In investment analysis, it is primarily taken into account. Fundamentals of the theory of investment analysis
Investment analysis is part of the theory of investment. Investing as a process of increasing the investor's capital requires understanding and evaluating the feasibility of investing in an investment project.
Getting an idea about possible risks in the environment surrounding the invested object and in the object itself. And in the process of investment, the investor needs to analyze the changes taking place in the invested object, find out whether it meets the expected parameters and, on this basis, make decisions on adjusting the investment process. Even after the end of the investment process, it is necessary to analyze the results to study the mistakes and successes of investment in order to use them in subsequent investment in other objects.
Investment analysis is a completely independent field of analysis with its own methods and tools, techniques and techniques. Of course, some of its elements are borrowed from financial analysis, some of the analysis economic activity enterprises and organizations, but in general, investment analysis is an independent section of the theory of investment.
The main task of any business is the task of stable profit, which is possible under one indispensable condition - the constant renewal of the production apparatus, if we are talking about real production, and not about financial speculation.
Investments in the development of production capital, which increases the mass of profits, are investments in the real sector of the economy. This process is discrete, since each investment project has its own life cycle, after which the production is updated with the help of a new investment project. Investment projects can overlap each other, creating longer life cycles, but the discreteness of innovations is preserved.
Subject of investment analysis
Item investment analysis lies in economic relations arising in the process of making an investment decision, as well as in the process of investing.
When financial investment, the subject of investment analysis are stock market valuable papers and factors influencing its change from the position of investing in securities and the assessment of profitability and risks for the investment process.
Thus, there are significant differences in the investment analysis of real and financial investments. Accordingly, the methods of investment analysis of real and financial investments differ.
Methods
Methods for analyzing real investments
Analysis Method investment projects is based on the definition of mandatory parameters or conditions that characterize both the project itself and the quality of the analysis. The obligatory conditions of investment analysis include: - assessment of the size of investments or investments; - assessment of income, income from investments; - definition interest rate to take into account the time factor and risk; - choice of analysis methods
When starting to analyze production investments, it is necessary first of all to assess the depth of the analytical study of the project, the economic feasibility of the costs that make up the cost of the proposed investments. The second most important task is the assessment of income, cash receipts from investments
To evaluate the return on investment, it is necessary to determine: 1) when the income will be received; 2) what will be the net income (profit); 3) how long the property will generate income; 4) what is the expected net proceeds from the sale of the property at the end of ownership; 5) how likely is the income. The answer to the question of when the income will be received is based on the timing of construction and development of production. At these stages, cash flows are negative, since no income is received during the construction period, and at the development stage, or the stage of putting the facility into operation, current costs exceed income. The term for receiving income is determined by building a break-even schedule
The quality of the forecast significantly affects the quality of estimates of the effectiveness of investments, especially short-term ones (up to 5-10 years)
An error in determining the period of receipt of income leads to errors in the calculations of the present value of the proceeds from investments, calculated using the function of the present value of the annuity F4. The shorter the annuity is, the greater the error in the calculations can lead to an error in estimating the period of income.
The table shows the values of the annuity factor F4 and the percentage differences in annuities by periods
Table 13.6 - Annuity factor at a rate of 10% and difference in percentage Year 1 2 3 4 5 6 Factor F4 0.909 1.736 2.487 3.170 3.791 4.355 Percentage differences between periods, % +91.0 +42.7 +26.9 +19, 1 +14.9 An error in choosing between two- and three-year periods of income leads to differences in results of 42.7%, an error between five- and six-year periods leads to an error of 14.9%. When the forecast period is longer, the error in the forecast of future property resale proceeds also decreases.
