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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
