A86045Accoun,ngandFinancialRepor,ng(2017/2018)
Session2FinancialAnalysis:Ra,oAnalysis
PaulG.SmithB.A.,F.C.A.
SESSION2SESSIONOBJECTIVES&OVERVIEW
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Session2Overview
Mins
Sessionobjec,vesandoverview 5
Reviewofpre-workandsession1recap 15
Financialandra,oanalysis 30
Marketmeasures,analystsfocusandotherconsidera,ons 15
Ra,oanalysis,trendanalysisandcommonsizeanalysis 15
Requiredreadingandassignmentfornextsession 5
Summaryandvalida,onandoverviewSession3 5
90
3A86045Accoun,ngandFinancialRepor,ng
CourseObjec,ves
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Attheendofthiscoursestudentswillbeableto:• Readandperformahighlevelinterpreta2onofthefinancialstatementsofcompaniesapplyinginterna9onalaccoun9ngstandards
• Iden2fyandevaluatetheimpactonacompaniesaccountsofalterna9veaccoun9ngmethods
• Carryoutahighlevelassessmentofthetheeconomic-financialposi9onofacompanyrepor9ngunderIAS/IFRS.
CourseOverview
A86045Accoun,ngandFinancialRepor,ng
1.Financialrepor,ngunderIFRS 14.Construc,oncontracts
2.Financialanalysis:Ra,oanalysis 15.OtherNon-financialliabili,es
3.Financialanalysis:SegmentsandEPS 16.Reviewsession
4.Reviewsession 17.Midtermtest
5.Revenues 18.FinancialInstruments1
6.Costsandexpenses 19.FinancialInstruments2
7.Taxa,on-DirectandIndirect 20.Reviewsession
8.Non-currentassets-Intangibleassets 21.CashFlowStatement
9.Non-currentassets-Tangibleassets 22.Groupaccounts/Businesscomb
10.Financialleases 23.Reviewsession
11.Impairmentofassets 24.Reviewsession
12.Reviewsession 25.Finaltest
13.Inventories
PGS
PT
PT
PGS
PGS
5
Objec,vesofSession2&3
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Attheendofthesetwosessions,andthefollowingreviewsession,studentswillbeableto:• Applythebasictechniquesoffinancialanalysis
• Ra,oanalysis• Trendanalysis• Commonsizeanalysis
• Performahighlevelassessmentofacompany’s:• Profitability• Liquidity• Efficiency• Investmentrisk
SESSION1RECAPANDPRE-WORK
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Session1recap• Introduc,ons• Courseobjec,ves,overview,referencematerials,teachingmethods
• Evolu,onofaccoun,ng,stakeholders,IASsandIFRSs
• The5ComponentsofFinancialstatementsandlinkagesbetweenthem
• Basicbookkeepingrecap• Reading,researchandassignmentfornextsession
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• UnderstandingtheFinancialStatementsRequiredbyIAS1– Profitorlossandothercomprehensiveincome(oneortwo
statements,bynatureordes,na,on)– Financialposi,on(classifiedorunclassified)– Changesinequity– Cashflows(Directorindirectmethod)– Notes
• CurrentsAssets• CurrentLiabili,es• TheLinkagesamongthe4FinancialStatements
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Session1recap-Cont’d
RequiredReadingandresearchassignment
• Reading– Melville
• Chapter1–TheRegulatoryFramework(14pages)• Chapter2–TheIASBConceptualFramework(19pages)• Chapter3–Presenta@onofFinancialStatements(30pages)• Chapter4–Accoun,ngpolicies,accoun,nges,matesanderrors(5pages)• Chapter21–RelatedPar,esandChangesinforeignexchangerates(7pages)
– IFRS• IAS1Presenta@onofFinancialStatements(38pages)
• Exercises– MelvilleExercises3.1–3.6– MelvilleOn-linemul,plechoiceques,onsfortheabovechapters– ExerciseEX1FinancialStatements
• Researchassignment– EuropeancompaniesintheTopGlobal100companiesusingIFRS
• Presenta,onop,ons• RA1Datacollec,ontemplateforchosencompanies
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• ChooseacompanyfromthelistofEurope’sTopCompanies
• Obtainthe2015AnnualReportand/orForm20F(forUSSECRegistrants)
• LocatetheConsolidatedFinancialStatementspreparedunderIFRS
• Completethetemplatefortheprofitandlossaccountandstatementoffinancialposi,on
• Obtainanunderstandingofthecompany’sBusinessModel.
