Adjust the financial statements in the same manner CFA teaches? i.e. capitalizing all obligations and making the adjustments to BS and IS? Are sell-side analysts or buyside analysts more likely to do all of the adjustments?
On #1, no. On #2, no opinion. I would say equally.
Any idea why not? I’m not in ER myself, but it seems like a worthwhile endeavor to restate the FS to reflect the true economics vs. the accounting. Have there been any studies that have shown that this effort is fruitless or is this just plain laziness on the part of research?
I speak for my experience on sell side-The issue is the timliness of the report. Look the senior analysts who are in the business for years dont really need to look at the numbers to see what is happening. They have a very good idea of what is going on. The “earnings season” is a mandatory thing to do which practically adds minimal value to clients. The true research is done between the earnings season. I said timliness because quite a few companies report after market closes-around 5 pm. And depending on the industry more than one company will report at the same time. The senor analysts (my and atleast quite a few from what I have heard) want to publish the report and release it to the traders and clients before market opens the next day. This involves sorting out the modelling, analyzing the results and then writing the report. However, it doesnt end there. Place where I work (and am sure at most other places too) the report has to go through a set of compliance and review procedures before it can be published and distributed. This entire ordeal could go into the wee hours of the night IF one fails to submit the report for approval before a certain time (10 pm where I work, after which Asia desk takes over and I never see it reviewed before 3 am) If one were to restate the entire financials, the timliness effect will go away and so will any ounce of sanity that is left. Am not even talking about a good nights sleep as power naps during earnings season is the norm for me. Some important, adjustments/normalizations are, however, made.
darkhelmet Wrote: ------------------------------------------------------- > Any idea why not? I’m not in ER myself, but it > seems like a worthwhile endeavor to restate the FS > to reflect the true economics vs. the accounting. > Have there been any studies that have shown that > this effort is fruitless or is this just plain > laziness on the part of research? I think sid did a good job answering the question. If I may summarise: it is all about the cost-benefit calculus. Of course, everyone makes adjustment for one-off restructurings etc., but often-times adding the PV of operating lease payments to your debt is just not worth it… And, of course, if you do it for one firm, you have to do it for everyone to ensure comparability. Who needs the headache? Not me.
Income statement adjustment are a necessity. No one really cares about balance sheet adjustment unless they suspect fraud and/or indication that future revenue will be down (i.e. deferred revenue balance). How helpful is capitalizing lease obligations? No one really look at Cash flow anymore since most companies have stop providing it.
Would these kind of adjustments be common in investment banking when trying to pitch a deal?
negativefcf Wrote: ------------------------------------------------------- > No one really look at Cash flow anymore since most > companies have stop providing it. ??? Cash flow Statement is required by GAAP
So then what on the IS (or altogether) is absolutely necessary to adjust for? CFA recommends a lot of stuff and from the research reports I’ve read, most of that doesn’t get done?
Really? Couldn’t adjusting for capital leases have significant impact on valuations considering its impact not only the balance sheet, but net income as well?
Investors in SBUX didn’t care about adjusting balance sheets for operating leases and see what that got them.
I think the point is that you will make the adjustments that you think are material and worthwhile. To stick with the example, if a company has huge lease obligations, only an incompetent analyst will be unaware of the issue. He may adjust or he may simply flag the issue.
I get the point that there is a diminishing return aspect to the amount of effort expended vs. the difference in the final outcome (i.e. final valuation). But as history has shown, this kind of negligence to the process has yielded some massive massive losses (e.g. Enron). I don’t remember reading any major analyst warning months or years ahead of the event that Enron was holding all of that debt off it’s balance sheet, yet the information was there in the notes. Just goes to show… do your own due diligence!
Thats not true, researchers who called out Enron were just black balled
GenY Wrote: ------------------------------------------------------- > Thats not true, researchers who called out Enron > were just black balled Than all the more reason why the industry can’t be trusted to steer investors in the right direction.
he who is the most dilligent wins in the long term (law of averages)… as far as the buyside (long/short equity) is concerned i wouldnt understand how someone could buy a security (which is buying a stake in a business) without takin into account all the adjustments…more than the quantitative picture it might tell you a thing or two about the managment which imo is as important… you might not adjust the leases, but if the creditors do then they will have a problem raising money when they really need to, where your analysis might have concluded with the D/E ratio that they can still lever up… everyones lookin here to have expectations that are different from the ‘crowd’ and how is anyone supposed to achieve better risk adjusted returns if they dont do more ‘work’ in general than the crowd…
^^^ I’m guessing most of the idealists are still trying to break into the industry. And, no, I-bankers don’t make all the adjustments for a pitch. Only a minority would even know how. Sad, but true.
^^^ I’m guessing most of the idealists are still trying to break into the industry. And, no, I-bankers don’t make all the adjustments for a pitch. Only a minority would even know how. Sad, but true.
Etienne Wrote: ------------------------------------------------------- > ^^^ I’m guessing most of the idealists are still > trying to break into the industry. > > And, no, I-bankers don’t make all the adjustments > for a pitch. Only a minority would even know how. > Sad, but true. So you admit that the industry’s analysis is sh^t then?
He’s not. He’s just saying you can add more value in other areas. Given finite amount of hours in the day, you can’t do everything.