Financial Modeling Interview

Prepared by

Corporate Bridge Must Know Toolkit
www.educorporatebridge.com

Dheeraj Vaidya, CFA, FRM
CEO & MD, Corporate Bridge, Ex- JPMorgan, CLSA India

Some common types include: 1. Corpora te Bri dge Page 1 . 2. it permits analysis of the impact of several key variables. a price inflation factor and a volume factor are used. Violations subject to Indian copyright regulations. For Example: Telecom industry Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution. but offers no insights into the components or dynamics of growth. This useful approach allows modeling of fixed and variable costs in multi product companies and takes into account price vs volume movements. Sales Growth: Sales growth assumption in each period defines the change from the previous period. 4. Unit Volume. Dollar Market Size and Growth: Market Share and Change in Share – Useful for cases where information is available on market dynamics and where these assumptions are likely to be fundamental to a decision. This is simple and commonly used method. Average Price and Change in Price: This method is appropriate for businesses which have simple product mix. A well designed and logical revenue model reflecting accurately the type and amounts of revenue flows is extremely important. There are as many ways to design a revenue schedule as there are businesses. Change in Volume. Inflationary and Volume/ Mix effects: Instead of a simple growth assumption. 3.1 COMMON MODELING APPROACHES INCOME STATEMENT: LINE ITEM DRIVERS a) Revenues For most companies revenues are a fundamental driver of economic performance.

) 7. Modeling should focus on net staffing.2 5. hotels. Product Availability and Pricing 8. 11. Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution. Store. revenues of professional services firms or sales-based firms such as brokers. or to determine whether expansion would require new investments. Luxury car market 6. or a best of breed premium priced niche player) e. Revenue driven by investment in capital. revenue per employee (often based on billable hours). facility or Square footage based: Retail companies are often modeled based on the basis of stores (old stores plus new stores in each year) and revenue per store. Employee based: For example. dis posables. service and add-ons etc). Capacity Utilization and Average Price: These assumptions can be important for businesses where production capacity is important to the decision. 12. Examples include classic razor-blade businesses and businesses like computers where sales of service. for example. Occupancy-factor based: This approach is applicable to airlines. 10. Modeling the installed base is key (new additions to the base.g. software and upgrades are important. Corpora te Bri dge Page 2 . movie theatres and other businesses with low marginal costs. Unit Market Size and Growth: This is more detailed than the preceding case and is useful when pricing in the market is a key variable. Revenue based on installed base (continuing sales of parts. (In the purchase of additional capacity. for example. Violations subject to Indian copyright regulations. (For a company with a price-discounting strategy. marketing or R&D 9. More detailed models will include seniority and other factors affecting pricing. attrition in the base. Volume Capacity. continuing revenues per customer etc).

750 YoY % 86% 800 1.712 5% 23% 2.314 7% 2.451 2.750 10% 330 8 0% 55 10% 399 3.250 8% 330 8 0% 58 5% 498 3.033 10% 14% 2.500 8% 622 8% 453 14% 102 14% 2.3 Company XYZ Revenue Buildup Case 1 FY05 FY06 Historical FY07 FY08E FY09E FY10E FY11E Forecast FY12E FY13E FY14E Applicable for companies with multiple segments.191 8% 493 8% 300 18% 68 18% 2.288 4.100 0% 2.000 9% 365 78% 1.000 730 2.630 3% 1.500 YoY % YoY % 1.286 8% 533 8% 348 16% 79 16% 2.139 3.021 6% 423 16% 212 19% 48 26% 1.USD (per hour) YoY % Total Revenues (USD mn) 2.704 1. IT companies No of employees YoY % No of average work days No of billable hours per day YoY % Average Billing rate .732 1.100 0% 100% 1.825 4% 86% 825 3% 1.200 964 14% 365 6% 178 39% 38 52% 1.260 5% 1.100 0% 100% 1.389 5% 1.100 0% 2.545 1.100 3% 3% 2. Corpora te Bri dge Page 3 .750 10% 365 75% 1.532 5% 2.872 1.000 0% 365 80% 1.130 5.348 Applicable for ITES.575 5% 1.323 5% 1.760 Applicable for Metals & mining companies.411 1.200 20% 1.100 0% 97% 1.389 8% 575 8% 397 14% 90 14% 2.100 0% 2.000 8% 86% 893 5% 1. Most commonly used method by research analysts Business Segment 1 YoY % Business Segment 2 YoY % Business Segment 3 YoY % Others YoY % Total Revenues Case 2 843 345 128 25 1.000 14% 330 8 0% 59 5% 623 4.825 5.620 8% 671 8% 507 12% 115 12% 2.341 1. restaurants etc No of Rooms YoY % No of days Occupancy (%) Average Rent per room per day YoY % Total Revenues (INR mn) Case 4 2.459 5% 2.100 0% 100% 1. same logic can be applied to airlines.253 1.000 0% 365 80% 1. Violations subject to Indian copyright regulations.913 2.528 1.545 4.000 14% 365 80% 1.000 9% 330 8 0% 55 0% 436 3.608 5% 2.039 1.148 7% 2.052 1.228 7% 2.299 1.171 2.386 1.050 -5% 897 3.500 330 8 50 330 2.100 10% 828 3.246 2.073 7% 2.500 13% 330 8 0% 62 5% 737 5.100 8% 88% 937 5% 1.250 8% 365 80% 1.000 0% 330 8 0% 68 5% 898 Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution.750 8% 725 8% 568 12% 129 12% 3.003 7% 2.850 1% 88% 850 3% 1.500 365 80% 1. Oil & Gas companies Production (mn tonnes) Maximum permissible growth Capacity (mn tonnes) Capacity utilization (%) Average Selling Price or ASP (USD per tonne) YoY % Total Revenues (USD bn) Case 3 Used Data validation to ensure production is below capacity Applicable for hotels.677 2.000 0% 330 8 0% 65 2% 858 5.500 8% 365 80% 1.236 5.500 8% 330 8 0% 56 -3% 517 4.500 13% 365 80% 1.580 1.103 8% 457 8% 254 20% 58 20% 1.100 0% 100% 1.000 11% 330 8 0% 64 3% 845 5.848 8% 23% 2.000 11% 365 80% 1.

