Financial and non-financial performance of companies to rank them according to investment attractiveness
Identifying investment-attractive companies allows different methods within the framework of industry-specific valuation models. At the heart of the analysis of individual companies and their ranking on investment attractiveness lie the most diverse financial and natural indicators: the availability of assets and the degree of their wear and tear; possible and planned by the controlling owners of the growth rate of revenue and market share occupied; schemes for managing costs and stocks and corresponding indicators of profitability of sales and returns on invested capital. The analysis includes studying both the dynamics of these indicators in time (the so-called horizontal analysis) and the progress in the structure of the elements that form certain indicators (for example, the structure of expenditures, the revenue structure), and comparisons by relative indices within the existing industry proportions for example, in labor productivity, in profit margins). In investment analytics, it is also of interest to compare the deviations of the expected (planned) and actual indicators.
When comparing financial and non-financial indicators by companies, it is important to consider the development strategy and business model chosen by the key owners. Ignoring these elements of analysis can lead the analyst to gross errors. Even within the same industry, different business models can generate a different combination of relative financial indicators. It is also necessary to take into account the organizational, functional, organizational and legal structure of the companies being compared. For example, a business can be implemented by several legal entities, some of which act as cost centers, and some as centers of income and profit. The center of value that builds relationships with market investors and attracts capital can be either any of these centers, or a specially created management company. Considering only a part of this financial group without consolidating the results and understanding the flows available for distribution between market investors can deceive the analyst about the company's investment attractiveness.The company's development strategy can be viewed as an explicitly formulated system of values and company goals that harmonize the interests of various stakeholders (stakeholders - investors, employees, top managers, counterparties), which is a set of indicators and activities is translated into concrete plans of achievement of results in time.
First of all, the strategy is necessary for fixing the interests of various groups of owners and for forming an understanding of management of what the company seeks in the long term, how to make decisions in daily activities in order to achieve its goals. The totality of goals is expressed by qualitative benchmarks, for example: "start work in the European market", "enter the top three". Quantitatively, goals are formulated in the form of tasks. For example, to enter the top five national industry leaders, companies, taking into account the growth rate of the industry and competitors' positions plans, it is necessary to reach an annual turnover of X billion rubles within four years, the sales profitability level should not be less than Y%, investment and, accordingly, attracted capital should be Z billion rubles.
The complexity of the company's analysis (internal factors of fundamental analysis) lies in the fact that not always existing owners and management disclose all aspects of the chosen development strategy. But it is from the understanding of the chosen strategy that the forecasted and financial fair value estimates of the company's growth rate, the period of retaining competitive advantages, investment outflows, the level of current costs and profitability of sales depend, and ultimately return on capital in dynamics. Some companies do not have a development strategy at all, they, figuratively speaking, "float on the waves". The second problem is related to the fact that the implementation of a particular strategy requires a certain skill in management. Trust in management declaring this or that strategy is also decisive in choosing an investment object. The presence of a strategy, competent management and trusting investors allow us to be guided by a fundamental analysis when choosing an investment object.
Analysts pay attention to two important elements that form the company's development strategy: increasing returns on already created assets and creating new competitive advantages, implemented as a growth strategy. In Fig. 10.1 this concept is presented graphically.
Fig. 10.1. Financial component of the business development strategy
Quantitative indicators that diagnose the financial factors of value creation are often grouped into three large groups: 1) viability ("survival in the market"); 2) current efficiency, i.e. the opportunity to repay obligations by proceeds; 3) actually achieved, sustainable and planned growth rates and the investments necessary for them to create new assets and progress in the financial lever. The influence of these groups on the cost is shown in Fig. 10.2.
Fig. 10.2. The pyramid of financial indicators that diagnose the creation of business value
Typical financial indicators presented for analysis (by the example of VimpelCom ) are shown in Fig. 10.3.
Fig. 10.3. Financial indicators submitted for analysis by VimpelCom
The sequence of fundamental analysis at the company level:
■ collection of basic information (about the owners of the company, its management, activities, financial and legal structure, the situation in the industry, accounting policies, the amount of loans and their collateral, etc.);
■ Obtaining the necessary financial statements (balance sheet, profit and cash flow statement)and notes to them, translating report forms into analytical form (building an aggregated balance sheet, etc.), revealing veiled balance sheet items for example, obligations);
■ collection of non-financial performance indicators (depreciation of capacity, counterparties, number of employees, etc.);
■ analysis of individual reports using special methods of information processing (for example, data normalization) and interpretation of the results obtained;
■ Calculation of indicators characterizing the dynamics of value creation (free cash flow, ROCE, WACC, spread and efficiency index);
■ building a financial model of the company and forecasting the results of the company's activities taking into account the expected changes in the market;
■ Calculation of fair market value and comparison with current observable market valuations.
A complete set of financial statements includes;
■ balance ( balance sheet) -,
■ income statement ( income statement) -,
■ statement of cash flows ( statement of cash flows)
■ statement of changes in equity ( statement of owner/s equity);
■ notes to financial statements ( notes to financial statements). Often, it is not enough to identify financial indicators for relatively attractive companies in the same industry. Comparisons are carried out on key non-financial indicators and relative metrics are calculated per unit of non-financial indicator, for example, profit per one subscriber. Within the Cellular The comparison can be based on the number of active subscribers, their commitment to the company, the number of minutes of purchasing services per month. To compare companies on different financial and non-financial indicators, this relative indicator, like the strength of business, is often used.
Business Strength is an integral measure of investment attractiveness, built on a set of key metrics that determine a competitive position in this industry market. This can be access to natural resources, tax benefits, brand security, etc. On a 10- or 100-point scale, the company's key factors are evaluated for the analyzed analysis object. Each key factor is assigned a weighting factor corresponding to the degree of its importance in industry competition. Integral measure business strength is obtained by multiplying the weight of the coefficient by its score value for the company in question.
The relative strength of a business is calculated as the ratio of the company's integral estimate to the corresponding value of the strongest competitor (with the highest value of the indicator).
Motion Global Reporting Initiative ( Global Repotting Initiative) aims to develop standards for non-financial reporting, which would include not only production indicators, but also indicators of the relationship between the company and society, the compilation of social impact reports (social reports) reflecting the level of social responsibility ( corporate social responsibility ).
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