CFA Program Level I for November 2024 $ & '

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K Home ) # Scope of Financial Statement Analysis 3 4 7 6

Lessons Table of Contents Confidence Levels Notes Bookmarks Highlights Scope of Financial Statement
u Study Plan

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g Flashcards

r Practice SCOPE OF FINANCIAL STATEMENT ANALYSIS

v Mock Exams
Learning Outcome
j Game Center describe the roles of financial statement analysis

e Discussions The role of financial statement analysis is to use financial reports prepared by companies, combined with
other information, to evaluate the past, current, and potential performance and financial position of a
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company for the purpose of making investment, credit, and other economic decisions. Managers within a
company perform financial analysis to make operating, investing, and financing decisions but do not
exclusively rely on analysis of related financial statements because they have access to nonpublic financial
information.

In evaluating financial reports, analysts typically have a specific economic decision in mind. Examples of
these decisions include the following:

Evaluating an equity investment for inclusion in a portfolio.

Valuing a security for making an investment recommendation to others.
Determining the creditworthiness of a company to decide whether to extend a loan to the company and if
so, what terms to offer.
Assigning a debt rating to a company or bond issue.
Deciding whether to make a venture capital or other private equity investment.
Evaluating a merger or acquisition candidate.

These decisions demonstrate certain themes in financial analysis. In general, analysts seek to examine the
past and current performance and financial position of a company to form expectations about its future
performance and financial position. Analysts are also concerned about factors that affect the risks to a
company’s future performance and financial position. An examination of performance can include an
assessment of a company’s profitability (the ability to earn a profit from delivering goods and services) and
its ability to generate positive cash flows (cash receipts in excess of cash disbursements).

Exhibit 2 shows how news coverage of corporate earnings announcements places corporate results in the
context of analysts’ expectations. Panel A shows the earnings announcement, and Panel B shows a sample
of the news coverage of the announcement. Earnings are also frequently used by analysts in valuation. For
example, an analyst may value shares of a company by comparing its price-to-earnings ratio (P/E) to the
P/Es of peer companies or may use forecasted future earnings as direct or indirect inputs into discounted
cash flow models of valuation.

Exhibit 2: An Earnings Release and News Media Comparison with Analysts’

Expectations

Panel A: Excerpt from Sea Limited’s Earnings Release

Singapore, August 16, 2022 – Sea Limited (NYSE: SE) (“Sea” or the “Company”) today announced its
financial results for the second quarter ended June 30, 2022.

“As we navigate the current environment of increased macro uncertainty with that same nimble and
decisive approach, we believe it is vital to be thoughtful, prudent, and disciplined. While we have strong
resources and are well on-track to achieve our self-sufficiency targets, we are nevertheless rapidly
prioritizing profitability and cash flow management. We are confident that this focus, combined with our
demonstrated ability to execute, our scale and leadership, and our proven business models, will position
us for long-term sustained success.”

Second Quarter 2022 Highlights:

Total GAAP revenue was US$2.9 billion, up 29.0% year-on-year.

Total gross profit was US$1.1 billion, up 17.1% year-on-year.
Total net income (loss) was US$(931.2) million compared to US$(433.7) million for the second quarter of
2021. Total net loss excluding share-based compensation and impairment of goodwill was US$(569.8)
million compared to US$(321.2) million for the second quarter of 2021.
Total adjusted EBITDA was US$(506.3) million compared to US$(24.1) million for the second quarter of
2021.
E-commerce Segment:
GAAP revenue was US$1.7 billion, up 51.4% year-on-year. Based on constant currency assumptions,
GAAP revenue was up 56.2% year-on-year.
Gross orders totaled 2.0 billion, an increase of 41.6% year-on-year.
Gross profit margin for e-commerce continued to improve sequentially quarter-on-quarter, as we have
seen faster growth of transaction-based fees and advertising income, which have higher profit margin
compared to product revenue and revenue generated from other value-added services.

E-commerce Full Year 2022 Guidance Update:

In our efforts to adapt to increasing macro uncertainties, we are proactively shifting our strategies to
further focus on efficiency and optimization for the long-term strength and profitability of the e-commerce
business. Given this strategic shift, we will be suspending e-commerce GAAP revenue guidance for the
full year 2022. We believe such efforts will further strengthen our ability to better capture the long-term
growth opportunities in our markets, which we remain highly positive about.

Source: Sea Limited, “Sea Limited Reports Second Quarter 2022 Results,” accessed 16 August 2022,
https://cdn.sea.com/webmain/static/resource/seagroup/website/investornews/2Q2022/uXxGiCr8oTGxOFTPhBUB/2022.08.16%20Sea%20Second%20Quarter%202022%20Results.pdf.

Panel B: Excerpt from News Article: Sea Limited Reports Mixed Results, Suspends Revenue
Guidance

Singapore-based Sea Limited (SE) reported second-quarter results early Tuesday that missed on revenue
but beat on earnings. The company, however, said it will suspend guidance for its e-commerce unit, which
accounts for about 60% of company revenue.

The company reported revenue of $2.9 billion, missing estimates of $2.98 billion. It lost 61 cents a share,
better than the estimated loss of $1.14 a share, according to FactSet.

SE stock plunged 14.3% during afternoon action on the stock market today.