The answers to the second and third questions are found by predicting the life cycle of an invested product or production. The description of the product life cycle is the result of a deep marketing research of the market situation, taking into account the impact of macroeconomic cycles on the development of the industry
The life cycle is the most likely period during which the investment being evaluated will generate income. In some cases, the duration of the investment period is determined by the depreciation period (which may differ in formal terms from the life cycle of the project), the period up to overhaul or retrofit
At the end of its useful life, the asset may be sold, and the sale price may differ from the book value of the asset. If the asset value is projected to rise against the residual value, then the net income from the sale will be the return on investment. If there is a loss in the value of the asset, i.e., the proceeds from its sale do not compensate for the residual value, then the amount of current income on investments should be reduced by an appropriate amount. Both the net income from the sale and the loss are converted to present value using the factor factor F3. Forecasting proceeds from the sale is carried out taking into account the following factors: - possible increase in the value of real estate due to cyclical changes in the market situation; - inflation index; - the degree of physical deterioration of the object; - transaction costs, including sales taxes
When assessing the return on investment, the factor of uncertainty in obtaining income is taken into account, which is assessed by the risk category. The risk here is the probability that the income received from investments will not reach the predicted value. To assess the risk, statistical, expert and combined methods are used. The degree of risk is taken into account when choosing the interest rate at which discounting is performed
The choice of interest rate is the most important point in investment analysis. Three types of rates are most often used: - based on the average cost of capital; - average level loan interest or rate on a long-term loan; - subjective assessments determined by the interests of enterprises, for example, the level of dividends on ordinary shares
The method of analytical calculations is based, as a rule, on a combination of the considered evaluation criteria. Priority shall be given in each particular case to those criteria which, in this moment reflect the interests of owners or investors to the greatest extent. If the profitability of the project is put forward in the first place, then the calculation is based on the index of return on investment or the internal rate of return. The higher the internal rate of return, the greater the efficiency of investment. Abroad, the internal rate of return is used as a criterion for selecting projects for analysis in the presence of several alternative projects. Projects with an IRR of at least 15-20% are accepted for consideration
In industries with the highest level of technological change, the priority of the payback period of the project is higher than the profitability of the project
Mandatory conditions for choosing an investment project from several alternatives is the observance of the following principles: 1) the net present value and the index of return on investment for this project must be higher than for an alternative project; 2) the investment efficiency ratio must be higher than the average cost of capital; 3) higher internal rate of return compared to other projects; 4) excess of the internal rate of return over the inflation rate; 5) compliance of the payback period with the period of technology update or the life cycle of the investment product
The methodology is based on certain mandatory parameters or conditions that characterize both the project itself and the quality of the analysis. The mandatory conditions for investment analysis include:
1. assessment of the size of investments or investments
2. Estimating return on investment proceeds
3. determination of the discount rate to take into account the time and risk factor
4. choice of methods of analysis.
When starting to analyze production investments, it is necessary first of all to assess the depth of the analytical study of the project, the economic feasibility of spending the components of the cost of the proposed investments, as well as to assess the income and cash receipts from investments.
To assess the return on investment, it is necessary to determine the moment of receipt of income, the amount net profit, the length of the income generation period, the amount of net proceeds from the sale of property at the end of ownership, the likelihood of income.
The question of when the income will be received is decided on the basis of certain terms of construction and development of production. At these stages, cash flows are negative, since no income is received during the construction period, and during the development stage, current costs exceed income. Thus, the period of receipt of income is determined by constructing a schedule to achieve breakeven.
The issue of the amount of net profit and the duration of the period of its receipt are solved by forecasting the life cycle of an investment product and production. The life cycle is the most likely period during which the investment being evaluated will generate income. In some cases, the duration of the investment period is determined by the period of depreciation or the period of pre-capital repairs.
At the end of its useful life, the asset may be sold, and the sale price may differ from the book value of the asset.
If the projected growth in the value of assets is greater than the residual value, then the net income from the sale will be a return on investment.
If there is a loss in the value of an asset, that is, the proceeds from its sale do not compensate for the residual value, then the amount of current income on investments should be reduced by an appropriate amount.
Both the net income from the sale and the loss are translated into fair value.
Sales revenue forecasting is made taking into account the following factors:
Possible increase in the value of real estate due to cyclical changes in the conjecture, information index, the degree of physical deterioration of the object, the cost of the transaction.
When assessing the return on investment, the uncertainty factor of its receipt is taken into account, which is assessed by the risk category. The degree of risk is taken into account when choosing the interest rate at which discounting is performed. The most commonly used 3 options are:
1. average cost of capital
2. average level of loan interest or long-term loan rates
3. subjective assessments determined by the interests of the enterprise, for example, the level of dividends on ordinary shares.
If the profitability of the project is put forward in the first place, then the calculation of the effectiveness of investments is based on the profitability index and the internal rate of return. In industries with the highest level of technological change, the payback period of a project takes precedence over the profitability of the project.
Under investment or investment in the most general sense is understood as a temporary refusal economic entity from the consumption of the resources (capital) at his disposal and the use of these resources to increase his well-being in the future. The simplest example of investment is spending Money for the acquisition of property characterized by significantly less liquidity - equipment, real estate, financial or other non-current assets.
The main features of investment activity that determine approaches to its analysis are:
- Irreversibility associated with the temporary loss of the use value of capital (for example, liquidity).
- Expectation of an increase in the initial level of well-being.
- Uncertainty associated with attributing results to a relatively long-term perspective.
