Business Analysis & Valuation

ECON F355

Prof. Niranjan Swain

Email ID: [email protected]
Mobile (Whatsapp) : 9381458097

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Module-1 would focus on…

Concept of Business Analysis & Valuation

An overview of Need for Business Analysis and Valuation

Course focus – Laying foundation of the course (Module Coverage)

Alignment of Business Decisions Structure, Objective and

Value Creation

BAV - Who is interested in what?

Understanding the role of Financial Reporting in Capital Markets
and Emergence of Intermediaries

Linkage between Business Activities and Financial Statements

Role of intermediaries
 What is Business Analysis?

Business Analysis finds the business needs and identify

solutions to business problems so as maximize
stakeholders value.

Business Analysis involves

Strategic Tools and Analytical Techniques to
Analyse and Interpret business performance.

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 Business Analysis & Valuation
Strategic Tool Technique

 Intrinsic Value of Business and Equity is

Present Value of Future Cash Flows to the
business and equity shareholders
respectively

BA involves Strategic Tools  Inputs required for valuation are

and Analytical Techniques  (1) Cash Flow (existing assets)
to Analyse and Interpret  (2) Future Cash Flows (Growth Assets),
business to performance.  (3) Duration of growth in future cash
flows and
 (4) An appropriate discount rate to
calculate present Value of Future
Cash Flows

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Business Analysis & Valuation

Business
Analysis
[Strategic
Tools]

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Why Should You Learn Doing Business
Analysis and Valuation? (Need for BAV)

If you are a

Business Manager:

Owner (shareholders):

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Why Should You Learn Doing Business
Analysis and Valuation? (Need for BAV)

Prospective Investor / Shareholder:

Lender / Supplier:

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BAV - Course Focus

A. Introduction:
Framework for Business Analysis and Valuation Using
Financial Statements:

i. Role of financial reporting in capital markets; From

business activities to financial statements; and

ii. Financial statements to business analysis - Case Study:

The Role of Capital Market Intermediaries in the Dot-
Com Crash of 2000

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BAV- Course Focus
B. Strategy and Competitive Analysis Techniques:
Industry Strategy Analysis – Michale E Porter’s Five
Competitive Forces that determine the Intensity of
Industry Competition,

Competitive strategy analysis – Generic Strategy (cost

leadership and differentiation, Core competence
- How organizations outperform others?),

Corporate Strategy – Product Portfolio Matrix

(BCG), SWOAT, PEST, Balanced Score Card (BSC)
SPACE Analysis and Blind spots Analysis

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BAV- Course Focus

C. Accounting Analysis

a) Institutional framework (GAAP) for financial reporting;

b) Factors influencing accounting quality;
c) Steps on doing accounting analysis;
d) Accounting analysis pitfalls and

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BAV- Course Focus

Implementing Accounting Analysis:

a) Recasting financial statements;
b) Asset distortions – Overstated & Understated assets;
c) Liability distortions and Equity distortions.

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BAV- Course Focus
D. Financial Analysis

Deals with two key tools of financial analysis: ratio analysis

and cash flow analysis.

Both these tools allow the analyst to examine a firm's

performance and its financial condition, given its strategy
and goals.

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BAV- Course Focus
E. Prospective Analysis

Forward-looking view that emanates from business strategy

analysis, business activities leading to financial reporting,
accounting analysis, and financial analysis, and based on
forecasting investment and rewarding decisions.

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BAV- Course Focus

Prospective Analysis - Business Valuation – Approaches and

Methods:

Valuation Frameworks and Methods – DCF (DDM, FCFE,

FCFF), Price Relative and Contingent Claim

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BAV- Course Focus ???

E. Equity Security Analysis

Involves establishing
a. objectives of the investor or fund,
b. forming expectations about the future returns and risks
of individual securities, and
c. then combining individual securities into portfolios to
maximize progress toward investment objectives.

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BAV- Course Focus

F. Dark Side of Valuation

“Dark Side (Valuing Young, Distressed and Complex

Businesses)” of valuation, where prices were justified using a
mix of new metrics and techniques.

