Hi, everyone. Financial statement analysis and valuation is performed in four parts: introduction to financial statements and SEC filings, beyond the financials, forecasting, and valuation. Today, we will go beyond the financials, looking at internal factors. As we will see, doing a thorough financial statement analysis is more than just looking at a balance sheet, income statement, or statement of cash flows. To perform a complete analysis and ultimately valuation, you need to go beyond the financials to obtain an understanding of the business, their strategies, and the risks and opportunities. Today, we'll take a closer look at the internal factors that need to be considered when understanding a business and forecasting their future performance. The internal drivers we will focus on include: knowing the business, management's strategies, understanding risk factors that could impact future performance, recognizing the business life cycle and corresponding financial profile of your company, understanding how management's incentives can play a big role in how the company is managed, knowing when insiders buy or sell stock and what that could signal for the future outlook of the business, and finally, knowing the major shareholders in a business and how they could exert influence over management and even board composition. All of these items need to be considered when developing forecasts for future performance and ultimately a valuation for a business. Obviously, there's a lot to consider. The next question is, how do shareholders gain access to the information necessary to develop these insights? The good news is that there is an abundance of valuable information available to shareholders. First are investor presentations; many companies participate in investor conferences where they present materials and engage in a Q&A session. This is very valuable information. I love looking at investor presentations. They usually outline management strategies, recap past performance, and provide insight into current and future plans and initiatives. Next, are earnings call transcripts. Almost all companies hold quarterly earnings conference calls. During these calls, management shares, prepared remarks and then there's a Q&A section with sell-side analysts. This is a great way to understand the questions on the mind of analysts and hear management's responses. As we previously discussed, the 10K has a lot of information about the business, including risk factors management believes exist. Understanding the risk factors are important because these represent what management is concerned about, and then your job as an investor is to assess the risk and how it could impact the company's future outlook. Also, sell-side analysts who cover a company produce reports where they talk about the business, past results, and develop their future outlook and valuation for the business. The proxy, an SEC filing, has incentive program information for annual and long-term incentive plans. I find this information critical as I want to ensure management's incentives are aligned with the shareholders and the strategies management has outlined for the business. Next, SEC forms 3, 4, and 5 disclose when an executive or insider is buying or selling stock. Finally, 13G and 13D SEC filings. This is where if an investor acquires a large percentage of the outstanding stock of a company, the SEC requires these investors to disclose it. A 13G means an investor has acquired a large percentage of a company's stock, but they do not intend to exert influence over management. This means they're just going to be a passive investor. 13D is different. 13D filings are required when a shareholder intends to actively engage with management. Sometimes it's just a conversation with management, or sometimes it develops into a campaign to push for a change; from change in leadership and/or board composition, to pressing for changes in the company's approach to capital allocation. A 13G or 13D filing could indicate that changes are on the horizon and as an investor, you need to take this into consideration when developing a forecast and valuation for a business. Ultimately, this is about trying to assess if management's strategies, initiatives, priorities, and incentives are aligned with driving shareholder value. If so, and if you, as an investor, believe in those strategies and those initiatives, then you should incorporate these items into your forecast assumptions to project the future outlook and ultimately valuation for the business.