It is customary to distinguish between two types of investments: real And financial(portfolio). In the further presentation of the material, we will mainly focus on the first of them.
It should be noted that in the case real investment the condition for achieving the intended goals, as a rule, is the use (operation) of the relevant non-current assets for the production of certain products and their subsequent sale. This also includes, for example, the use of the organizational and technical structures of a newly formed business to make a profit in the course of the statutory activities of an enterprise created with the attraction of investments.
Investment project
If the volume of investments turns out to be significant for a given economic entity in terms of its impact on its current and prospective financial condition, the adoption of appropriate management decisions should be preceded by the planning or design stage, that is, the stage of pre-investment research, culminating in the development of an investment project. investment project called a plan or program of measures related to the implementation of capital investments and their subsequent reimbursement and profit.
The task of developing an investment project is to prepare the information necessary for an informed decision-making regarding the implementation of investments. The main method for achieving this goal is mathematical modeling of the consequences of making appropriate decisions.
Budget Approach and Cash Flows. For modeling purposes, the investment project is considered in a time base, and the analyzed period (research horizon) is divided into several equal intervals - planning intervals. For each planning interval, budgets are compiled - estimates of receipts and payments, reflecting the results of all operations performed in this time period.
The balance of such a budget - the difference between receipts and payments - is the cash flow of the investment project for a given planning interval. If all the components of the investment project are expressed in monetary terms, we will get a series of cash flow values that describe the process of implementing the investment project.
In the enlarged structure, the cash flow of an investment project consists of the following main elements: Investment costs. Revenue from the sale of products. Production costs. Taxes.
At the initial stage of the project (investment period), cash flows, as a rule, turn out to be negative. This reflects the outflow of resources that occurs in connection with the creation of conditions for subsequent activities (for example, the acquisition of non-current assets and the formation of net working capital).
After the completion of the investment and the beginning of the operating period associated with the start of operation of non-current assets, the value cash flow tends to be positive. Additional revenue from the sale of products, as well as additional production costs incurred during the implementation of the project, can be both positive and negative values. In the first case, this may be due, for example, to the closure of unprofitable production, when the decline in revenue is covered by cost savings. In the second case, a reduction in costs is modeled as a result of their savings during, for example, equipment upgrades.
Technically, the task of investment analysis is to determine what will be the amount of cash flows on a cumulative basis at the end of the established research horizon. In particular, it is fundamentally important whether it will be positive.
Profit and depreciation. In investment analysis, the concepts of profit and cash flow, as well as the related concept of depreciation, play an important role.
The economic meaning of the concept of "profit" is that it is a capital gain. In other words, this is an increase in the welfare of an economic entity that manages a certain amount of resources. Profit is the main goal of economic activity.
As a rule, profit is calculated as the difference between the income received from the sale of products and services for a given time interval and the costs associated with the production of these products (rendering services).
It should be specially noted that in the theory of investment analysis the concept of "profit" (however, like many other economic concepts) does not coincide with its accounting and fiscal interpretation.
In investment activity, the fact of making a profit is preceded by the reimbursement of the initial investment, which corresponds to the concept of "amortization" (in English, the word "amortization" means: repayment of the main part of the debt). In the case of investing in non-current assets, this function is performed by depreciation.
Thus, the justification for fulfilling the main requirements for a project in the field of real investment is based on the calculation of the amounts of depreciation and profit within the established research horizon. This amount, in general case, will be the total cash flow of the operating period.
Cost of capital and interest rates. The concept of "cost of capital" is closely related to economic concept- profit.
The value of capital in the economy lies in its ability to create added value, that is, to make a profit. This value in the relevant market - the capital market - determines its value.
Thus, the cost of capital is the rate of return that determines the value of disposing of capital over a certain period of time (usually a year).
In the simplest case, when one of the parties (seller, lender, lender) transfers the right to dispose of capital to another party (buyer, borrower), the cost of capital is expressed in the form of an interest rate.
The interest rate is determined based on market conditions(that is, the availability of alternative options for the use of capital) and the degree of risk of this option.
At the same time, one of the components of the market value of capital is inflation. When performing calculations at constant prices, the inflation component can be excluded from the interest rate. To do this, one should use one of the modifications of the well-known Fisher's formulas:
Where r is the real interest rate, n is the nominal interest rate, i is the inflation rate.
All rates and the inflation rate in this formula are given as decimal fractions and must refer to the same time period.
In general, the interest rate corresponds to the share of the principal amount of the debt (principal), which must be paid at the end of the billing period. Bets of this kind are called simple.