ResearchAssignment2Datacollec,on
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ResearchAssignment1-FinancialStatementPresenta,onOp,ons
A86045Accoun,ngandFinancialRepor,ng
SingleStatement or TwoSeparateStatements
ExpensebyNature or Expensesbydes,na,onorFunc,on
StatementofProfitorLossandOtherComprehensiveIncome
StatementofFinancialPosi@on
Current/Non-currentdis,nc,on
or ByOrderofLiquidity
StatementofCashFlows
IndirectMethod or DirectMethod
☐☐
☐
☐
☐
☐
☐
☐
Company_________________
RA1FinancialStatementPresenta,onOp,ons 12
RA1FinancialStatementPresenta,on
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StatementofProfitorLossandOtherComprehensive
Income
StatementofFinancialPosi@on
CashFlowStatement
P&LandOCIOneorTwoStatements
P&LbyNatureorFunc@on
Current/Non-currentorLiquidity
DirectorIndirect
Barclays Two Func,on Liquidity* Indirect
L’Oreal Two Func,on Current/Non-current Indirect
Nestlé Two Func,on Current/Non-current Indirect
Siemens Two Func,on Current/Non-current Indirect
Vodafone Two Func,on Current/Non-current Indirect**
*Page221Contractualmaturityoffinancialassetsandliabili,es**Note19Reconcilia,onofnetcashflowfromopera,ngac,vi,es
BusinessModels
• Howacompanyplanstomakemoney.• Spreadsheetsmadeitpossibletomodelbusinesses–byaccidentmorethanbydesign.
• Twopartmodel– 1.ac,vi,esassociatedwithmakingsomething:design,purchaseofrawmaterials,manufacturingetc.
– 2.ac,vi,esassociatedwithsellingsomething:findingandreachingcustomers,transac,ngasaleetc.
• Nottobeconfusedwithstrategy–i.e.offeringabelerbusinessmodelortoadifferentmarket
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RATIOANALYSIS
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Ra,oanalysis
• Profitability• Liquidity• Efficiency• Investment
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Facilitatestrendanalysis(comparisonover,me)andthecomparisonwithothercompaniesinthesameand/orother
industriesirrespec,veofthecompany’ssizeorcurrencyusedtopreparethe
financialstatements(Commonsizeanalysis)
Profitabilityra,os
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Grossprofitmargin%*(Netsales–costofsales)
Sales=
Opera,ngprofitmargin%**(GrossProfit–opera,ngexpenses) Sales
=
Netprofitmargin%Netincome
Sales=
X100
X100
X100
GrossProfit*
Opera,ngProfit**
Sales=netsales/salesexcludingVAT/salesrevenues/consolidatedsalesrevenues/revenue(s)/totalrevenues/grouprevenues/turnoverGrossprofit=grossmarginOpera,ngprofit=opera,ngincome/incomefromopera,onsNetincome=incomefortheperiod/consolidatednetincome/netprofit/netprofitfortheyear/profitaoertax/profitfortheperiod(year)(financialyear)
Rela,vetosales
Profitabilityra,osCont’d
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18
Returnoncapitalemployed(ROCE)%**
ProfitbeforeInterestexpenseandtax(PBIT/EBIT)
Shareholdersequity*+Long-termdebt*=
Returnonequity(ROE)%
Profitaoertax
Shareholder’sequity*=
X100
X100
Rela,vetoInvestment
*Technicallyshouldbebasedontheaverageofbeginningandendingamounts**MelvilleusesNon-currentliabili,esasopposedtoLong-termdebt
Shareholders’equity=Netassets,Capitalemployed,Equity,Totalequity,stockholders’equity
Liquidityra,os
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Currentra,oCurrentassets
Currentliabili,es=
Quickra,o(acidtest)
= Currentassets–inventories*
Currentliabili,es
*Inventories=Inventoriesandwork-in-progress,stock-in-trade
X:1
X:1
Efficiencyra,os
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Assetturnover** Sales
Non-currentassets*=
Inventoryturnover = Costofsales
Inventory*
Inventoryholdingperiod(DOI)
= Inventory*
CostofsalesX365
*Technicallyshouldbebasedonaverageofbeginningandendingamounts**Melvilleusesnetassetsorcapitalemployed
Costofsales=CostofrevenuesInventories=Inventoriesandwork-in-progress,stock-in-trade
Times
Times
Days
Efficiencyra,osCont’d
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Accountsreceivablecollec,onperiod(DSO)
