week 5- segment analysis Flashcards
(35 cards)
what is the purpose of segment analysis
the purpose of segment analysis is to determine which parts of a company are its main drivers in terms of profitability. Which segments have higher risks and whether capital allocation across different parts makes sense.
Items making > 10% revenues must be included in segment analysis
What is operating segment
An operating segment refers to a component of a business that:
Engages in revenue-generating activities and incurs expenses,
Has its results regularly reviewed by the company’s chief operating decision maker (CODM) to assess performance and make decisions about resources,
Has discrete financial information available, such as revenue, profit, assets, or liabilities.
what is to be reported in the operating segment
For each reportable segment, disclose:
Revenue (both external and intersegment).
Interest revenue and expense (if used in measuring segment performance).
Depreciation and amortization.
Material items of income and expense.
Segment profit or loss.
Total segment assets (if regularly reviewed by CODM).
Total segment liabilities (optional under IFRS 8 but required under US GAAP if reviewed by CODM).
Investments in associates/joint ventures.
Additions to non-current assets (e.g. property, plant, equipment).
What are some segment ratio
Segment Margin
Segment turnover
Segment ROA
Segment Cash ROA
Segment Debt Ratio
What is the formula for segment debt ratio
Segment Liabilities/ Segment Assets
What is the formula for segment margin
Segment Profit (Loss)/ Segment Revenue
What is the formula for segment ROA
Segment profit (loss)/ Assets
Segment Cash ROA
Segment Profit(loss) + depreciation/ segment Assets
if you’re asked to calculate something in the exam and its not available what do you do
You write information is not available thus we cannot calculate the required ratios / calculation
what is the formula for segment turnover
sales/ non current assets
do we need to make adjustments to reported financials
Yes because its needed for comparability against companies or over time is affected by differences in
the
Methods: eg, LIFO vs. FIFO in inventory valuation
LIFO: permitted by US GAAP but prohibited by IFRS
Estimates: eg, companies with similar fixed assets use different
estimates of useful life for depreciation
How could we improve comparability
To improve comparability,
adjustments to financials might be necessary before computing ratios
what are some adjustments that need to be made to the financials
- adjustments for goodwill and other intangible assets
What is goodwill and why do we make this adjustment
goodwill is a special intangible asset arising only from
company acquisition transactions
when purchase price > sum of the fair values of
identifiable assets and liabilities
the excess is recognized as goodwill
How can we identify good will and what is they reasons why we make this adjustment
when purchase price > sum of the fair values of
identifiable assets and liabilities
the excess is recognized as goodwill
By definition,
goodwill cannot be identified separately from the
business as a whole
When accounting for intangible assets why is it important that we distinguish between internally developed and externally purchased intangible assets
- because accounting for them differs
-Expenditures on purchased intangibles are capitalized in
B/S at fair value (i.e., purchase price) when acquired
classified as investing cash outflows in CFS (its also depreciated in the I/S if necessary) - (internally developed) Goodwill arising from business acquisition is not amortized
but subject to impairment test at least annually. they are expensed in the income statement (classified as operating cash outflows)
For example,
advertising expenditures to build a brand must be
expensed as incurred
why must we adjust for goodwill and how in the books
we must adjust for goodwill as valuation can differ from company to company causing doubt. It can be highly discretionary in terms of impairment.4
May exclude goodwill from equity or total assets to obtain adj. book value, or even focus on tangible book value by excluding all intangible assets to mitigate accounting differences due to purchased vs. internally developed intangibles
what happens after we make adjustments for goodwill and intangible assets
We get to see a greater analysis of the firms we are comparing showing us truly if they are comparable or not
what is the formula for adjusted market to book value
MV/ adjusted Book value
What is the formula for market to tangible book value
Market value/ Tangible Book value
we can use this ratio for further comparison
Can segment analysis be affected by the SIZE of the company
Yes aside from goodwill the size of the company can often effect the valuation of the company as diversified (multi-segment or conglomerate) firm is valued less by the market than the sum of its individual business segments if they were operated as standalone companies. known as diversification discount
What is the difference between the value of the individual segments and market value of the whole firm known as.
DiversificationDiscount= (∑(Valueofindividualsegments))−(Marketvalueofthewholefirm)
why might diversification discount exist
Due to inflation of goodwill
or diversified firms engage in more M&A activity, causing its value to be low
what is the formula for Market value of total assets
MV= total assets - book value of common equity + (share price * shares outstanding)
written as:
at - ceq + prcc_f*csho, where
at = BV of total assets (aka. assets, total)
ceq = BV of common equity
prcc_f = share price (closing) at fiscal year end
csho = number of common shares outstanding
= common shares issued - common shares in treasury
