Well, that's part 1 of assignment 1 down.
Writing my KCQ's was daunting at first having never done it before but in the end it was actually a great exercise to help cement the things I had read and relate them back to my own life experiences.
Here you go... Feedback is always welcome.
Kiah...
Preface
What a great introduction to what I hope is a fun subject. I started the readings early to make sure I gain a solid foundation of understanding of this capstone subject. Working in the accounting industry, more specifically public practice, for the last 17 years has meant I have only really had to deal with the preparation and analysis of small business financial statements.
I agree with the reasoning behind making Financial Statement information available to the public including key stakeholders since the late 19th Century. There are many consequences to being an investor, supplier, employee, tax authority, or regulator without valuable financial information. In recent times we’ve all seen the consequence of big business failing and the domino effect it has on investors, employees and suppliers.
Whilst my work life has consisted primarily of number crunching (think human calculator), it is refreshing to learn the other side. I have always told my business clients that the numbers tell a story and that we need to look at them to see what has happened in their businesses, but now I expect to be armed with the knowledge to make better predictions and forecasts to help them plan and grow - to be able to focus on the realities of their particular business environment.
The section about relying too heavily on other people’s opinions and how they can damage our own sense of reality really stood out for me. Nobody has the same background and life story as another, and as such we would all approach each situation with that different culmination of events and situations that make us who we are. In the same way we would have differing insights and value different aspects of a target business when performing an analysis. Does that mean that one person may value a business higher than another? I would argue that would definitely be the case depending on what that individual values. However, when the economic profit, and discounted cash flow approaches are used I can see that it can provide some solid foundation to base the analysis on.
Chapter 1: Focus on Reality
I do believe that seeking to understand the economic and business realities of a firm is important in investigating its worth. The financials paint a historic picture of where the firm has come from, but analysing its economic environment will give an indication of where it is headed in the future, which ultimately if it is heading in the right direction will benefit investors.
1.1 Fundamental Analysis
Looking at the big picture and including the economy and industry conditions, the financial statements, and other qualitative characteristics I can see is invaluable. Being able to look through the obvious, and not get caught up in the hype, to see long term outcomes and predictions - to get to the nitty gritty, day to day foundations of the firm and really do our due diligence. After all money is valuable to us all – so if we do want to invest we should make sure we have done our homework.
I found the theory of efficient market hypothesis rather interesting. It has not yet to date come up in my studies so I have since done some background research into it. I can see that it does have some merit, but at the same time I feel that our stock market is so volatile and reactive to worldwide non-financial issues that it can easily under or over value certain companies.
1.2 A Framework
I found myself excited that I may be able to gain the skills I could use in real life investing. Being at a time in my own life where I feel financially able to perhaps make some equity investments, I feel that after the end of this unit I could use the skills learned to take that scary step.
I was also admittedly a little excited at the idea of using a spreadsheet to map the conceptual framework. I use a spreadsheet quite regularly in my work life for client work, and unashamedly for home budgets and forecasts. I don’t profess to be an expert at all, but am always open to learning new skills in that area.
As I previously mentioned, the numbers tell a story and I can see the use of Return on net operating assets (RNOA), and economic profit are formulas that will take the basic numbers (raw data) from the financial statements and turn them into meaningful information.
The comparison between King Enterprises and Marks Inc was a great description that explained to me how two companies can show equal income, however how much of their capital or net investment is required to create that income, will reflect free cash flow. The more net investment the less efficient that organisation is in using its capital investment.
1.3 Many Points of View
I can appreciate that different types of stakeholders will have differing points of view when it comes to analysing a firm’s financial statements. Each type of stakeholder would be interested in differing areas, and in life we may be more than one type of stakeholder in a business – so an understanding of how we value an organisation is important for this reason.
On a personal level, I am a director of my own small company from which I run my accounting practice. As the director I am responsible for the day to day running of my business and I look at my figures on a daily basis. Not just purely Profit & Loss, but also compare my month by month figures to my budget to see if I am hitting the goals I have set for my business. I also will forecast where I am headed and what my next step in business will be. Currently I am preparing to purchase commercial premises and that decision took a lot of preparation by way of cash flow forecasts and debt financing submissions. There are short term goals, and long term goals. My husband and I are equal shareholders so from a financial point of view we both have a say in what happens.
1.4 What it Takes
Being a ‘mature’ aged student I wonder if having some life experiences might help me make more wise decisions and judgements when it comes to financial statement analysis. I’ve had more life to live and consequently made more mistakes (that I have hopefully learned from). Perhaps I have observed more ups and downs in the economy, and taken a closer look at why things like share prices, and interest rates have fluctuated and how that has impacted my personal finances and superannuation.
I would hope that 17 years in the accounting industry would not hinder my ability to see through the black and white figures on a piece of paper. I know that I can easily read financial statements and see the story they tell. However I don’t have any background in finance so the concepts of risk, and net present values are not as familiar to me.