ASS#1 Step 2

ACCT13017 – Assessment 1 – Step 2 My blog link: https://quynhgiaonguyen.wixsite.com/my-site-1

Step 2

KCQ- 1 Chapter 2 – How a Firm Adds Value

After reading chapter 2, I have grasped some useful knowledge about business and how businesses operate. Before reading this article, I thought that to maintain a company's business, it only needed to have profits, but after reading this chapter, I realized that I had thought wrong because to maintain a business, it is required that the business must generate profits greater than the initial capital cost. I was also quite surprised to hear the author say that when investors invest in a company, it is important that they care about the future instead of the past. The concern here is about a company's strategy that can be effective in the future, which is a sustainable strategy. 

"Engaging with and assessing a firm's strategy is the key to doing this. To be good at financial statement analysis we need to develop our capacity for strategic insight, to be able to focus on the few things that really matter in a business". 

This sentence from the author made me think a lot because it made me curious to know more about the ways and methods to be good at analyzing financial statements which is important and necessary for me to be able to apply in business or investment in the future. I hope that Martin can be more specific and detailed so that someone like me who has never had experience working in a financial accounting environment can grasp knowledge and information quickly and effectively. In addition, I wondered about the reliability of financial statements in decision making when I read about the concept that financial statements may not fully reflect the value of a company, in which the opportunity and ability to generate profits from the company's investments are also not included. In addition, the author made it interesting for me to mention something that we cannot see directly, something that is more like an idea or an interpretation. It is likened to us having to come up with our own thoughts instead of depending on data to serve the company's strategy. I became curious and wanted to know more about financial analysis methods. However, some passages also made me feel a bit confused and confused about linking qualitative strategy and quantitative financial data. I still don't know how to accurately evaluate strategy because strategy is quite abstract and subjective.

In short, through chapter 2, the author made me emotionally confused but that's okay because that makes the reading interesting and stimulates curiosity to read more. In addition, the author helped me clearly understand the necessary factors in financial statement analysis such as judgment, critical thinking, and the ability to connect both qualitative and quantitative information. 

Questions: 

1. How to accurately assess whether a company's strategy is sustainable and increases profits in the future? 

2. How to know which companies really create value?

KCQ 2- Chapter 3 – Many Ways to Assess Value

After reading chapter 3, I realized that financial statement analysis is much more complicated, it includes P/E ratio and multiple analysis and many ratios are used without clear justification. In addition, I also find P/E methods quite interesting. When I didn't understand it clearly, I felt a bit confused about this method, but when I read the following paragraphs that the author included, my brain seemed to be enlightened. The author says that this method is based on what people in the market think and does not help us understand the value of a company. In my opinion, I find this method important and necessary because it helps investors compare and measure market prices and profits per share. In addition, it can quickly evaluate the price or cheapness of stocks. Not only that, this method can be easily applied by everyone. One idea in the chapter makes me question whether ratio-based analysis is really reliable to use. The reason for this is that the ratios have not yet reached a clear consensus despite having been in use for a long time. But the author says that many people use this method because it seems to work, not because of any theoretical basis. This surprised me quite a bit about how it worked and how it was so effective for future operations. I also learned useful knowledge in analyzing financial statements and learned the lesson that instead of focusing on numbers for analysis like before, now I need to focus mainly on connecting financial data with the economic and business reality of the business. The author says that one should rely on the future of a company to evaluate and invest instead of relying on its past, but I do not completely agree with this opinion because the past is more or less the foundation of a company, so we cannot completely cut it off without care. Because if there is no past to create, how can its future appear? Meanwhile, what happens in the future is unpredictable and no one can accurately guarantee this future value. Therefore, it is not very reasonable to determine the value of a company based solely on a company's cash flow, dividends and future profits. Another thing that I find difficult to understand is the practical method and its theoretical basis. Hopefully the author will clarify or explain this relationship in more detail so I can understand it better. 

Overall, this chapter helped me grasp a lot of knowledge about financial statement analysis methods that require judgment, connection, and critical thinking. 

Question: 

1. Why does the ratio not have a solid theoretical basis but is still widely used? 

2. How to determine which valuation method is reliable and should be used?