Interest rates that differ in the duration of the settlement period can be compared with each other through the calculation of effective rates or compound interest rates. The effective rate is calculated according to the following formula:
, where e is effective rate, s is the simple rate, N is the number of interest periods within the considered interval.
The most important component of the cost of capital is the degree of risk. It is precisely because of the various risks associated with various forms, directions and terms of use of capital that different assessments of its value can be observed in the capital market at any given time.
Discounting
The concept of "discounting" is one of the key in the theory of investment analysis. The literal translation of this word from English (“discounting”) means: cost reduction, markdown. Discounting is the operation of calculating the present value (the English term “present value” can also be translated as “true value”, “present value”, etc.) amounts of money relating to future periods of time
The opposite of discounting is the calculation of the future value of the original sum of money- is called accumulation or compounding and is easily illustrated by an example of an increase in the amount of debt over time at a given interest rate: F = P * (1+r)N
where F is the future, and P is the present value (initial value) of the amount of money, r is the interest rate (in decimal terms), N is the number of interest periods.
The transformation of the above formula in the case of solving the inverse problem looks like this: P = F / (1+r)N
Discounting methods are used if it is necessary to compare the amounts of cash receipts and payments spaced over time. In particular, the key criterion for investment efficiency - net present value (NPV) - is the sum of all cash flows (receipts and payments) arising during the period under review, given (recalculated) at one point in time, which is usually chosen as moment of commencement of the investment.
As follows from what has been said above, the interest rate used in the formula for calculating the present value is no different from the usual rate, which in turn reflects the cost of capital. In the case of using discount methods, this rate, however, is usually referred to as the discount rate ( possible options: "comparison rate", "barrier rate", "discount rate", "reduction coefficient", etc.).
A qualitative assessment of the effectiveness of an investment project largely depends on the choice of the discount rate. There are a large number of different methods to justify the use of one or another value of this rate. In the most general case, you can specify the following options for choosing a discount rate:
- The minimum rate of return of an alternative use of capital (for example, the rate of return on reliable marketable securities or the rate of deposit in a reliable bank).
- The current level of return on capital (for example, the company's weighted average cost of capital). The cost of capital that can be used to implement this investment project (for example, the rate on investment loans).
- Expected rate of return invested capital taking into account all the risks of the project.
The rates listed above differ mainly in the degree of risk, which is one of the components of the cost of capital. Depending on the type of discount rate chosen, the results of calculations related to the assessment of the effectiveness of investments should also be interpreted.
Tasks of evaluation of the investment project
The main goal of evaluating an investment project is to substantiate its commercial (entrepreneurial) viability. The latter involves the fulfillment of two fundamental requirements:
- Full recovery (payback) of invested funds.
- Receiving profit, the amount of which justifies the rejection of any other way of using resources (capital) and compensates for the risk arising from the uncertainty of the final result.
It is necessary to distinguish between two components of the commercial viability of an investment project, its necessary and sufficient conditions, respectively:
- Economic efficiency of investments.
- Financial viability of the project.
An economic assessment or an assessment of the effectiveness of capital investment is aimed at determining the potential of the project under consideration to provide the required or expected level of profitability. When performing investment analysis, the task of evaluating the effectiveness of capital investments is the main one that determines the fate of the project as a whole.
The financial assessment is aimed at choosing a project financing scheme and thereby characterizes the possibilities for implementing the project's existing economic potential. The assessment should be carried out economic approach and consider only those benefits and losses that can be measured in monetary terms.
Investment project evaluation stages
The investment project development cycle can be represented as a sequence of three stages (stages):
- Formulation of the project idea
- Assessment of the investment attractiveness of the project
- Choosing a project financing scheme
As you move through the stages, the idea of the project is refined and enriched. new information. Thus, each stage is a kind of intermediate finish: the results obtained at it should serve as confirmation of the feasibility of the project and, thus, are a "pass" to the next stage of development.
On first stage there is an assessment of the possibility of implementing the project in terms of marketing, production, legal and other aspects. The initial information for this is information about the macroeconomic environment of the project, the intended market for the product, technologies, tax conditions, etc. The result of the first stage is a structured description of the project idea and a time schedule for its implementation.
Second stage in most cases is decisive. Here, the evaluation of the effectiveness of investments and the determination of the possible cost of the capital involved. The initial information for the second stage is the schedule of capital investments, sales volumes, current (production) costs, the need for working capital, discount rate. The results of this stage are most often presented in the form of tables and investment performance indicators: net present value (NPV), payback period, internal rate of return (IRR).
