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Taking the Investment Reins

Taking the Investment Reins
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The ability to create post-investment financial controls greatly influences investment acquisition, such as taking monetary control of the investee company. Said organisation will often be in an emerging industry and at a high growth-rate stage of development during the initial ma. In contrast to mature enterprises in traditional industries, experts have more trouble evaluating high-growth companies using price earnings ratio (PE) and other common indexes because some are still in deficit.
Additionally, emerging markets also carry special risks, such as market uncertainty. According to the risk return matching principle and capital asset pricing model (CAPM), the capital cost of emerging markets may be higher than that of traditional industries.The core objective of investment is the rapid growth of shareholder equity, which is always a long process, usually taking at least three to five years, and making post-investment financial control crucial. In order to adequately control finances after investment, there are three directions that can be taken.

Analysis Evaluation on Operational Performance

The Dupont Analysis (which compartmentalises Return on Equity) and radar chart are useful methods for comprehensive evaluation of the overall financial index in terms of the relative value index. This includes return on sales, asset turnover and financial leverage.
We suggest focusing on Economic Value Added (EVA), which refers to the profit balance of net operating profit after deducting debt and equity cost from the company’s taxes. In terms of the absolute value index, EVA is more suitable for evaluating the actual equity of shareholders, which is vital for investors. In recent years, the State-owned Assets Supervision and Administration Commission has used this index to judge the operational status of China’s state-owned enterprises.

Variance Analysis and Strategic Planning

Generally speaking, there will be a variance between actual operational performance and strategic planning. By analysing these variances, companies can continuously improve strategic planning. Variance analysis includes financial and non-financial indices such as the market index, internal control flows and team growth.
The primary purpose of variance analysis on financial indices is to explain the reason for operating profit variance, which will affect sales, production costs and market size variances, as well as other internal or external factors.

Value Predictions

When confronting a new challenge, managers should put forward some potential countermeasures, as well as valuing the influence caused by significant adjustment strategies. In terms of growth, focus on the size of the future market, the profit ratio of the company and the investment required to meet operational objectives.
In practice, we suggest high-growth companies use the scene discount evaluation method, which takes probabilistic weighting on market value under different scenes that result from strategic adjustments. This means we multiply the market values under three situations, such as the most likely situation: 60 per cent; the most optimistic situation: 25 per cent; and the most conservative situation: 15 per cent) by their corresponding weights to obtain the final estimated value.


In practice, good financial analysis strategy can provide valuable support for shareholders and managers to make wise investment and operational decisions.

CPL Consulting provided auditing services for CBBC China for the financial year 2010-2011. For more information, contact Queena Ye at Queena.ye@cplchina.biz, +86 (10) 6591 6000 ext. 602, www.cplchina.biz

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