, 638–45 see also Air Berlin; Air France; American Airlines; Delta Air Lines; Finnair; GB Airways; KLM Royal Dutch Airlines; Lufthansa; Ryanair Holdings plc; SkyWest Airlines; Southwest Airlines allowances 151–4 Altman Z-score model 426–7, 433 American Airlines 640–1 amortization 99, 154 Amtran 70–1 analyst meetings 11 Anheuser-Busch InBev S.A 355 annuity 172 antitrust laws 442 Apple Inc 531–47 ArcelorMittal Dofasco 591–610 asset beta 334, 337–8, 352 asset turnover 186, 193–6, 207 assets 7, 16 distortions 140–54, 164–5 held for sale 100 impairment 154 intangible 146–7, 154 leased 143–6, 154 recognition of 136–9 valuation 349–50 methodologies 302–3 value 347–9 write-offs 94 Association of European Airlines (AEA) 62 AstraZeneca 146–7 Audi 169–70 auditing 9–10, 12–13, 16, 32, 94 auto manufacturers 64, 108, 169–70 average cost of sales 216 average sales 216 BA (British Airways) 141–2 balance sheet, standardized format 99–102 Banco Bilbao Vizcaya Argentaria (BBVA) 162–3 bankruptcy 414 banks 413 bargaining power 50–1, 60 BAT (British American Tobacco plc) 157 BBVA (Banco Bilbao Vizcaya Argentaria) 162–3 Beleggingsvennootschap met Veranderlijk Kapitaal (BEVEK) 393 Belgium, trade payables 414, 415 Benetton Group 211 beta risk 331–2, 334, 355 BEVEK (Beleggingsvennootschap met Veranderlijk Kapitaal) 393 bias from accounting rules 88–9, 107 Black-Scholes 161–2 BMW Group 169–70 borrowers, financial analysis 418–19 BP 266–7 Brinkman, Rob 81 British Airways (BA) 141–2 British American Tobacco plc (BAT) 157 Burberry Group plc 170–1 business activities 96 business analysis 13–15 business assets 187 business strategy analysis 13–14, 16 buy-side analysts 31 Canada 591–610 capital 187 see also working capital capital asset pricing model (CAPM) 331–3, 353 capital gains tax 465 capital markets 4–5, 16, 90 CAPM (capital asset pricing model) 331–3, 353 car manufacturers 64, 108, 169–70 Carlsberg 158–60 Carnival Corporation & plc 91, 92 Carrefour S.A 223–38 cash and marketable securities 99 cash flow analysis 202–6 cash flow statements 102–3, 202–3 cash flows discounted 280–1, 303 excess 352 free 280–1, 296–7, 301, 445–6 profits 94 cash ratio 196 Casino 226 clean surplus accounting 301, 356 collective investment funds 382, 392 commercial banks 413 common accounting practices 105 common accounting standards 105 competition 90 competition laws 442 competitive advantage 54–6 competitive equilibrium assumption 341–3 competitive forces 48–50, 60 647 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 648 INDEX competitive strategy analysis 53–7, 61 comprehensive approach to forecasting 239–40, 257 concentration in an industry 49, 64 condensed financial statements 240, 257 conflicting interests conservative accounting 104 contingent claims 161–2 corporate control contests 89–90 corporate strategy analysis 57–9, 61 cost leadership 54, 61 cost of debt 335 cost of equity 331–5, 353 cost of materials by nature 99 cost of sales by function 97 credit analysis 416–21, 431 credit market 413–14 credit ratings see debt ratings critical accounting estimates 91 cross-sectional comparisons 181, 207 current assets, delayed write-downs 151 current debt 101 current liabilities 196 current ratio 196, 420 customer relationships, valuation 459–60 Danisco 440–2, 446–7, 449, 452, 454–62 days’ inventories 194 days’ payables 194 debentures 161–2 debt see also debt financing cost of 335, 411, 431 definition of 187 equity financing 415–16 value of 348, 427–30 debt analysis 634–7 debt covenants 89, 111 debt financing 197–8, 411–16, 431 debt ratings 413, 421–5, 427–30, 431, 433–9 debt-to-capital ratios 197 debt-to-equity ratios 197, 415–16 default probabilities 427–30 deferred tax assets 100 deferred tax liability 102 deferred taxes on adjustments 140–1 defined contribution plans 172 Delta Air Lines 641–2 depreciation 99, 145–6, 154 derivatives 100, 101 differentiation 49, 54–5, 61, 64 disaggregated data, ratios of 