Chapter 11 - Equity analysis and valuation. This chapter emphasizes equity analysis and valuation. Our earningsbased analysis focuses on assessing earnings persistence and earning power. Attention is directed at techniques to aid us in measuring and applying these analysis concepts. Our discussion of equity valuation focuses on issues in estimating company values and forecasting earnings. | Financial Statement Analysis . Subramanyam Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11 CHAPTER Equity Analysis and Valuation Earnings Persistence Earnings persistence is a key to effective equity analysis and valuation Analyzing earnings persistence is a main analysis objective Attributes of earnings persistence include: Stability Predictability Variability Trend Earnings management Accounting methods Analyze Earnings Persistence Two common methods to help assess earnings persistence: Recasting of income statement Adjusting of income statement Recasting and adjusting earnings aids in determining the earning power. Recasting and Adjusting Earnings Persistence Information for Recasting and Adjusting Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative effect of changes in accounting principles Other financial statements and notes Management’s Discussion and Analysis Others: product-mix changes, technological innovations, work stoppages, and raw material constraints Recasting and Adjusting Earnings Persistence Aims at rearranging earnings components to provide a meaningful classification and relevant format for analysis. Components can be rearranged, subdivided, or tax effected, but the total must reconcile to net income of each period. Discretionary expenses, components like equity in income (loss) of unconsolidated subsidiaries or affiliates should be segregated. Components reported pretax must be removed along with their tax effects if reclassified apart from income from continuing operations. Recasting Earnings and Earnings Components Earnings Persistence Income tax disclosures enable one to separate factors that either reduce or increase taxes such as: Deductions—tax credits, capital gains rates, tax-free income, lower . | Financial Statement Analysis . Subramanyam Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11 CHAPTER Equity Analysis and Valuation Earnings Persistence Earnings persistence is a key to effective equity analysis and valuation Analyzing earnings persistence is a main analysis objective Attributes of earnings persistence include: Stability Predictability Variability Trend Earnings management Accounting methods Analyze Earnings Persistence Two common methods to help assess earnings persistence: Recasting of income statement Adjusting of income statement Recasting and adjusting earnings aids in determining the earning power. Recasting and Adjusting Earnings Persistence Information for Recasting and Adjusting Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative .
