Spotlight on Professor Cheng Lai

Financial Ratio Analysis & Equity Valuation

2017-07-13

Almost all the students in accounting major have learned financial ratio analysis and equity valuation. However, the IMBA professor Cheng Lai has taught it so vividly and easy to understand. He starts with a saving account valuation. The simple example tells us that the difference between value and book value is determined by residual or abnormal earnings. Value does not depend on dividend payout, neither is it related to free cash flows. As a result, we need to learn the residual earnings discount model.

Students can ask whatever they want to ask whenever they want. There’s no question that can be seen as a stupid one. Professor Cheng Lai always looks straight at students’ eyes to make sure whether or not they have understood what he talks about. When students seem confused, the professor would explain again and again until the students fully understand. Consequently, students can react quickly and actively as long as the professor puts forward a question. The atmosphere in class is very relaxed, but the students learn well and efficiently.

Professor Cheng Lai communicate with students

Furthermore, Professor Cheng Lai flexibly uses cases and illustrations as teaching technique to make the course more impressive. Companies such as Wal-mart, Carrefour, Levono, Samsung, Apple can frequently be seen on the PowerPoint. Students not only need to learn the valuation method, but also need to use the method to value a company. Professor Cheng Lai emphasizes the utilization of what you have learn. Just as the author of the textbook, Professor Stephen Penman says, “It goes almost without saying that, in an applied discipline like accounting, the aim of research is to affect practice. Theory can be admired on a number of dimensions, but a stream of research is ultimately judged on the products it delivers, how it enhances technology.”

Professor Cheng Lai also provides comparisons of financial ratios between American companies and Chinese companies to give students a whole picture about how well Chinese companies operate. Generally, Chinese companies manifest lower return on equity than American companies, and one of the main reason is that Chinese companies’ asset turnover ratio is too low. Chinese companies really need to enhance their operating efficiency. After listening to the lecture on ratio analysis, I realize once again that accounting information is a kind of communication language from which we can recognize a lot of problems that a company or even a whole country is facing. After introducing a number of financial ratios, Professor Cheng Lai emphasized the necessity of identifying sustainable earnings and distinguishing core and transitory components of earnings, which is important when valuing a firm.

Group assignment and presentation is frequently used during the course. After teaching the valuation method, Professor Cheng Lai asked students to cooperate with each other to value Apple, Levono, Microsoft and Alphabet and give investment suggestions. Students first used Porter’s industry analysis tools to predict the future development of the industry, and then reformulate the financial statements and calculate key financial ratios to capture the business model, operating capacity and earnings sustainability of these sample firms. During the presentation, Professor Cheng Lai sometimes questioned the reasonability of students’ valuation assumptions and the students reacted actively and quickly.

 

Student Presentations

There are also some international students in this IMBA course. These students come from various countries with different cultural background. The presentation style of many western students is full of confidence. When Professor Cheng Lai questioned their assumption and analysis, they can confidently respond and give reasons. In contrast, students from China are relatively conservative. They won’t speak a word unless they have make it sure, which gives audience a somewhat timid impression at the presentation. Teaching these students in one class at the same time is another tough job Professor Cheng Lai needs to do. After all, it’s not very easy to evaluate students with extremely different backgrounds. However, professor did it very well. Students say that they have really learnt much. When the class is over and Professor Cheng Lai said “Good luck for your future”, students all surrounded the professor in the front part of the classroom. It’s really an impressive scene for me.

Students surrounded Professor Cheng Lai at the front of the classroom

To sum up, I think it’s a fantastic class. The knowledge is relatively basic, but the professor emphasized on the appliance of knowledge through cases, illustrations and group presentations, which impresses me very much.