INTRODUCTION TO

INVESTING
AND VALUATION
Financial Statement Analysis
and Security Valuation
Stephen H. Penman

THE AIM OF THE COURSE

To develop and apply technologies for valuing
firms and for planning to generate value within
the firm using financial statement analysis.

WHAT WILL YOU LEARN FROM

THE COURSE

How intrinsic values are calculated

What determines a firms value
How financial analysis is developed for strategy and planning
The role of financial statements in determining firms values
How to pull apart the financial statements to get at the
relevant information
How ratio analysis aids in valuation
How growth is analyzed and valued
The relevance of cash flow and accrual accounting
information
How to calculate what the P/E ratio should be
How to calculate what the price-to-book ratio should be
How to do business forecasting
How to assess the quality of the accounting

USERS OF FIRMS FINANCIAL

INFORMATION (DEMAND SIDE)

Equity Investors
Investment analysis
Management performance evaluation
Debt Investors
Probability of default
Determination of lending rates
Covenant violations
Management
Strategic planning
Investment in operations
Evaluation of subordinates
Employees
Security and remuneration

Litigants
Disputes over value in the firm
Customers
Security of supply
Governments
Policy making
Regulation
Taxation
Government contracting
Competitors
Investors and management are the primary
users of financial statements

INVESTMENT STYLES

Intuitive investing
Rely on intuition and hunches: no analysis
Passive investing
Accept market price as value: no analysis
Screening
Use a few pieces of information and no forecasting:
minimal analysis
Fundamental investing
Discover the value in an investment through
anticipations of payoffs
Analyze information
Forecast payoffs from information

COSTS OF EACH APPROACH

Danger in intuitive approach:

Self deception; ignores ability to check intuition
Danger in passive approach:
Price is what you pay, value is what you get
Danger in screening
Ignores information about the future
Fundamental analysis
Requires work !
Prudence requires analysis: a defense against paying the
wrong price (or selling at the wrong price)
The Defensive Investor
Activism requires analysis: an opportunity to find mispriced
investments
The Enterprising Investor

THE FIRM, ITS CLAIMANTS,

AND THE CAPITAL MARKET
The Capital Market:
Trading Value
The Firm:
The Value Generator

The Investors:
The Claimants on Value
Cash from Loans
Interest and Loan Repayments

Operating
Activities

Investment
Activities

Debtholders

Cash from Sale of Debt

Secondary
Debtholders

Shareholders

Cash from Sale of Shares

Secondary
Shareholders

Financing
Activities

Cash from Share Issues

Dividends and Cash from
Share Repurchases

Balance
Sheet

Income
Statement

Cash Flow
Statement

The Financial Statements:

Information on Value

Statement of
Shareholders'
Equity

Value of the firm = Value of Assets

= Value of Debt +
Value of Equity
Typically valuation of debt is a
relatively easy task.

Figure 1.1 The firm, its claimants, the capital market and the financial statements. Arrows indicate cash flows.

VALUE-BASED MANAGEMENT

Test strategic ideas to see if they generate value

a. Develop strategic ideas and plans
b. Forecast payoffs: pro forma analysis
c. Use pro forma analysis to discover value
creation
Applications: Corporate strategy
Mergers & acquisitions
Buy outs & spinoffs
Restructurings
Capital budgeting
Manage implemented strategies by examining decisions
in terms of the value added
Reward managers based on value added

INVESTING WITHIN A BUSINESS:

INSIDE INVESTORS
Business Ideas (Strategy)

Investment Funds: Value In

Apply Ideas with Funds

Value Generated: Value Out

THE PROCESS OF FUNDAMENTAL ANALYSIS

Step 5 - Trading on the Valuation
Outside Investor
Compare Value with Price to BUY,
SELL, or HOLD
Inside Investor
Compare Value with Cost to
ACCEPT or REJECT Strategy

Step 1 - Knowing the

Business
The Products
The Knowledge Base
The Competition
The Regulatory Constraints

Strategy

Step 4 - Convert
Forecasts to a Valuation

Step 3 - Forecasting
Payoffs
Measuring Value Added
Forecasting Value Added

Step 2 - Analyzing
Information
In Financial Statements
Outside of Financial
Statements

A valuation model guides the process

Forecasting is at the heart of the process and a valuation model
specifies what is to be forecasted (Step 3) and how a forecast is
converted to a valuation (Step 4). What is to be forecasted (Step 3)
dictates the information analysis (Step 2)

0
180.00%

Forecast Period 4 Years Beyond the

Horizon
Forecasts
available
for next
4 Years

160.00%

140.00%

Valuation Error (%)

120.00%

100.00%

80.00%

Used to
estimate
implicit
price

60.00%

40.00%

20.00%

0.00%

Dividends

Cash
Flows

Residual
Earnings

Dividends

Cash
Flows

Residual
Earnings

0
180.00%

Forecast Period 4 Years Beyond the

Horizon

176.20%
160.00%

Valuation Error (%)

140.00%

120.00%

100.00%

80.00%

63.30%

60.00%

40.00%

10.30%

20.00%

0.00%

Dividends

Cash
Flow s

Residual
Earnings

Dividends

Cash
Flow s

Residual
Earnings

0
180.00%

Forecast Period 4 Years Beyond the

Horizon

176.20%
160.00%

Growth
beyond
Year 4

Valuation Error (%)

140.00%

120.00%

100.00%

80.00%

63.30%

60.00%

40.00%

10.30%

20.00%

0.00%

Dividends

Cash
Flow s

Residual
Earnings

Dividends

Cash
Flow s

Residual
Earnings

0
180.00%

Forecast Period 4 Years Beyond the

Horizon

176.20%
160.00%

Valuation Error (%)

140.00%

Combine
forecasts
to
determin
e
implicit
price

120.00%

100.00%

80.00%

63.30%

60.00%

40.00%

10.30%

20.00%

0.00%

Dividends

Cash
Flow s

Residual
Earnings

Dividends

Cash
Flow s

Residual
Earnings

0
180.00%

Forecast Period 4 Years Beyond the

Horizon

176.20%
160.00%

Valuation Error (%)

140.00%

120.00%

100.00%

76.50%

66.30%
80.00%

60.00%

40.00%

10.30%

20.00%

16.70%

6.10%

0.00%

Dividends

Cash
Flows

Residual
Earnings

Dividends

Cash
Flows

Residual
Earnings

A FRAMEWORK FOR VALUATION BASED

ON FINANCIAL STATEMENT DATA
FORECASTS OF EARNINGS
(and Book Values)
FORECASTS OF
CASH FLOWS

DISCOUNTED
RESIDUAL EARNINGS

BUDGETS,
TARGETS,
FORECASTED EVA
* Performance
Evaluation
*Benchmarking

FORECASTING

DISCOUNTED
CASH FLOWS

VALUE OF
THE FIRM/
DIVISION

CURRENT AND PAST

FINANCIAL STATEMENTS
(analysis of information,
trends, comparisons, etc.)

Q&A
Siapkan Laporan Keuangan 1 (satu) Emiten
yang akan menjadi objek dalam tugas akhir.