= *Accountsreceivable(lessVAT)
CreditSalesX365
Accountspayablecollec,onperiod(DPO)
= *Accountspayable(lessVAT)
CreditpurchasesX365
*Technicallyshouldbebasedonaverageofbeginningandendingamounts
Accountsreceivable=tradeaccountsreceivable,receivables,tradereceivablesAccountspayable=tradeaccountspayable,accountspayabletrade,currenttradeandotherpayables
Days
Days
Investmentra,os
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DividendcoverNetincome
Dividends=
Earningspershare(IAS33)
Netincome
Weightedaveragenumberofordinarysharesoutstandingduringtheyear
=
Price/Earnings(P/E) Sharemarketprice
Earningpershare(EPS)=
DividendYield%Dividendpershare
Sharemarketprice= X100
DividendpershareOR Earningpershare(EPS)
Investmentra,oscont’d
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CapitalGearingLong-termdebt
*Equity=
Interestcover Profitbeforeinterestexpenseandtax(PBIT/EBIT)
Interestexpense=
Long-termdebt=financialliabili,es,long-termborrowings,financialdebts,interestbearingloansandborrowings,debt,financialdebt,non-currentfinancialdebt,non-currentborrowingsanddebt,borrowingsandotherfinancialliabili,esInterestexpense=financecosts,financingcosts,financialexpenses,financeexpense,financialinterestondebt,costofnetfinancialdebt,financecostsongrossdebt
*MelvilleusesEquity+Non-currentliabili,es
MARKETMEASURES,ANALYSTSFOCUSANDOTHERCONSIDERATIONS
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MeasuresthatMaler1. Execu,onofcorporatestrategy2. Managementcredibility3. Qualityofcorporatestrategy4. Innova,veness5. Abilitytoalractandretaintalentedpeople6. Marketshare7. Managementexperience8. Alignmentofcompensa,onwithshareholder
interests9. Researchleadership10. Qualityofmajorbusinessprocesses
A86012ManagementandPrinciplesofAccoun,ng 25Source:Ernst&YoungLLPMeasuresthatmaler
AnalystsFocus
• EBITDARM• EBITDAR• EBITDA• EBIT• EBT
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Earningsbeforetax,interest,deprecia,on,amor,za,on,rentsandrestructuring,managementfees
Otherusefulra,os/informa,on
• Effec,vetaxrate(Incometaxesasa%ofPre-taxincome)
• Intangiblesasa%totalassets• Intangiblesasa%ofequity• Debtmaturi,es/covenants• MarketCapitaliza,onvs.Netequity• R&Dasa%ofrevenues• Con,ngencies
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Expectedrela,onshipsamongdata–someexamples
Observa@on Consequence
Salesincrease AccountsreceivableincreasebutDSOshouldremainsthesame.Inventoriesmaydecreaseunlessproduc,onhasincreased
Grossmarginincreases Salespriceshaveincreased,pricesofrawmaterialshavedecreasedorachangeinmixofsalestomoreprofitableproducts/services
Workingcapitalincreases Improvedcollec,onofaccountsreceivables,delayedpaymentofcreditors,posi,vecashflowsfrominves,ngandfinancingac,vi,es
Effec,vetaxrateislowerthatstatutorytaxrate
Useofprioryeartaxlosses,propor,onofprofitfromcountrieswithlowertaxrates,existenceofnon-taxableincome
Inventorydecreases SalesincreaseA86045Accoun,ngandFinancialRepor,ng 28
RATIO,TREND&COMMONSIZEANALYSIS
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Ra,oAnalysis
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ProfitabilityGrossmargin(Grossprofit/Revenues) % #DIV/0!Opera,ngmargin(Opera,ngprofit/Revenues) % #DIV/0!Netprofitmargin(Netprofit/Revenues) % #DIV/0!Returnonequity(Netprofit/Shareholders'equity) % #DIV/0!ReturnonCapitalemployed(PBIT/Shareholders'equity+Long-termdebt) % #DIV/0!
LiquidityCurrentra,o(Currentassets/Currentliabili,es) Ra,o:1 #DIV/0!Quickra,o(Currentassets-inventory/Currentliabili,es) Ra,o:1 #DIV/0!
Efficiencyra@osAssetTurnover(Sales/Non-currentassets) Times #DIV/0!Inventoryholdingperiod(DOI)(Costofsales/inventoryx365) Days #DIV/0!Inventoryturnover(Costofsales/inventory) Times #DIV/0!Tradereceivablescollec,onperiod(DSO) Days #DIV/0!Tradepayablepaymentperiod(DPO) Days #DIV/0!