198–9 disaggregation 96 disclosure, quality of 93 disclosure strategy 111 discount rates 330–8 discounted abnormal earnings 281–7, 296, 303–4, 445–6 discounted cash flow 280–1, 296 discounted cash flow model 303 discounted dividends 279, 303–4 distressed debt investors 427 distribution channel strategy 71–2 distribution channels 50 diversification 442 dividend payments 103 dividend payout ratio 199 dividend policies 200–1 dividends, discounted 279, 303–4 dividends received 102 Dofasco 591–610 dot-com companies 34, 42 dot-com crash of 2000 23–35 DuPont 440–2, 446–7, 449, 452, 454–62 earnings before interest, taxes, depreciation and amortization (EBITDA) margin 192–3 earnings behavior 243 earnings multiples 444–5 easyGroup 58–9 easyJet 150–1 EBITDA (earnings before interest, taxes, depreciation and amortization) margin 192–3 economies of scale 49, 50 EM.TV & Merchandising AG 168–9 entrenched target management 450–1, 463 environmental, social and governance (ESG) ratings 512–30 equity equity analysis 621–33 equity distortions 161–3, 165 equity financing 415–16 equity markets 415–16 equity multiplier 185–9 equity per share 301 equity security analysis 381–409 equity valuation 349–50 equity value 279, 296, 298–301, 347–9 ESG (environmental, social and governance) ratings 512–30 estimated values 346–50 Etam Group 211 EU (European Union) 12–13, 22 Euro Disney 109–10 Europe 22 European airline industry 51–3, 62–3 European Economic Area 22 European oil and gas industry 264–77 European Union (EU) 12–13, 22 excess capacity 49 exit barriers 49 expenses 7, 16 see also operating expenses expertise asymmetry Extensible Business Reporting Language (XBRL) 104 factoring of receivables 414–15 fair value accounting 19–20 FASB (Financial Accounting Standards Boards) 32–3, 89 fashion retailers 108–9, 182–4, 211 see also French Connection; Hennes & Mauritz (H&M); Hugo Boss AG; Inditex Fiat Group 118–35, 214–15 finance companies 413 Financial Accounting Standards Boards (FASB) 32–3, 89 financial analysis 14, 16, 181–238, 418–19 financial distress 411, 425–7, 431 financial instruments 19–20 financial intermediaries 4–5, 16 financial leverage 186, 196–9, 207 financial management 196–9 financial performance 93 financial reporting 12–13 in capital markets 4–5 institutional framework 17 standards enforcement 493–500 financial statements 5–6 categories of items 96–103 condensed 240, 257 definition 16 market efficiency 383 public debt 421–5 recasting 95, 113–17 standardized templates 113–17 financing activities 96 Finnair 143–6 firm size effect 333 first mover advantages 50 flat-panel televisions 68–9, 74–5 forecast errors 89 forecasting 239–63 assumptions 245–52 comprehensive approach 239–40, 257 credit analysis 419 European oil and gas industry 264–77 performance 339–41 sensitivity analysis 255–6, 257 formal valuations 385 four-firm concentration ratio 64 France, trade payables 414, 415 free cash flows 280–1, 296–7, 301, 411–12, 445–6 French Connection 211, 426 fund management 384–5 fund managers 390–1 fundamental analysis 385 funds flow coverage 418–19 funds flow statements 202–3 GAAS (Generally Accepted Auditing Standards) gains, recycling of 162–3 GB Airways 150–1 Generally Accepted Auditing Standards (GAAS) Germany, bankruptcy 414 Getronics NV 433–9 GlaxoSmithKline 168 goodwill 95, 460–2 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it INDEX governance 94 gross profit 107 gross profit margin 190–1 Healthcare Locums plc 147–50 Hennes & Mauritz (H&M) asset turnover ratios 195–6 background 182–4 cash flow 205–6 decomposition of operating expenses by function 191–3 discounted abnormal earnings growth model 285–7 financial performance 426 financial statements 96, 216–22 forecasting 241–2, 245–56 non-current assets 170–1 required return on operating assets 336–50 hotels 634–7 Hugo Boss AG 298–9, 354 IASB (International Accounting Standards Board) 8, 88–9 IFRS (International Financial