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 Business Decisions Structure
and objective is to…..
Investment
External Decisions
Opportunities
& Threat
Corporate
Strategy

Internal
Strength & Rewarding Financing
Weakness Decisions Decisions
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Business Objective……
creating shareholder value -----depends on properly managing
the three basic decision areas common to all organizations

 Investment Decision: ROI > Risk Adjusted Cost of

Capital (+ve NPV)
 Operating Decisions: Increase is NOPM (Cost Minimization
vs. Sales Maximization) and +ve Net Operating Cash Flow
 Financing Decisions: Right Mix of Debt and Equity with
Minimum WACC and Maximum Business Value keeping
future financing flexibility.
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Investment

Financing

Operation
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 BUSINESS ANALYSIS
Who is interested in what?

 Security Analyst Invest

ment
 Lender Banker

 Management Consultant
 Corporate Manager
 Independent Auditor

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A security analyst may be interested in
knowing:

How well is the firm is performing – Operating

efficiency

Did the firm meet performance expectations of

existing and prospective shareholders?

If not, why not? What is the value of the firm’s stock
based on its current and future performance?”
A lender may need to know:

What is the credit risk involved in lending a certain

amount of money to this firm?

How well is the firm managing its liquidity and

solvency?
A lender may need to know:

What is the firm’s business risk?

What is the additional risk created by the firm’s

financing and dividend policies?
A management consultant might ask:

What is the structure of the industry in which the

firm is operating?

What are the strategies pursued by various players

in the industry?

What is the relative performance of different firms

in the industry?
A corporate manager may ask:

Is company properly valued by investors?

Is investor communication program adequate to

facilitate this process?
A corporate manager could ask:

Is this firm a potential takeover target?

How much value can be added if we acquire this firm?

How can we finance the acquisition?

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An independent auditor would want to ask:

Are the accounting policies and accrual estimates in this

company’s financial statements consistent ?

Do these financial reports communicate the current

status and significant risks of the business?

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 Role of Financial Reporting in Capital Markets
and Emergence of Intermediaries

Asymmetric
information The emergence of
intermediaries
can prevent such
a market
Good / Bad breakdown

Entrepreneurs are Lack of credible

better informed communication from
than investors entrepreneurs to investors
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Types of intermediaries in the
capital markets

Who are Financial intermediaries?

What do they do?

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What do they need?

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 Who are Information intermediaries ?

 What do they do?

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How do Information intermediaries
add value ?

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Both these types of intermediaries add value by
helping investors distinguish “good” investment
opportunities from the “bad” ones.

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FROM BUSINESS ACTIVITIES TO
FINANCIAL STATEMENTS

Organization’s business activities are influenced by its

business economic environment (Market structure) and
its own business strategy.

 What does the economic environment include?

 What does organization’s business strategy

determine?

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FROM BUSINESS ACTIVITIES TO FINANCIAL STATEMENTS

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From Business Strategy to Business Activities to
Business Analysis Using Financial Statements

Market
(industry /
Financial
sector)
Structure Statements.
Business Business Analysts
Activities
Business Own use financial
Strategy statements for
Accounting Business Analysis
System & Valuation

GAAP

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Module Summary

 Significance of Business Analysis on Valuation.

 BAV course focus and business decision structure (Internal
Strength & Weakness, External Opportunities & Threat,
Corporate Strategy, Investment Decision, Financing and
Rewarding Decision)
 Value creation through investment, Operating and
Financing decisions.
 Who are interested in and what do they do?:-
Security Analyst, Lender,
Management consultant,
Corporate manager
and Independent Auditor.

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 Role of Financial Reporting in Capital Markets – Why
market crash (Loss of confidence).
 Role of Intermediaries – Financial and Information to
ensure confidence of market players.
 Linkage between strategy, business activities and financial
reporting (financial statements).
 Institutional features of accounting system features: –
Accrual Accounting (Concept and
significance),Accounting Standards and
Auditing (significance) and Managers’
Reporting Strategy (rationale behind
following a particular strategy).

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 How business intermediaries (both financial and
information) use financial statements to accomplish four
key steps:
 (1) business strategy analysis,
 (2) accounting analysis,
 (3) financial analysis, and
 (4) prospective analysis.

 Discussed concept and briefly purposes of above four

business analysis tools

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Thank You

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