The paper 'A Financial Statement Analysis of Sydney Airport' is a great example of a financial and accounting case study. The objective of financial statement analysis is to assess whether the market is pricing a firm’ s shares fairly. It is done by studying the intrinsic characteristics of a firm in conjunction with the firm’ s financial statements. This exercise should be done in a very careful way since the results of financial statement analysis can be applied in many different decision-making settings such as setting the credit rating of the company, valuation of mergers and acquisitions, and Initial Public Offering (IPO) valuations (Foster, 1986). Financial statement analysis is also used to evaluate a firm’ s current and past performance and to predict its future performance.
The expected future performance is then used to measure the value of the firm’ s shares. Investment decisions are made by comparing the estimates of the firm share value got from the financial statement analysis with the current market share price to determine whether the shares are overvalued or undervalued (Myer, 1969). We conduct a financial statement analysis of Sydney Airport and subsequent valuation for the last five years from the year 2010 to the year 2015.
Also, we analyze the median analysts for the firm’ s performance in the next two years 2016 and 2017. Sydney Airport is a major airport in Australia serving over 45 airlines with over 40% of international passengers passing through the airport each year. The residual income model is similar to the P/B model. The present value of residual income is negative. This implies that the P/B based on fundamentals is less than one. Based on the above calculations, the shareholder's equity of Sydney Airport should be priced at a discount to their book value. In all the years except 2015, the Return on Capital Employed (R. O.C. E) is less than the return expected by the equity shareholders (cost of equity) of 10%.
This implies an unsatisfactory use of capital since the projects in which such capital is invested are not generating the expected returns. As a result, common equity-holders do not get the expected return on their investments. This could be due to internal factors such as the management style and policies adopted by the company or external factors such as the unfavorable operating environment. After the analysis of the financial statements of Sydney Airport conducted above, it was found that a look at the firm’ s residual incomes shows that the firm’ s shares are quoted at a premium to their book value.
However, the correct position is that they should be quoted at a discount to their book values. This is because the firm exhibits a negative value of the sum of the present value of residual incomes (Woelfel, 1988). Also, the firm performed below the shareholder’ s expectations in the years 2010 to 2014.
This is shown by a Return on Capital Employed (calculated after adjusting for abnormals) that is lower than the required cost of equity. This makes the stock fairly undesirable for new investors since they will fear that they may not get value for their money. The free cash flow valuation method shows that the company’ s shares are overvalued by a great margin. From a current market price per share of 6.35, the calculated value per share is 1.32.Generally, all these valuation methods point at a company that is highly over-valued as opposed to its intrinsic/real value.
Foster, G. (1986). Financial statement analysis. Englewood Cliffs, N.J., Prentice-Hall.
Myer, J. N. (1969). Financial statement analysis. Englewood Cliffs, N.J., Prentice-Hall.
Woelfel, C. J. (1988). Financial statement analysis. Chicago, Ill, Probus Pub. Co.