Investmentra@osEarningspershare(EPS) USD #DIV/0!PriceEarningsra,o(P/E)(Shareprice/EPSxCHFXrate) Times #DIV/0!Dividendcover Times #DIV/0!Dividendyield % #DIV/0!Debt/Equityra,o(Gearing) Ra,o #DIV/0!Interestcover Times #DIV/0!
OtherEffec,vetaxrate % #DIV/0!R&Dasa%ofrevenues % #DIV/0!Intangiblesasa%oftotalassets % #DIV/0!Intangiblesasa%ofequity % #DIV/0!
Comparison
samon
gstd
ata
TrendAnalysis
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Profitability Year1 Year2 Year3Grossmargin(Grossprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Opera,ngmargin(Opera,ngprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Netprofitmargin(Netprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Returnonequity(Netprofit/Shareholders'equity) % #DIV/0! #DIV/0! #DIV/0!ReturnonCapitalemployed(PBIT/Shareholders'equity+Long-termdebt) % #DIV/0! #DIV/0! #DIV/0!
LiquidityCurrentra,o(Currentassets/Currentliabili,es) Ra,o:1 #DIV/0! #DIV/0! #DIV/0!Quickra,o(Currentassets-inventory/Currentliabili,es) Ra,o:1 #DIV/0! #DIV/0! #DIV/0!
Efficiencyra@osAssetTurnover(Sales/Non-currentassets) Times #DIV/0! #DIV/0! #DIV/0!Inventoryholdingperiod(DOI)(Costofsales/inventoryx365) Days #DIV/0! #DIV/0! #DIV/0!Inventoryturnover(Costofsales/inventory) Times #DIV/0! #DIV/0! #DIV/0!Tradereceivablescollec,onperiod(DSO) Days #DIV/0! #DIV/0! #DIV/0!Tradepayablepaymentperiod(DPO) Days #DIV/0! #DIV/0! #DIV/0!
Investmentra@osEarningspershare(EPS) USD #DIV/0! #DIV/0! #DIV/0!PriceEarningsra,o(P/E)(Shareprice/EPSxCHFXrate) Times #DIV/0! #DIV/0! #DIV/0!Dividendcover Times #DIV/0! #DIV/0! #DIV/0!Dividendyield % #DIV/0! #DIV/0! #DIV/0!Debt/Equityra,o(Gearing) Ra,o #DIV/0! #DIV/0! #DIV/0!Interestcover Times #DIV/0! #DIV/0! #DIV/0!
OtherEffec,vetaxrate % #DIV/0! #DIV/0! #DIV/0!R&Dasa%ofrevenues % #DIV/0! #DIV/0! #DIV/0!Intangiblesasa%oftotalassets % #DIV/0! #DIV/0! #DIV/0!Intangiblesasa%ofequity % #DIV/0! #DIV/0! #DIV/0!
Comparisonover,me
CommonSizeAnalysis
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Profitability CoA CoB CoCGrossmargin(Grossprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Opera,ngmargin(Opera,ngprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Netprofitmargin(Netprofit/Revenues) % #DIV/0! #DIV/0! #DIV/0!Returnonequity(Netprofit/Shareholders'equity) % #DIV/0! #DIV/0! #DIV/0!ReturnonCapitalemployed(PBIT/Shareholders'equity+Long-termdebt) % #DIV/0! #DIV/0! #DIV/0!
LiquidityCurrentra,o(Currentassets/Currentliabili,es) Ra,o:1 #DIV/0! #DIV/0! #DIV/0!Quickra,o(Currentassets-inventory/Currentliabili,es) Ra,o:1 #DIV/0! #DIV/0! #DIV/0!
Efficiencyra@osAssetTurnover(Sales/Non-currentassets) Times #DIV/0! #DIV/0! #DIV/0!Inventoryholdingperiod(DOI)(Costofsales/inventoryx365) Days #DIV/0! #DIV/0! #DIV/0!Inventoryturnover(Costofsales/inventory) Times #DIV/0! #DIV/0! #DIV/0!Tradereceivablescollec,onperiod(DSO) Days #DIV/0! #DIV/0! #DIV/0!Tradepayablepaymentperiod(DPO) Days #DIV/0! #DIV/0! #DIV/0!