Reporting Standards) 8, 112–13, 118–35 IKEA 56–7, 64 impairment 591–610 incentives 92 income statement 97–9 Inditex 96, 183, 185–6, 188–90, 196, 205–6, 209–10 industry analysis 47–53, 61 industry competition 48–50, 61 industry growth rate 49 informal valuations 385 information asymmetry information intermediaries 5, 16 information quality 6–10 institutional framework for financial reporting 17 insurance companies 413 intangible assets 89, 146–7, 154 interest coverage 197–8 interest expense 98, 187 interest income 98 interest paid 103 interest received 102 interim forecasts 255–6, 257 intermediaries 27 see also financial intermediaries; information intermediaries internal governance 94 internal rate of return 454, 465 International Accounting Standards Board (IASB) 8, 88–9 International Auditing Standards (ISA) International Financial Reporting Standards (IFRS) 8, 112–13, 118–35 internet consultants 23–7 inventories 100, 418 inventories turnover 194 inventory build-up 94, 111 investment assets 187, 347–8 investment banks 29, 413 investment income 98 investment management 193–6 investment objectives 381–2 investment vehicles 382 investor relations 93 iPhone 531–47 ISA (International Auditing Standards) Italy debt-to-equity ratios 415–16 trade payables 414, 415 Japanese auto manufacturers 64 Jim Henson Company 168–9 Juventus F.C S.p.A 108 Kaplan-Urwitz models of debt ratings 422–4 KarstadtQuelle AG 501–11 key accounting policies 108–9 KLM Royal Dutch Airlines 569–90 LBOs (leveraged buyouts) 411, 413 LCD televisions 68–9, 74–5 learning economies 49 lease financing 417 leased assets 143–6, 154 legal barriers to market entry 50 legal liability 10 legal protection of investors’ rights 5, 17 lemons problem 4, 17 leveraged buyouts (LBOs) 411, 413 liabilities definition 7, 17 distortions 155–60, 165 held for sale 102 recognition of 154–5 liabilities-to-equity ratio 197 loan covenants 419–20 loan pricing 420–1 long-term solvency 197–8 loss losses, recycling of 162–3 Lowe, Ken 81 Lufthansa 141–2 machinery and equipment 418 maintenance of minimum net worth 420 management compensation 89 market efficiency 383–4, 392 market for credit 413–14 market risk premium 332, 355–6 market value accounting 301 market values 350 Marks and Spencer Group plc (M&S) 173–80 maximum ratio of capital expenditures to earnings before depreciation 420 649 maximum ratio of total liabilities to net worth 420 McRae, Matt 81 mean-reversion 244, 257 merger accounting 167–8 mergers and acquisitions 440–90 abnormal earnings 445–6 acquisition pricing 443–7 benefits 440–2, 463 capital gains tax 465 earnings multiples 444–5 entrenched target management 450–1, 463 form of payment 447–9 free cash flows 445–6 intangible assets 456–62 motivation for 440–3 other potential bidders 450 regulation 451 reporting 452–62 tangible assets 456–7 target value analysis 444–6, 463 Metro International S.A 151–4 MicroStrategy 156 minimum coverage ratio 420 minimum net working capital balance 196, 420 minority equity investments 100 minority interests 98, 101, 349 mortgage loans 417 M&S (Marks and Spencer Group plc) 173–80 multiple-bank borrowing 414 multiple-based valuations 287–91, 297 negative book values 351–2, 356 net assets held for sale 348 net debt issuance 103 net debt repayment 103 net financial leverage 245 net gain/loss from discontinued operations 98 net investment in investment assets 103 net investment in non-current operating 103 net investment in operating working capital 103 net investment profit after tax (NIPAT) 187 net liquidation of investment assets 103 net liquidation of non-current operating 103 net liquidation of operating working capital 103 net non-current operating asset turnover 195 net non-current operating assets 187, 194 net operating profit after taxes (NOPAT) 187, 188, 189 net operating profit after taxes (NOPAT) margin 192–3, 245 net profit margins 186, 189–93 net profit/loss to ordinary