Hi

I am enjoying reading your ASS#1 Step 6.

Most people found Chapter 4 thus far to be the most challenging chapter of the Study Guide to read and seek to apply to our firms:

Chapter four was for me the most difficult chapter, so far, on taking in information and trying to apply it.

A lot of people found Figures 4-1 and 4-1A to be very helpful, to help visualise our firms as having separate operating and financial activities. Indeed, many people can find this way of looking at a firm to be a very powerful concept that can stay with them throughout their working life.

I would like to add that Figures 4-1 and 4-1A were such a good visual aid in my opinion and really made me put two and two together.

Understanding the past

Some people have been thinking about how understanding the past can help us better predict the future of our firms:

Understanding how a business has performed in the past can provide insight and support better judgements as to how the business might perform in the future.

This rings true to me if I think about it in very general terms, for example; every morning, I get up around the same time, make myself a coffee and have breakfast. This routine has been the same for several years and the probability is very high that it will continue into the future.

In the same way, how a business has conducted itself and performed in the past is likely to be a good indicator of how it will perform in the future. This is obviously critical from the perspective of an investor. As an investor, you are buying into the future of a business – you cannot buy into its past performance.

And others saw the need to understand the past in order to be able to have a basis to be able to predict the future:

I really agree with the saying that “ whoever foresees the future must consult the past” because we can’t predict about tomorrow without knowing yesterday. As a chef in a kitchen,  I need to understand the past to predict the future for stock control. For example: I need to know the past sales of the kitchen to know about which time of the year will the kitchen be busy so that I can prepare the stock for the kitchen. Since the last Christmas was really busy, this helps me to predict that the Christmas this year will also be busy. Similar to this, we can use the financial statements of the firm to understand the past to predict the firm’s future. But, I wonder how can we use the financial statement to understand a firm’s past?

Expectations about the future

And some people commented on how value is about expectations about the future; and that there are real skills in being able to make quality predictions about the future:

….capital markets trade in expectations. No wonder it is so complex! Expectations can be based on reality if the person has studied the history of a firm, or is skilled in understanding what the key drivers of the firm is. But expectations can also be totally unrealistic and merely be what the person is hoping for. To be a good equity investor requires having realistic expectations based on knowledge about the firm’s history and their strategy for the future.

Restating financial statements

People who have completed ACCT11059 Accounting, Learning & Online Communication, have previously restated their firm’s financial statements. When doing it again in our unit, it is a good chance to see what you recall from studying ACCT11059 (the foundation unit in Accounting); and also whether the task is a lot easier (or not) based on your knowledge about accounting that you gained during your degree:

Restating the financial statements is not a new task having done it before in ACCT11059. The only issue here is that I did it back in Term 1, 2017…

Others are deepening their understanding about why restating a firm’s financial statements may help us better connect to what is driving a firm’s economic and business realities:

Restating the financial statements is the process of reformulating the business activities in order to drill down and discover what exactly is driving business profit.

Through this process, we can identify key profit drivers and learn how value is being created in the business.

With the future being uncertain, understanding what has driven profit in the past is obviously critical when assessing the viability of a business’s value, particularly … to support investment decisions.

Most people have a good understanding of what operating and financial activities are:

Financing activities are those driven by interactions with the capital markets (equity and debt) such as issue of shares or borrowing money from the banks. Operating activities are driven by the day to day activities of the business, such as Apple selling iPhones and computers.

Analyse ROE: Leverage and profitability

Many people did not particularly comment on Sections 4.3 and 4.4. Some people made some general comments about leverage:

I did enjoy reading the section on leverage and found the formula (FLEV = NFO/Equity) rather simple compared to the others which was a pleasant surprise. The concept and thinking behind it was a little difficult at first for me to understand…

Analyse ROE: Efficiency and leverage revisited

Some people commented that Section 4.4 on Analyse ROE: Efficiency and leverage revisited was the most challenging part of this chapter and the most difficult to understand:

The last concept I would like to cover is ‘Analyse ROE: Efficiency and leverage revisited’. This was by far the most confusing and hard to understand parts in this chapter. I am not sure if it is because it is at the end of the chapter and I was getting restless and not putting 100% into analysing it, or if it was just too much to take in. This part for me was difficult to understand and a lot of formulas and things to think about. This is something I have highlighted for when the class is on this week so I can focus and try to understand.

Also, quite a few people are looking forward to applying what we are learning to our analysis of our own firms:

Overall, I am thrilled to apply all this chapter about to my company as it will definitely help me to better understand my company’s past and somehow predict the future.

I know that if my sources of information are reliable, then I can confidently state what had happened in my company’s past, how they performed and the level or percentage of value they had contributed to their equity investors.

Also, assessing my company’s financial statements could help me to create my own assessment about their performance and position.

I look forward to working with you this week as we begin our topic: ‘Understanding the Past’.

Regards

Martin