Third stage associated with choice optimal scheme project financing and evaluation of the effectiveness of investments from the position of the owner (holder) of the project. For this, information is used on interest rates and loan repayment schedules, as well as the level of dividend payments, etc. The results of the financial assessment of the project should be: financial plan for the implementation of the project, forecast forms financial reporting and indicators of financial solvency.
Any method of investment analysis involves considering the project as a conditionally independent economic object. Therefore, at the first two stages of development, an investment project should be considered separately from the rest of the activities of the enterprise that implements it.
The isolated (local) nature of the consideration of projects excludes the possibility of a correct choice of schemes for their financing. This is due to the fact that the decision to attract one or another source for financing capital investments is made, as a rule, at the level of the enterprise as a whole or its financially independent subdivision. In this case, first of all, the current financial condition of this enterprise is taken into account, which is almost impossible to reflect in a local project.
Thus, on large enterprises the task of choosing a financing scheme for an investment project (at least for projects classified as "large") with the need to highest level management. At the level of middle management, the task remains to select the most effective, that is, the most potentially profitable projects from the existing list.
As you know, fixed assets are a set of material assets used as means of labor and acting in kind for a long time both in the sphere of material production and in the non-production sphere.
In the process of operation, fixed assets morally become obsolete, physically wear out, temporarily fail. Therefore, in order to maintain and expand the production potential, an enterprise needs to ensure the reproduction of fixed assets and maintain them in working condition. The latter is achieved by carrying out current and major repairs.
The reproduction of fixed assets can be simple, extended and narrowed. In the first case, there is a simple replacement of worn-out fixed assets with fixed assets with similar technical and economic characteristics. Expanded reproduction implies an increase production capacity in an intensive or extensive way, i.e., respectively, through improving the quality of fixed assets using the achievements of scientific and technological progress or increasing the number of fixed assets. Under the narrowed reproduction understand the lack of renewal of fixed assets and their gradual degradation.
Today, in our country, narrowed and simple reproduction of fixed assets prevails, while expanded reproduction takes place only at individual export-oriented enterprises of the gas and oil industry, ferrous and non-ferrous metallurgy, timber industry and in the financial and banking sector. The current situation is primarily due to the continuous decline in the volume of capital investments over 8 years and the increase in the terms of their development.
According to the regulation on accounting long-term investments (confirmed by the letter of the Ministry of Finance of the Russian Federation dated December 30, 1993 No. 160), long-term investments in fixed assets should be understood as the costs of creating and reproducing fixed assets. Investments can be made in the form capital construction and acquisition of fixed assets.
On the basis of interdependence, two types of investment projects can be distinguished:
- 1. alternative (mutually exclusive) (acceptance of one of them means the impossibility of accepting the other),
- 2. independent (the adoption of one of them does not affect the decision to accept the other).
When analyzing investment projects, certain assumptions are made. Firstly, it is customary to associate a cash flow (Cash Flow) with each investment project, the elements of which are either net outflows (Net Cash Outflow) or net cash inflows (Net Cash Inflow). Under the net outflow in k-th year is understood as the excess of the current cash costs of the project over the current cash receipts (with the opposite ratio, there is a net inflow). Cash flow, in which inflows follow outflows, is called ordinary. If inflows and outflows alternate, the cash flow is called extraordinary.
Most often, the analysis is carried out by years, although this limitation is not mandatory. The analysis can be carried out for equal periods of any duration (month, quarter, year, etc.). At the same time, however, it is necessary to remember about the comparability of the values of the cash flow elements, the interest rate and the length of the period.
It is assumed that all investments are made at the end of the year preceding the first year of the project, although in principle they can be made over a number of subsequent years.
The inflow (outflow) of cash relates to the end of the next year.
The indicators used in the analysis of the effectiveness of investments can be divided into two groups depending on whether or not the time aspect of the value of money is taken into account:
- a) based on discounted estimates;
- b) based on accounting estimates.
As the results of numerous surveys of decision-making practices in the field of investment policy in market conditions, in the analysis of the effectiveness of investment projects, the NPV and IRR criteria are most often used. However, there may be situations where these criteria contradict each other, for example, when evaluating alternative projects.
When developing an investment policy at an enterprise, the following principles are leading:
- · economic justification investments;
- · the focus of the investment policy on achieving the strategic goals of the enterprise;
- Accounting for inflation and risk factors;
- · Formation of the optimal structure of portfolio and real investments;
- · ranking projects and investments according to their importance and sequence of implementation based on available resources;
- · selection of reliable sources and methods of investment financing.
Accounting for these and other principles will help to avoid many mistakes and miscalculations in the development of investment policy at the enterprise.