Business Analysis Using Financial Statements

http://ocw.mit.edu/OcwWeb/Sloan-School-of-Management/15-535Business-Analysis-Using-Financial-StatementsSpring2003/CourseHome/index.htm

Primary Objectives:
- Learn how to use financial information to value and analyze firms
- Apply your economics / accounting / finance skills to issues in today's news to help understand : (1) What is contained in financial reports, (2) Why firms report certain information, (3) How to be a sophisticated user of this information.

Provide up-to-date applied knowledge of:
- Fundamentals valuation techniques
- Pitfalls of accounting reports
- Reading between-the-lines of financial reports

Financial statement information is used extensively by internal users:
- Management at various levels for performance evaluation, competitive analysis, investment decisions, valuation of targets
- Current and future employees for knowing is this firm going to meet its payroll and will the stock options be worth anything?

Financial statement information is used primarily by external users:
- Financial intermediaries (analysts) for stock recommendations
- Lenders for loan decisions and monitoring
- Investment bankers for (1) valuation for M&A and IPO and (2) top management performance evaluation

Financial statement analysis and business analysis applications' focus is more than mechanical analysis of financial statements and draw heavily on your understanding of finance, economics, marketing, and strategy (combine that understanding with financial statement information to diagnose problems and come up with solutions / recommendations).

This course is NOT about : extreme details of financial reporting rules and financial statement preparation and T-accounts and journal entries.


Market Efficiency and the Role of Financial Statement Analysis

Implications of stock market efficiency:
- Many profit-maximizing, actively competing traders
- Information almost freely available to all participants
- Competition means that the full effects of new information on intrinsic values are reflected instantaneously in prices
- Stock prices rapidly adjust to new information such that the new price promises only a normal rate of return to an investor

If markets are efficient, then what's the use of fundamental analysis and valuation?

Conflicting evidence on market efficiency
1. Markets are Efficient:
- Market's reaction to news events is instantaneous.
- Mutual funds have on average been unable to outperform broad indexes; in fact, generally under-performed.
- Why publish "secrets" instead of making money yourself?
2. Markets are Inefficient:
- Growing evidence of "easy ways" to beat market.
- Greater acceptance of "Behavioral Explanations" for stock market fluctuations.

The Lecturer's View on Market Efficiency:

- I am not dogmatic about efficiency: let the evidence accumulate and speak for itself then you can decide.
- On the other hand, financial (stock) markets are very competitive: it is not easy to make money above the expected rate for return for a given level of (beta) risk and trading strategies are not free of risk (Long Term Capital).
- Regardless of your allegiance, knowing state-of-the-art techniques and lingo from the "The Street" (post earnings announcement drift, PEG ratio, B/M effect) will certainly help get you a great job!)