1. Research: Financial Domain & Case Studies – Part 1
Welcome to Class 18
Research: Financial Domain & Case Studies – Part 1
Chapter 8

2. Corporate Financial Performance
Assess each of the following:
Revenue
Profitability
Cash flow
Liquidity
Asset utilization
Financial leverage
Operating leverage
Return on stockholder investment
Stock value, and more

3. Performance Assessment:
Issues to Remember
 Performance is a matter of opinion
 Terminology is often inconsistent

4. Opinion
Different analysts may have different opinions about performance.
They may compare a firm’s achievements to a different set of performance benchmarks. OR
2. They may be assigning different values to individual performance components.

5. Terminology Technicate Every profession has multiple terminologists.
A “terminologist” is one who uses or creates words or phrases to "technicate" terms in order to convey a unique thought or idea.
The result is "terminological incongruity“ which creates barriers to communication.
“Technicate” is an original word created to demonstrate what terminologists do in creating or redefining words to describe thoughts or ideas.

6. Clarification = Communication Thus, we define how the term:
“INVESTED CAPITAL”
will be used for analysis purposes

7. Shareholders and Creditors.
Invested Capital
Invested Capital will represent the total of all funds contributed by both
Shareholders and Creditors.
Invested Capital $$
Shareholder
Creditor
Therefore…

8. Invested Capital [IC] = [CC] + [EC] or [CC] + [EC] = [IC]
Invested Capital = Creditor Capital + Equity Capital
[IC] = [CC] + [EC] or
Creditor Capital + Equity Capital = Invested Capital
[CC] + [EC] = [IC]

9. Accounting Equation [A] = [L] + [E] or [L] + [E] = [A]
Assets = Liabilities + Equity
[A] = [L] + [E] or
Liabilities + Equity = Assets
[L] + [E] = [A]

10. Think about it… Liabilities Equity Assets Capital Creditor Equity
Invested
Think about it…
Liabilities
Equity
Assets
Capital
Invested
Assets

11. Assets, Liabilities, & Equity
A closer look at
Assets, Liabilities, & Equity

12. Assets, Liabilities, & Equity
For analysis purposes we will divide as follows:
Assets are divided into "current" and “noncurrent.”
Liabilities are divided into "current" and “noncurrent.”
Equity is divided into "paid in" and "earned.“
Invested capital is divided into "borrowed" and "equity."
Financial services firms generally do not divide their assets and liabilities.
These organizations include S & Ls, banks, investment houses, etc.
They believe the financial nature of their business does not require this distinction.
Although, some analysts are likely to disagree.

13. Liabilities (Borrowed Capital):
Assets:
(1) Current Assets (assist with required payments)
(2) Noncurrent Assets (enable the firm to conduct its business)
[facilities, equipment, property, long-term investments, intangibles, etc.]
Liabilities (Borrowed Capital):
(1) Current Liabilities or near-term debt (due within 1 yr. or the operating cycle)
(2) Long-term debt (all the other debt)
Shareholder Equity (Equity Capital):
(1) Earned Capital (accumulated earnings that have been retained in the business)
(2) Paid-in Capital (money paid by stockholders to purchase stock)
Invested Capital:
(1) Borrowed Capital (credit extended by suppliers, banks, and note and bondholders, etc.)
(2) Equity Capital (investments by stockholders)

14. These are highlighted in the Financial Position Model
Understanding the relationship between the different classes of accounts is fundamentally important to financial analyses.
These are highlighted in the Financial Position Model

15. Financial Position Model
Important relationship between CA & CL
Important relationship

16. Financial Position Model
A thorough understanding of the
Financial Position Model
is crucial to
Financial Decision-Making

17. The Financial decision-making domain includes:
1. Internal Financing Decisions
2. Asset/Debt Decisions
3. Debt/Equity Decisions

18. Financing
Decisions
Internal
Asset/Debt
Debt/Equity

19. 1. Internal Financing Decisions: Tactical and Strategic
Internal financing decisions fall into two main categories:
(1) Short-term focus
Tactical financing decisions
(2) Long-term focus
Strategic financing decisions

20. Internal Financing Decisions: TACTICAL
Tactical financing decisions center on maximizing internal funding by changing the way things are done.
For example, directing staff to consider
► SPEEDING collections of accounts receivable (ACP)
► REDUCING inventory with JIT (just-in-time) techniques
Objective: Improve performance by improving current system

21. Internal Financing Decisions: STRATEGIC
(2) Strategic financing decisions center on making significant changes to some particular aspect of the firm in order to improve cash flow.
Significant changes in corporate operations, such as:
► OUTSOURCING customer service, or
► SUBCONTRACTING major manufacturing (e.g. NIKE)
Objective: Improve performance by completely changing system

22. 2. Asset and Debt Management Decisions
Asset/Debt decisions include consideration of how to maximize utilization of high-ticket assets such as property, facilities, equipment, intangibles, etc.
These decisions are also directed at maintaining an optimum balance between:
current assets and current liabilities
current and noncurrent debt
current and noncurrent assets
Capital budgeting: Decisions about whether to buy or sell property, plant, & equipment are part of this domain

23. 3. Debt/Equity Decisions
Debt and Equity decisions are primarily concerned with:
The use and extent of long-term financing
The optimum level and configuration of equity
The appropriate balance between total debt and total equity.
Decision-making in this domain involves considering issues such as:
How much money is needed to sustain growth
How should the company acquire those funds
(For example, should the corporation issue bonds, issue common stock, issue preferred stock, or borrow from other sources?)

24. Important Financial questions:
How much short-term cash is necessary and what is the best strategy to ensure that cash is available when necessary?
What is the best long-term strategy for investment in this company?
What is the optimum financial leverage?
What are the most appropriate sources of cash in-flow?
 What is the optimum relationship between equity and debt financing?

25. End, Research: Financial Domain & Case Studies – Part 1
End, Research: Financial Domain & Case Studies – Part 1
Re-read Chapter 8

26. Special note on Proxy Statements….
THEY ARE VERY IMPORTANT!!!
They include:
Invitation to the annual meeting
Legal rights and administrative details available to the shareholders
Biographies of all directors (most with pictures)
Board committees & board compensation
Executive compensation
Shareholder proposals
Information on salaries and bonuses
Information on stock options and other significant declarations by the TMT

27. It contains information such as:
Proxy Statement & DEF 14A
Proxy statements are available from all publicly traded companies.
It contains information such as:
Invitation to the annual meeting
Legal rights and administrative details available to the shareholders
Biographies of all directors (most with pictures)
Board committees & board compensation
Executive compensation
Shareholder proposals
SEC Form DEF 14A is a filing with the Securities and Exchange Commission (SEC) used in combination with an annual proxy. It includes:
Adequate information to allow shareholders to make informed decision when voting their shares.
Date, time and place of shareholder meetings,
Dissenter’s right of appraisal, modification or change of securities, voting procedures, and other relevant issues and data.