Euromoney Audit Training

A number of key issues can have a major impact on the value of companies, including the status of their pension arrangements, their use of leases and other off-balance sheet finance, and peculiarities in the rates of tax charged or paid. In addition, there are often major gains or losses that are not visible in the profit and loss account, such as the impact of changes in exchange rates on translated balance sheets or the dilution that is incurred by existing shareholders as a result of substantial use of employee stock options. Finally, there is sometimes evidence of earnings manipulation, or of perfectly legitimate earnings being of low quality.

The focus of this  Euromoney Training course is on the interpretation of corporate financial statements and on how, in equity markets, this is translated into share prices. The emphasis is on the use of accounts to benchmark corporate performance, and to relate that performance, including its acquisition history, to either the appraisal of a currently quoted company or to the potential market valuation of a currently private company.

This programme is targeted at users of financial statements. By the end of the course you should have both the knowledge and the confidence to undertake a basic analysis of any industrial company, and to form an option as to its worth.

How will this course assist you?

This 3-day course will provide delegates with the knowledge and the confidence to interpret corporate financial statements and to form an opinion on current or potential share prices.

During the course, participants will:

• Review the basics of financial statements: profit and loss, cash flow and balance sheet.
• Understand consolidated accounts, including associates and minorities.
• Learn how to interpret financial data to assess corporate performance.
• Discuss and analyse how equity markets relate company performancewith share prices through the application of equity and enterprise value multiples.
• Examine potential pitfalls relating to pensions, leases, taxation, foreign exchange, stock options and earnings quality or even creative accounting.
• Review the rationale for, and historical success or failure of, merger activity.
• Learn how to assess and interpret the impact of potential mergers on the earnings and balance sheets of the acquiring company.
• Respond in a timely manner to company announcements.

Who should attend?

• Investor relations and public relations professionals
• Corporate planners and finance professionals
• Equity investors and equity salesmen
• Accountants and solicitors interested in market valuations
• Private wealth managers and advisors
• Managers and financial analysts
• Regulatory compliance officers
• Investment analysts
• Asset managers
• Senior corporate managers

Supported by:

DAY 1

Introduction to financial statements

This section introduces delegates to why accounting matters, who regulates it, and how.

• Users of accounts.
• Accounting rules and international accounting standards.
• Introduction to key accounting concepts.
• Basic mechanics of financial statements.
• Double entry book-keeping.

Case study: delegates interpret basic financial information.

Components of financial statements

This section introduces delegates to the main items they need to understand to interpret corporate financial statements.

• Current assets – receivables and inventory and short term financial assets.
• Current liabilities – payables and short term financial liabilities.
• Non-current assets – tangible, intangible and financial assets.
• Non-current liabilities – long term debt and provisions.
• The composition of shareholders’ equity.
• Group accounts: consolidation and acquisition accounting.

Case study: delegates complete various exercises deriving connections between cash flow and balance sheet items.

Analysing financial statements – rearranging the numbers

This section shows delegates how to reorganise accounting data into a suitable format for analysis and interpretation.

• Reorganising balance sheets: operations, investments, financing.
• Profit measures: before and after interest and taxation.
• Cash flow measures: leveraged and unleveraged, before and after investment.

Case study: delegates rearrange accounting items to isolate operational items in preparation for performance analysis.

Analysing financial statements – interpreting the numbers

This session introduces delegates to DuPont analysis, disaggregating returns into margins, capital turns and the impact of leverage. Treatment of discontinued operations and nonrecurring items is discussed.

• Cash versus non-cash costs.
• Fixed versus variable costs.
• Interpretation of margins.
• Capital efficiency and capital turns.
• DuPont analysis and return on capital employed.
• The implications of financial leverage: risks and returns to equity.
• Discontinued operations and non-recurring items.

Case study: delegates use case study company’s accounts in order to calculate and interpret key performance and financial ratios.

DAY 2

Introduction to multiples and equity multiples

This session introduces delegates to the basics of multiples and analysis and to the theoretical underpinnings of P/E ratios and dividend yields.

• Why use multiples?
• Choice of comparable companies.
• Choice of valuation multiples.
• Equity multiple mathematics.
• Practical issues – cyclicality, maturity, leverage.
• Share placings, rights issues, buybacks and stock options.

