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Course Objective: Analysis of Financial statements is extremely crucial from the point of view of Management, Shareholders and Lenders. While the Management is more keen to measure the operational efficiency of the company, the shareholders are worried about returns on their investment and lenders about the solvency and the ability of the company to meet its interest and debt obligation.

The Course objective is to learn the importance of cash flows in financial analysis vis-a-vis the conventional reported profits, which often can be manipulated and Cash flows can significantly deviate from profits. Cash flows not only indicate the quality of earnings but also about the financial flexibility the company enjoys, which is essential to exploit any future growth opportunity and meet the discretionary (dividends/capital expenditure) and non-discretionary (interests/debt repayment) obligations of the company.

The course would further deal in depth with the following:

1) Correct measurement and analysis of various ratios classified as liquidity, profitability, efficiency and capitalization ratios. The financial analysis will cover a Retailing Company, IT Company, Pharmaceutical Company, Bank, Cement Company, Steel Company. This will clearly bring out the profitability drivers in various industries.

2) The necessary adjustments required from reported numbers (which are in accordance with accounting laws) to correctly reflect the economic significance of such numbers. This includes capitalization of lease expenses, capitalization of R&D expenditure, right treatment for deferred taxes in measuring return on capital employed and in projecting future free cash flows.

3) The concept of Economic value addition (EVA) and its direct linkages to fundamental value. The objective is to learn the various adjustments that are required to be made to NOPAT and their economic significance.

4) Discounted Cash Flow Valuation Methods like Dividend Discounting model; FCFE/FCFF Adjusted Present Value/EVA Model.

5) Application of Real options in Valuation ; Valuation of Intangibles ( like Brand etc); Valuation of Synergy etc.

1. The Analysis and Use of Financial Statements by Gerald I. White, Ashwinpaul C. Sondhi & Dov Fried.
2. Corporate Valuation by Damodaran

Pedagogy: The course will be taught through a series of lectures and the application of concepts like measuring cash flows, financial ratios and various accounting adjustments that will be taught through analysis of P& L, Balance Sheet data on the excel of some real companies. The group assignments will again focus on application and concepts learnt on Profit & Loss and Balance Sheet data from some big companies which require a number of accounting adjustments taught during the course.

Evaluation

Component	Weight ages	Description
Class Participation	10
Quizzes	20	10*2
Assignments	30	COMPREHENSIVE ASSIGNMENT
End Term Exam	40

Session Details

Session		Cases/Articles	Activity
1-2	Revision of Balance Sheet and P&L statement fundamentals. Indian Accounting Standards Indian Accounting Standard vs US GAAP (This would also cover the manipulations often done by companies to show higher profits)	Presentations will be sent in due course of time
3-4	Cash Flow Analysis i) Measuring operating / financing and investing Cash flows. ii) Cash flows and life cycle state of a company iii) Cash flows and financial flexibility (linkages to dividend policy and over retention of profits)	“------do-----“
6,7,8,9	Assessing Business Performance i) Operational efficiency ratios (Gross profit, net profit margins and various turnover ratios) ii) Liquidity ratios – Current Ratio / Acid test iii) Profitability ratios, Valuation Ratios EPS/ ROE/ ROCE/ Total Shareholder returns, Linkages between ROE & ROCE & optimal capital structure and determinants of PE multiple, Price to book value, EV/EBDITA multiple. iv) Capitalization ratios- Debt Equity, Debt to Assets. v) Du-pont Analysis vi) Coverage ratios and credit analysis and ratings (The emphasis will be on correct interpretation and correct measurement i.e. with necessary accounting adjustments for these ratios).	“------do-----“
10,11,12	Free Cash flows to Equity / Firm i) From earnings to free cash flows ii) Adjustment from standard accounting to correctly measure free cash flow. iii) Capitalisation leasing expense and R&D expenditure, correct treatment for amortization expense and deferred taxes iv) Measuring correct ROE & ROC after adjusting for inter-corporate investments. v) Implication of the above mentioned adjustments on fundamental valuations / company and PE or Price / Book Value or EBDITA multiple.	“------do-----“
13,14,15	Introduction to Advance Accounting Concepts i) Merger and acquisition ii) Consolidation of balance sheets iii) Deferred taxes, minority interest iv) NOPAT and adjustments to NOPAT from EVA perspective to measure correct economic cash flows. v) Economic value added (EVA) and linkages between value of a company and EVA. vi) Equity Analysis, Stock Splits and Buy back viii) Managing Productivity of Corporate Capital viii) Composite Index for measuring productivity	“------do-----“
16,17	Dividend Discounting Model	“------do-----“
18-24	FCFE/FCFF/APV/EVA Models of Valuation. The application of these models will be done for a real Company. The emphasis will be to project the free cash flows in a scientific manner keeping in mind that roe and rr are two important components of growth and rr also impacts free cash flows.	.
25-30	Projecting Balance Sheet and Profit and Loss explicitly for the future. Application of Real options in Valuation. Valuation of Intangibles Valuation of Distress Companies Valuation of Synergy.	.