Investmentra@osEarningspershare(EPS) USD #DIV/0! #DIV/0! #DIV/0!PriceEarningsra,o(P/E)(Shareprice/EPSxCHFXrate) Times #DIV/0! #DIV/0! #DIV/0!Dividendcover Times #DIV/0! #DIV/0! #DIV/0!Dividendyield % #DIV/0! #DIV/0! #DIV/0!Debt/Equityra,o(Gearing) Ra,o #DIV/0! #DIV/0! #DIV/0!Interestcover Times #DIV/0! #DIV/0! #DIV/0!
OtherEffec,vetaxrate % #DIV/0! #DIV/0! #DIV/0!R&Dasa%ofrevenues % #DIV/0! #DIV/0! #DIV/0!Intangiblesasa%oftotalassets % #DIV/0! #DIV/0! #DIV/0!Intangiblesasa%ofequity % #DIV/0! #DIV/0! #DIV/0!
ComparisonwithothercompaniesIrrespec,veofsizeorrepor,ngcurrency
REQUIREDREADINGANDRESEARCHASSIGNMENT
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RequiredReadingandresearchassignment
• Reading– Melville
• Chapter22–Ra,oAnalysis(26pages)– IFRS
• None• Exercises
– MelvilleExercises22.1–22.6– MelvilleOn-linemul,plechoiceques,onsfortheabovechapter– ExerciseEX2FinancialAnalysisExercises
• Researchassignment– EuropeancompaniesintheTopGlobal100companiesusingIFRS
• RA2Datacollec,ontemplateforchosencompanies– Calculatetheprofitability,liquidity,efficiencyandinvestmentra,os– PerformathreeyeartrendanalysisoftheProfitandlossaccounts– Performatwoyearcomparisonofthestatementoffinancialposi,on– Iden,fyreasonsforsignificantfluctua,onsfromtheCompany’sAnnualReport
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RA1Researchassignmenttemplate
A86045AccountingandFinanciaklReporting PaulG.Smith
ResearchassignmenttemplateCompany
2016 2015 2014 2016 2015IncomeStatement Statementoffinancialposition €millions €millions
€millions €millions €millions Non-currentassetsNetsales GoodwillOtherrevenues Intangibleassets
Totalrevenues 0 0 0 Property,plant&equipmentCostofsales Investments
Grossprofit 0 0 0 DeferredtaxesOperatingexpenses OtherResearch&development 0 0Selling,generalandadministrativeexpenses CurrentassetsDepreciation,ammortizationandprovisions Inventories/Long-termcontractsOtherincome(expense) Tradereceivables
Operatingprofit 0 0 0 OthercurrentassetsFinanceincome(expense) Short-terminvestmentsShareofresultofassociatedcompanies Cashandcashequivalents
Pre-taxprofit 0 0 0 AssetsheldfordisposalIncometax 0 0
Netprofitcontinuingoperations 0 0 0Discontinuedoperations Totalassets 0 0
Netprofit 0 0 0
CurrentliabilitiesShort-termBorrowingsTradepayablesIncometaxesProvisionsOthercurrentliabilitiesLiabilitiesheldfordisposal
0 0
Non-currentliabilitiesLong-termBorrowingsProvisionsDeferredtaxliabilitiesPensionsandemployeebenefitsOther
0 0Shareholders'equityTotalequityandliabilities 0 0
WeightedAveragenumberofsharesoutstandingSharepriceMarketcapitalization 0 0Dividendpershare
NBIntheincomestatementinsertnega?venumberswithaminussign
RA2ResearchAssignmentTemplate
A86045Accoun,ngandFinancialRepor,ng
RA2Researchassignmenttemplate
Ifthecompanyclassifiesexpensesbynatureputallexpensesintoopera,ng
expenses
35
Session2summary
• RecapSession1andthe4basicfinancialstatements
• Financialanalysis• Ra,oanalysis(profitability,liquidity,efficiencyandinvestment)
• Ra,o,trendandcommonsizeanalysis• Reading,researchandassignmentfornextsession
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OverviewofSession3
• SegmentAnalysis–(IFRS8)• Earningspershare–(IAS33)• Handsonapplica,onanddiscussionoffinancialanalysistechniquesusingthecompaniesresearched– Commonsizeanalysis– Trendanalysis– Ra,oanalysis– Industrycomparisons
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SessionValida,on
• Namethekeyra,o(s)usedtoassessliquidity• Whattypeofanalysisdoweperformtocomparecompaniesofdifferentsizesandacrossdifferentindustries?
• Whatra,owouldyouusetoassessacompany’sabilitytocon,nuetopaytheinterestonitsloansasitbecomesdue?
• Howmanyyearsdatadoweneedtoperformameaningfultrendanalysis?
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