Case study: delegates calculate and interpret equity multiples for case study company.

Enterprise value multiples and interpretation

This session completes the discussion of multiples, explaining enterprise value multiples and relating valuation multiples to performance metrics.

• Rationale for enterprise value multiples.
• EBIT, EBITDA and sales multiples.
• Accounting versus cash numbers.
• Extending DuPont analysis to industry specific metrics.

Case study: delegates calculate enterprise value multiples for case study company and interpret valuation multiples in relation to performance metrics.

Taxation and off-balance sheet finance

This session introduces delegates to some key financial issues and to the interpretation of relevant notes in corporate accounts. The result is related back to implications for valuation.

• Determinants of the tax charge to profit.
• Capital allowances versus depreciation and deferred tax liabilities.
• Other sources of deferred tax assets and liabilities.
• Operating versus finance leases.
• Securitisation and project finance.

Case study: delegates examine notes relating to discussed items, and interpret them in terms of their impact on corporate valuation.

Potential pitfalls

This session addresses items that give rise to dirty surpluses and explains how to build them into valuations.

• Foreign exchange transaction effects.
• Foreign exchange translation effects.
• Hedging and derivatives.
• Interpreting dirty surpluses in accounts.

Case study: delegates examine notes relating to discussed item, and review the quality of profits from a case company.

Day 3

Earnings quality

This session addresses the issues of manipulation of presentation of earnings, what is the evidence for this and what are the items for which to look? How do share prices respond to earnings announcements?

• Defining earnings quality.
• Cash and accrual components of earnings.
• Decomposition of return on equity.
• What to look for - Share price response to earnings announcements.

Case study: delegates examine and interpret sundry examples of earnings management.

Understanding mergers and acquisitions

This session provides the knowledge required to assess the likely benefit or otherwise to a bidder from a proposed transaction.

• Background and drivers to M&A activity.
• Lessons from M&A experience.
• Acquisition accounting.
• Analysing mergers: impact on earnings per share and balance sheet leverage.
• Analysing mergers: returns on invested capital.

Case study: delegates calculate and interpret pro-forma numbers for a transaction.

Pulling it all together

• Full analysis of a single case company under trainer supervision.
• Making use of all relevant material from previous sessions of the course.
• Teams present results to the group.

All the material from the course so far is brought to bear on the appraisal of a case study company. Delegates are provided with corporate information on the case study company and with the results of analysis of comparable companies. Working in teams, with access to the trainer for advice where necessary, they produce an investment case using the techniques of comparative valuation, performance analysis, and other items covered in earlier sessions that they believe are relevant to the case company. This is then presented to the whole group, with the aim of making a persuasive investment case.

• Nick Antill

  Nick Antill read Economics and Politics at Bristol University and began his career in the oil industry, working for BP and Saudi Aramco. He subsequently transferred to the financial services industry, spending 16 years as an equity investment analyst, specialising in oil and gas companies. He was responsible for the European oil and gas research teams for a number of investment banks, notably ABN AMRO Hoare Govett, BZW and, finally, Morgan Stanley, where he worked during the latter part of the 1990s.
  
  At Morgan Stanley, he was personally responsible for writing investment research on the European integrated oil majors and for marketing it to investment institutions globally. This period coincided with a dramatic concentration of the industry, via wide-spread mergers, in which Morgan Stanley was a prominent advisor. Nick’s team wrote extensively on the drivers to corporate activity and its likely consequences.
  
  He has co-authored, with Robert Arnott, ‘Valuing Oil and Gas Companies’ (Woodhead Publishing, 1994 & 2000), an introduction to the oil and gas industry for financial professionals which focus on measuring company performance and deriving stock market values. He also co-authored, with Kenneth Lee, ‘Company valuation under IFRS’ (Harriman House, 2005 & 2008), a comprehensive introduction to techniques for company forecasting and valuation, along with the interpretation of financial statements published together with the International Financial Reporting Standards. It has also been translated into Russian.

  Courses run by this instructor

  • Mergers & Acquistions Modelling
  • Oil & Gas Valuation

Understanding Financial Statements and Market Valuations

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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