Sea has one of the largest e-commerce and digital entertainment platforms in the Southeast Asia region. It
also provides financial services.

The company said its decision to suspend revenue guidance was driven by a highly volatile and
unpredictable macro environment.

"We think the right thing to do in this time of continuing heightened macro volatility is to prioritize efficiency
and self-sufficiency," Chief Executive Forrest Li said in written remarks in the Sea Limited earnings report.

Sea's gaming unit, called Garena, accounts for about 31% of revenue.

"We are in an environment of increased macro uncertainty, with rising inflation, rising interest rates, local
currency depreciations against the U.S. dollar, and ongoing reopening trends," said Li. "In this environment,
being agile and adaptable is even more crucial to the long-term success of our business."

SE stock is down about 62% this year.

Source: Brian Deagon, “Sea Limited Reports Mixed Results, Suspends Revenue Guidance,” 16 August 2022,
https://www.investors.com/news/technology/se-stock-drops-on-second-quarter-results-earnings/.

Analysts are also interested in the financial position of a company, particularly for credit analysis, as
depicted in Exhibit 3. Panel A of the exhibit is an excerpt from an August 2022 T-Mobile’s press release
highlighting a series of credit rating upgrades that the company received from the three major rating
agencies. Panel B of the exhibit is an excerpt from a July 2022 announcement from Moody’s Investor
Service about its upgrade of T-Mobile’s credit rating.

Exhibit 3: Credit Rating Upgrade for T-Mobile

Panel A: Excerpt from Announcement by T Mobile

T-Mobile Secures First-Ever Full Investment Grade Rating

BELLEVUE, Wash.--(BUSINESS WIRE)-- T-Mobile US, Inc. (NASDAQ: TMUS) today announced that
following an investment grade issuer rating from S&P Global Ratings (S&P) – the third it has received from
credit rating agencies – the company now has its first-ever full investment grade rating. S&P has assigned
the Company a BBB- with positive outlook. This follows the company securing a Baa3 rating with a stable
outlook from Moody’s and a BBB- rating with a positive outlook from Fitch.

This full investment grade rating comes as a result of T-Mobile’s successful operational and financial
performance, which is consistently demonstrated through strong subscriber growth and the company’s
ability to translate that into increasing free cash flow.

“Achieving a full investment grade rating is an important milestone for T-Mobile that reflects the leading
credit rating agencies’ positive outlook on our Un-carrier leadership strategy that is rooted in an unwavering
focus on putting customers first,” said Peter Osvaldik, T-Mobile chief financial officer. “This ‘clean sweep’ in
upgrades provides T-Mobile with the ability to unlock full access to the deep investment grade debt markets,
which will further fuel our growth and momentum toward our mission of being the very best at connecting
customers to their world.”

Source: “T-Mobile Secures First-Ever Full Investment Grade Rating,” 5 August 2022, https://investor.t-mobile.com/events-and-
presentations/news/news-details/2022/T-Mobile-Secures-First-Ever-Full-Investment-Grade-Rating/default.aspx.

Panel B: Excerpt from Moody’s Announcement About Rating Action on T-Mobile

Rating Action: Moody's upgrades T-Mobile to Baa3; outlook stable

New York, July 20, 2022 -- Moody's Investors Service (Moody's) upgraded T-Mobile USA, Inc.'s (T-Mobile)
senior unsecured debt rating to Baa3 from Ba2 and affirmed the Baa3 rating on the company's existing
senior secured notes and senior secured revolving credit facility.

Moody's has also withdrawn T-Mobile's Ba1 corporate family rating, Ba1-PD probability of default rating and
SGL-1 speculative grade liquidity rating. With this rating action, Moody's changed T-Mobile's ratings outlook
to stable from positive.

The ratings upgrade reflects T-Mobile's accelerated achievement of higher than expected operating cost
synergies following its April 2020 merger with Sprint, significant and nearly complete network and operations
integration and high visibility into the company's steady path towards sustained debt leverage (Moody's
adjusted) below 3.75x. T-Mobile's sizable operating scale, high speed 5G coverage footprint, substantial
upside growth potential in historically under-indexed rural and enterprise end market segments, solid Rate Your Confidence
incremental revenue growth adjacencies in fixed wireless access, extensive asset base and solid industry
market position support continued subscriber growth, EBITDA margin expansion and ramping free cash flow High

over the next 12-18 months. The company's financial policy, which prudently focuses on network
Medium
infrastructure investments to support market share growth, remains an important driver of the credit profile
going forward. Moody's views network investments, including spectrum investments, as supportive of the Low
business profile.

The stable outlook reflects Moody's expectation for T-Mobile's continued subscriber and service revenue Continue !
growth, EBITDA margin expansion, debt leverage (Moody's adjusted) declining steadily towards and
sustained around 3.75x and rising free cash flow. Category

Introduction to Financial
Source: “Moody's Upgrades T-Mobile to Baa3; Outlook Stable,” 20 July 2022, https://www.moodys.com/research/Moodys-upgrades-T-Mobile-to- Statement Analysis
Baa3-outlook-stable--PR_468077.

In conducting financial analysis of a company, the analyst will regularly refer to the company’s financial r Related Questions:
statements, financial notes, and supplementary schedules as well as a variety of other information sources. Practice questions related to
The next lesson introduces commonly used information sources. this topic

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