Summary and conclusion
The financial evaluation of technology’ firms is One of most challenging tasks for financial statement analysis. mainly due to the mismatching expenses with revenues. The purpose of this
Study was to present a new approach, GPFA, that makes it possible to restate financial statement according to alternative revenue—based depreciation theories. GPFA is based on financial statement information only, but it makes use of longer time series of financial statements. This approach includes three processes that are combined to form a financial model of the firm. These processes are the growth, revenue-generating, and finance processes. The growth of the firm is described by a steady growth path for total expenditures. Then, it is assumed that total expenditures generate a flow of revenues, according to the principle of identical investment projects. Thus, GPFA describes the causal relationship between total expenditures and total revenues. This causal relationship is depicted by a geometric, infinite lag distribution. The distributed lag model makes it possible to use several revenue-based depreciation theories to rematch total expenses with total revenues, i.e. to restate financial statements. in GPFA, three depreciation theories are applied: realization, proportional, and annuity depreciation. The growth and revenue-generating processes are described using only three parameters, i.e. the rate of growth, the internal rate of return, and the lag distribution parameter. The finance process was incorporated into GPFA with six finance Parameters that make it possible to model financial assets, their return, taxes, interest expenses, dividends, debt, and shareholder assets, When restating the financial statement at this stage, the financial process will also be restated. The three processes allow us to forecast the future potential of the firm, based on different depreciation theories. In GPFA, the residual earnings model is used to evaluate the equity of the firm,
In this short paper, GPFA was illustrated by only one case study of a technology firm, namely Nokia. The development of Nokia during the last 10 years has been very unstable However in 1996 a new strategic phase, associated with the theme of “Mobile Information Society”, was started. This phase is characterized by a steady growth of total expenses which is consistent with the assumptions of GPFA. Thus, the estimation of the parameters of both the growth and revenue-generating processes was successful and, consequently, the generation of total revenue was accurately described by the model. This case clearly showed that the choice of phase for analysis is important because changes in strategic behavior may distort the estimates. The restatement of Nokia’s expenses and assets had a significant effect on financial ratios. The estimation of the six finance parameters was not an easy task because of the obvious financial changes under way. These changes may cause the set of resulting six estimates, when assessed separately, not to lead to a consistent behavior of financial statements when compared with the previous ones. Thus, it is important to ensure this consistency and to choose the set of parameters accordingly. When the finance process has been incorporated, the effects of restatement are, to some degree, diminished. However these effects are remarkable On profit and profit-based margins. This is important because the valuation of the firm is based on the profit concept. When assessing the future potential of Nokia, the CAPM was used to obtain an estimate of the required return on equity. If the firm is not publicly traded, this return should be estimated by other methods. GPFA proved to be a useful approach to assess the value of equity. However a critical stage is to choose the life for the strategic phase modeled The assessment of the future potential is thus conditional with respect to this choice.
In conclusion, GPFA proved to be a promising new approach for financial statement analysis, GPFA makes it possible to estimate the profitability of the firm from the time series of total expenditure and revenues Without any assumptions on the valuation of assets. Moreover, it allows us to restate the expenses and assets, and also the finance process, according to revenue based depreciation theories However, GPFA is based on the steady state assumption that ire restrict its potential applicability This assumption is only a simplification which leads to a approximation of the actual financial behavior of the firm In any case, future research should be directed to evaluate the effects of this assumption This paper only reports one cm technology firm This case firm is exceptional in many ways Thus, new case studies are needed to show the applicability of the approach in a wider perspective In this view, an econometric study based on a sample of technology firms would also be welcome