When investors need to restate liabilities – EDF

In measuring its €40bn French nuclear decommissioning liability, EDF applies a 10-year historical ‘sliding average’ discount rate to a current estimate of cash flows. In our view, this leads to an out of date (and at present understated) liability that you should not use in your analysis, even though the approach is deemed to comply with IFRS.

Smoothing out the effects of discount rate changes may reduce apparent volatility, but it does not help investors. Balance sheets should include realistic and fully up to date estimates of the present value of decommissioning and other similar obligations.

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EV to EBITDA multiples must be consistent – Novartis

Swiss pharma company Novartis provides investors with its own calculation of an EV/EBITDA multiple. However, in our view, the EV is inconsistent with EBITDA. We review the company’s calculation and suggest amendments to ensure it better captures the value of Novartis’ core business.

To derive useful valuation multiples, you must be consistent. Our main adjustment to the Novartis calculation relates to the value of their stake in fellow Swiss pharma company Roche.

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Leasing – Are you prepared for IFRS 16?

EBITDA up, EBIT up, EPS? … well it depends. The impact of lease capitalisation under IFRS 16 on key company metrics in 2019 is complex and depends on several variables, including transition options chosen by companies.

We highlight what you should look out for and present a simple interactive model to help you understand the effects of IFRS 16 on profitability, growth rates, return on capital and leverage.

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In search of free cash flow – Amazon

Amazon provides investors with three alternative calculations of a free cash flow metric. For 2018 these range from $8.4bn to $19.4bn. In contrast our preferred approach gives a negative free cash flow of $3.4bn. What explains these material differences?

The disclosures by Amazon about its free cash flow measures are good and the calculations go further than many other companies. However, in our view important components are missing. We explain our additional adjustments in respect of leased assets and stock-based compensation.

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Price earnings ratios – DCF in disguise

Are you trying to identify what is ‘priced in’ to a current stock price or work out a terminal value in a DCF analysis? A target valuation multiple calculation may be the answer. We present a simple interactive model.

Many dismiss valuation multiples as being too simplistic; however, multiples are just DCF in disguise. You can derive a price earnings ratio with the same value drivers as you would use in a discounted equity cash flow model.

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Investors need fair value, not fake value

Equity investments currently reported at fair value could be measured at cost or some other ‘fake value’ in EU companies’ financial statements, depending on the outcome of a European Commission consultation.

There seems to be a never-ending debate in Europe about fair value measurement, particularly regarding equity investments. In our view any move to change the current financial reporting requirements would be detrimental for users of financial statements.

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When cash flows should include ‘non-cash flows’

The problem with cash flow statements is that … they only include cash flows. This may seem odd, given that the purpose of cash flow statements is simply to report cash movements. However, most cash flow analysis is focused on sub-totals and it is here that offsetting flows arising from non-cash transactions become important.

We explain why we believe adjustments to cash flow sub-totals are required and for which transactions you should adjust.

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Enterprise value – calculation and mis-calculation

Valuation methods based on enterprise value have become the benchmark in equity valuation. Most of you will have analysed equity investments using valuation multiples based on enterprise value or used absolute valuation methods to derive an enterprise value.  

In simplistic terms enterprise value is market capitalisation plus net debt; but is that good enough? In many situations we think not.  We review the key building blocks of enterprise value to assist you in deriving relevant valuation metrics.

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Leasing transition options – Air France KLM

In 2019 you will see a significant change in the financial statements of many companies due to the adoption of IFRS 16 on lease accounting. In addition to understanding the new accounting, it is also important that investors are aware of the transition options selected by companies and their impact.

We explain how IFRS 16 transition works and the impact transition options will have on key metrics. Early adopter Air France KLM has already selected the full retrospective approach; we examine some of the effects on its financial statements.

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IFRS 15 revenue recognition may impact forecast growth

For some companies the change in revenue recognition due to the adoption of IFRS 15 in 2018 has resulted in a material change in reported revenue and profit. However, your analysis needs to go beyond the transition effect and also consider the impact on future growth.

We illustrate how your forecast of profit growth can be impacted by IFRS 15 using a simple interactive model.

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Not so ‘prudent’ actuarial values – BAE Systems

The valuation of pension obligations can be an important component in determining the value of an equity investment. But should you include in your analysis the pension surplus or deficit based on the accounting liability or, as some argue, the lower actuarial ‘funding’ valuation?

It is all about the discount rate. The problem is that there are very different opinions about the appropriate rate for pension obligations and what measurement approach is most relevant for investors. We examine a view expressed by many, including BAE Systems.

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