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ACCT5907 International Financial Statement Analysis Week 3 第 2 页 共 3 页 Week 3 Balance Sheet 1. FREQ framework – FREQ: label the issue or Red Flag that you have identified with a short explanation – INFER: explain your reasoning process in arriving at above point, Provide Evidence – ADJUST: the numbers to arrive at a number before management discretion, or explain which are the appropriate figures that you should be using in your analysis – RESPOND: what you will do after doing the above 3 items. From the point of view of the investor/analyst – RETROSPECT: what was the market’s judgement, did the market agree with you Four more FREQ labels 1. FREQ Liquidity Short term cash problem Acceleration of debt and leading to solvency issue Inference: Find the evidence from new articles, company announcements, etc. Traditional view : CA/CL > 1, better >2, operating cycle, cash cycle Modern view: Negative working capital (use others’ money to run your business) / Negative cash cycle. Alternative methods: o Comparing cash reserve vs short-term debt obligations o Looking for market bond value o Credit rating of the company/issuer 2. FREQ Solvency Long term debt problem Inference: Leverage calculation: A/E, D/E, interest coverage ratio ***Hoenig’s method: E/A, how much (in %) can you lose in your asset before you lose all your equity. 第 3 页 共 3 页 3. FREQ Asset quality Loans in financial institution Inference: Looking for leverage ratios changes Adjustment: Calculate adjustments to impairment of the loan, might do stressing test Response: Recalculate critical indicators(E/A here) and make recommendation accordingly 4. FREQ Off-balance sheet items Items kept off the balance sheet (fully funded by liability, no equity) Inference: Look for off-balance sheet items: leases, special purpose vehicles. Adjustment: Add back both assets and liability Note: asset might be impaired. Response: Recalculate critical indicators (E/A here) and make recommendation accordingly