shareholders 98 net share issuance 103 net share repurchase 103 Neuer Markt 18–19 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 650 INDEX new entrants to an industry 49–50 Newsome, Laynie 81 NH Hoteles SA 621–37 NIPAT (net investment profit after tax) 187 noise from accounting rules 88–9, 107 non-current assets 170–1 delayed write-downs 150–1 impairment 168–9 management 194–6 overstated depreciation 140–1 non-current debt 101 non-current intangible assets 100 non-current liabilities 158 non-current operating accruals 102 non-current tangible assets 100 non-operating gains/losses 102 non-operating investments 334–5 NOPAT (net operating profit after taxes) 187, 188, 189 NOPAT (net operating profit after taxes) margin 192–3, 245 normal profit margin 261 Novartis 395–409 Oddo Securities 512–30 OEIC (Open-Ended Investment Company) 393 off-balance sheet financing 414–15 oil and gas industry 264–78 open line of credit 417 Open-Ended Investment Company (OEIC) 393 operating asset turnover 245 operating assets 187, 336–8, 353 operating cash flow ratio 196 operating expenses 95–6, 106–7, 190–2 operating management 189–93 operating working capital 187, 194 see also working capital ordinary shareholders’ equity 101 other current assets 100 other current liabilities 101 other income, net of other expense 98 other non-current liabilities (non-interest bearing) 101 other non-operating investments 100 other operating income, net of other operating expense 97, 99 PartyGaming Plc 611–20 passive portfolio management 392 PCAOB (Public Company Accounting Oversight Board) PEG (price/earnings to growth) ratio 301 pension benefits 158–60 performance behaviour 242–5 performance forecasts 339–41 personnel expenses 99 portfolio management 384–5, 392 portfolio managers 27, 31 Portugal, debt-to-equity ratios 415–16 positioning 55 post-employment benefits 158–60 PP&E (property, plant, and equipment) 194–5 PPR Group 466–90 preference dividends 433 preference shares 101 price multiples 287–91, 303, 344 price sensitivity 51 price/earnings to growth (PEG) ratio 301 private corporations 15–16, 433 private debt markets 416–21 product-market rents 441–2 profit profit before interest and tax 102 profit margin 261 profit margin analysis 207 profit margin ratio 186 profitability 184–9 profits and cash flows 94 property, plant, and equipment (PP&E) 194–5 prospective analysis 15, 17, 257 forecasting 239–63 valuation 278–329 implementation 330–78 provisions 156–7 prudence Public Company Accounting Oversight Board (PCAOB) public corporations 15–16 public debt 413, 415, 421–5 public debt rating see debt ratings public enforcement 10–11 Puma 466–90 purchase price allocations 452–62, 463 qualified audit opinions 94 quality of disclosure 93 quality of earnings analysis see accounting analysis quantitative analysis 385 quick ratio 196 ratio analysis 181–202, 207, 210–11 ratio of fixed to variable costs 49 ratios, historical pattern 201–2 ratios of disaggregated data 198–9 real estate 418 recasting financial statements 95, 113–17 red flags 93–5 regulation 90, 111, 451 related-party transactions 94 relative bargaining power 51 relief-from-royalty method of valuation 456 reporting strategy 8–9, 17, 383–4 required return on operating assets 336–8, 353 research and development 88–9, 169–70, 433 retail investors 33–4 return on assets (ROA) 185–9 return on business assets (ROBA) 188 return on equity (ROE) abnormal 283–7, 291–2 behaviour 243–5, 261–3 decomposition 207, 208, 209–10 equity growth 292–3 historical pattern 201–2 profitability 184–9 value of 105 return on operating assets 336–8, 353 return on sales (ROS) 186, 189–93 revenues 7, 17 accelerated recognition 147–50, 154 unearned 156 revolving line of credit 417 riskless rates 331 rivalry among existing firms 49 ROA (return on assets) 185–9 ROBA (return on business assets) 188 ROE see return on equity ROS (return on sales) 186, 189–93 Royal Dutch Shell 