Accounting Analysis
▪Identifying accounting distortions
–caused by estimation error, bad GAAP, or
management manipulation
▪But you have to know the distortion exists!
the RI model and accounting distortions
▪suppose firm has 100 in SE, but you believe that 8 of their
assets are worthless.
▪you forecast 12 of NI next year, but only 4 in NI the year
after when they will write off the worthless assets.
▪now suppose that you restate accounting so that SE = 92.
8678.95
)10.1(
)12100(10.4
10.1
)100(10.12
100 2=
+
+−
+
+
−
+=
e
P
8678.95
)10.1(
)1292(10.12
10.1
)92(10.12
92 2=
+
+−
+
+
−
+=
e
P
the RI model may be immune
to accounting manipulation
but are you?
1997 1998 1999 2000 2001 2002 2003 …
–makers of the George Foreman Grill (1/3 of
sales) and other small appliances.
▪What is their strategy?
–manufacture in Asia
–sell to K–Mart, Wal–Mart etc.
load Salton into eVal
▪close any open eVal files
▪browse to CD, “Salton” folder
▪open file “Salton Benchmark Valuation”
Salton’s Past Performance
Actual Actual Actual Actual
Financial Leverage (LEV) 1.224 0.975 2.444 2.413
Financing Expense (FEXP) 0.078 0.071 0.075 0.066
Spread (RNOA –FEXP)) 0.033 0.174 0.163 0.220
Return on Equity 0.150 0.415 0.637 0.818
Return on Net Operating Assets 0.110 0.245 0.238 0.287
= Net Operating Margin 0.039 0.076 0.088 0.131
Gross Margin
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
0.400
0.450
Salton
Maytag
Applica
Whirlpool