Overview of
financial statement
analysis & valuation
Table of contents
01 02 03 04
Industry Company strategy Accounting Financial
analysis analysis analysis analysis
05 06
Prospective Valuation
analysis
01
Industry analysis
Economic characteristics and competitive dynamics
influences the strategies firms will employ.
Tools for industry analysis
Ø Value chain analysis
Ø Porter’s Five Forces classification framework
Ø Economic Attributes Framework
01 Industry analysis – Value chain analysis
Value chain for Pharmaceutical Industry
R&D to Approval Creation
discover Manufacture
new of new of Distribution
products of products demand
products
01 Industry analysis – Porter 5 Forces
Horizontal competition Vertical competition
§ Rivalry among Existing § Buyer Power
Firms § Supplier Power
§ Threat of New Entrants
§ Threat of Substitutes
Rivalry among existing firms
Industries are characterized by:
• Concentrated rivalry.
• Diffuse rivalry.
Greater the industry concentration, the lower
the competition between existing rivals and thus
the more profitable the firms will be.
Threat of new entrants
• How easily can new firms enter a market?
• Are there entry barriers?
• Do the existing rivals have distinct competitive
advantages making it difficult for other firms to
enter and compete?
Threat of substitutes
• How easily can customers switch to substitute
products or services?
• How likely are they to switch?
• With close substitutes, competition increases and
profitability decreases.
• Unique products with few substitutes, enhance
profitability
Buyer power
• Relates to the relative number of buyers
and sellers in the industry and the leverage
buyers have with respect to price.
• Relates to buyers’ price sensitivity and the
elasticity of demand.
• Are the buyers price takers or price setters?
Supplier power
• Relates to leverage in negotiating input
prices from suppliers.
• If an industry has a large number of
potential buyers of inputs that are
produced by relatively few suppliers, the
suppliers will have greater power in
setting prices and generating profits
01 Industry analysis – Economic Attributes
• Demand
• Supply
• Manufacturing
• Marketing
• Investing & Financing
Demand
• Are customers highly price-sensitive or relatively insensitive?
• Is demand growing rapidly or is the industry relatively
mature?
• Does demand move with the economic cycle or is it
insensitive to it?
• Does demand vary with the seasons or is it relatively stable
throughout the year?
Supply
• Are suppliers offering similar or unique products?
• Are there high barriers to entry?
• Are there high barriers to exit, such as environment
cleanup costs?
Manufacturing
• Is the manufacturing process capital-intensive or labor-
intensive or a combination of the two?
• Is the manufacturing process complex with low tolerance
for error or relatively simple with ranges of products that
are of acceptable quality?
Marketing
• Is the product promoted to other businesses or marketed
directly to consumers?
• Does steady demand pull products through distribution
channels, or must firms continually create demand?
Investing and Financing
• Are the assets of firms in the industry relatively short-term
or long term?
• Is there relatively little risk or high risk in the assets of
firms in the industry?
• Is the industry relatively profitable and mature generating
enough cash flows or growing rapidly and in need of
external financing?
02 Company strategies
Framework for Strategy Analysis
● Nature of product or service
● Integration within value chain
● Geographical diversification
● Industry diversification
02 Company strategies
Nature of Product or Service
○ Product differentiation strategy
§ Unique products
§ Achieving relatively high profit margins
○ Low-cost leadership strategy
§ Non-differentiated products
§ Accepting a lower profit margin in return for a higher sales volume
and market share
02 Company strategies
Integration in Value Chain
○ Manufacturing: Is the firm conducting all manufacturing
operations itself or outsourcing all manufacturing or
outsourcing the manufacturing of components but conducting
the assembly operation in-house?
○ Distribution: Is the firm maintaining control over the distribution
function or outsourcing it?
03 Company strategies
Geographical Diversification Industry Diversification
o Is the firm targeting its products to o Is the firm operating in a
its domestic market or integrating single industry or diversifying
horizontally across many across multiple industries?
countries?
03 Accounting analysis
Assess The Quality Of The Financial Statements
• Income Statement: Measuring Operating Performance
• Balance Sheet: Representation of Economic Position
• Statement of Cash Flows: Assesses a firm’s past ability
to generate free cash flows and for predicting future
free cash flows
04 Financial Analysis
Tools:
• Common-size financial statements
• Percentage change financial
statements
• Financial Statement Ratios
o Profitability ratios.
o Risk ratios
05 Prospective Analysis
• Forecasts are the inputs into valuation models and
the quality of the decisions rests on the reliability
of the forecasts.
• Forecasted financial statements rely on
assumptions the analyst makes about the future.
• Amounts from the forecasted financial statements
serve as the basis for the valuation models.
06 Valuation
Approaches:
• Dividends valuation
• Earnings based valuation
• Cash flows based valuation
• Market multiple
Competitive strategy analysis - airline
Vietnamairline - HVN Vietjet - VJC
Tutorial exercises
E1-11
E1-13