267 Ryanair Holdings plc 357–78 J Sainsbury plc 108 sales 97, 99 sales growth behavior 242–3 satellite navigation 305–29, 310–11 scale economies 49, 50 Schindler, Jeff 81 Schindler, John 81 Scient Corporation 23, 25–7 seasonality 255–6 Securities and Exchange Commission (SEC) security analysis 384–9, 392 security analysts 389–90 segment disclosure 93 selling, general, and administrative expenses (SG&A) 96, 97, 191 sell-side analysts 29–31 sensitivity analysis 255–6, 257, 350 SG&A (selling, general, and administrative expenses) 96, 97, 191 shareholder value 279 Shell 267 short-term liquidity 196 SICAV (Socie´te´ d’Investissement a` Capital Variable) 393 size effect 333 Skoda Auto 169–70 SkyWest Airlines 642–3 Socie´te´ d’Investissement a` Capital Variable (SICAV) 393 Southwest Airlines 643 Spain, debt-to-equity ratios 415 Speed Investments Ltd 168–9 Spyker Cars N.V 108 stakeholders 90 Statoil 267–8 steel industry 591–610 stock options 161, 172 strategy analysis 47–59 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it INDEX substitute products 50 sum-of-the-years’ digits method of depreciation 145–6 supernormal profitability 343–4 supplier financing 414 supply chain management 70–1 sustainable growth rate 199–201, 207 Sweden, debt-to-equity ratios 415 switching costs 49 Switzerland, debt-to-equity ratios 415–16 systematic risk 331, 355 systems of activities 55 Taffler distress prediction model 426–7 takeover regulations 451, 463 target value analysis 444–6, 463 tax expenses 98, 193 tax profits 94 tax shields 348, 411 taxation 90 taxes paid 102 technical analysis 385 technology, valuation 456 televisions 68–9, 74–5 term loans 417 terminal values 294–5, 341–6, 353, 354 Tesco 226–7, 259–60 time-series comparisons 181, 208 TomTom 210–11, 305–29 trade names 456 trade payables 101 trade payables turnover 194 trade receivables 94, 100, 418 trade receivables turnover 194 transaction structuring 92 transactions, unexplained 93 Tseng, Eunice 81 unbiased accounting 301 unearned revenues 156 unexplained transactions 93 unique core competencies 55 United Kingdom bankruptcy 414 debt-to-equity ratios 415–16 United States airlines 638–45 Generally Accepted Auditing Standards (GAAS) Public Company Accounting Oversight Board (PCAOB) universal banking 413, 433 valuation 278–329 abnormal earnings 356 accounting distortions 351 capital transactions 301 comparison of methods 293–5 customer relationships 459–60 estimated 346–50 excess cash flow 352 goodwill 460–2 651 implementation 330–78 negative book values 351–2 price multiples 303 ratios 638–45 relief-from-royalty method of 456 summary of notations 297 technology 456 trade names 456 workforce 459 value of debt 348 value of minority interests 349 value-to-book multiples 288–9 value-to-earnings multiples 289–90 venture capitalists (VCs) 18, 27, 28–9 VIZIO, Inc 65–77 voluntary disclosure 12 WACC (weighted average cost of debt and equity capital) 189, 335–6, 353 Wang, William 65–6 weighted average cost of debt and equity capital (WACC) 189, 335–6, 353 Wescoat, Kyle 81 White Pharmaceuticals AG 493–500 workforce valuation 459 working capital 193–4, 417 XBRL (Extensible Business Reporting Language) 104 year-end adjustments 94 Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 201 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Prospective Analysis: Valuation Theory and Concepts 278 Prospective Analysis: Valuation Implementation 330 PART A FRAMEWORK FOR BUSINESS ANALYSIS AND VALUATION USING FINANCIAL STATEMENTS BUSINESS ANALYSIS. .. Work BUSINESS ANALYSIS AND VALUATION TOOLS PART 45 STRATEGY ANALYSIS 47 Accounting Analysis: The Basics 88 Accounting Analysis: Accounting Adjustments 136 Financial Analysis 181 Prospective Analysis: ... Nugget? and Vizio, Inc KEY FEATURES This book differs from other texts in business and financial analysis in a number of important ways We introduce and develop a framework for business analysis and