2. For future years. d) Interest expense (or Net interest expense): 1. Average balance can be used as well (it will give circular reference though) e) Income taxes: 1. General and Administrative: Generally treated as % of Revenues 2. Percentage of Revenues: Simple but offers no insight into any leverage (economy of scale or fixed cost burden 2. For example. Effective rate is calculated as Taxes paid / Pre-Tax income. Variable costs based on revenue or volume. Costs other than depreciation as a percent of revenues and depreciation from a separate schedule: This approach is really the minimum acceptable in most cases. it is actually a revenue driver and not driven by revenues. Violations subject to Indian copyright regulations. Ending balance of previous year can be used to calculate interest expenses to avoid circular reference in excel 3. 3. either the marginal tax rate equivalent to the country of incorporation is taken or if the effective rate is much lesser than the marginal tax Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution. A interest schedule is generally developed to i) calculate interest received on cash and short term investments and ii) calculate interest expenses arising from all types of debt. brokerage business or pure plays trading and marketing firms. This is one of the few income statement items that is driven by balance sheet information. R&D: Generally R&D costs are treated as % of revenues. Corpora te Bri dge Page 4 . fixed costs based on historical trends and depreciation from a separate schedule: This approach is the minimum necessary for sensitivity analysis of profitability based on multiple revenue scenarios c) Operating expenses 1.4 B) COSTS Drivers include: 1. In some cases. Sales and Marketing: Generally modeled as % of Revenues. 3. Interest rate assumptions are needed. Effective tax rate is generally used. and permits only partial analysis of operating leverage.

3. Linked to cash from Cash Flow Statement 2. 2. Other Current Assets (Part of Working Capital Schedule): 4. Receivables = Receivables turnover days/365*Revenues 3. For example.2. Generally modeled as Days Sales Outstanding.3. Ending Balance for PPE = Beginning balance + Capex – Depreciation . Inventories are driven by costs (never by sales). A more detailed approach ma include aging or receivables by business segment if the collections vary widely by segments 2. BALANCE SHEET: LINE ITEM DRIVERS (ASSETS) 1.3.1.3. Plant and Equipment) 5. Cash and Cash Equivalents: 1. Violations subject to Indian copyright regulations. Corpora te Bri dge Page 5 . For Forecast 4.1.4. tax rate can be low but gradually would have to be moved to marginal tax rate.Adjustment for Asset Sales 5.2.1. For Historical 3. Inventories (Part of Working Capital Schedule): 3. Inventory = Inventory turnover days/365*COGS . Accounts Receivable (Part of Working Capital Schedule): 2. Receivables turnover = Receivables/Sales * 365 2.1.1. Separate schedule is prepared taking into account various components 5.5 ate then during the initial years. Modeled as % of sales 5.2. marginal corporate tax rate is 33%. Inventory turnover = Inventory/COGS * 365. Assume an Inventory turnover number for future years based on historical trend or management guidance and then compute the Inventory using the formula given below 3. Fixed Assets (Property.4. Sample Schedule is shown below: Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution. In India.

1 101.5% 81.0 (229.9 22.2 28.2 23.2 26.006.8 21.5% 1.8 175.5% 135.9 965.008.5 Years 97.9 23.7 244.1 3.8 21.4 24.3% 100.008.457 6.5% 166.3 111.6 19.5 Useful Life 8.7% 4.3 941.6 Existing PP&E Years 131.3 3.5 11.8) 1.126 FY07 FY08E FY09E FY10E FY11E Forecast 5.2 82.6) 1.8% 100.4 23.069 161 4.4 3.6 20.7% 229.0 8.0% 12.4 24.5 7.2 23.006.2 19.3 226.0 8.0 8.9 22.9 16.4 (179.5 72.1 (250.3 30.7 17.5% 7.5% 1.9 22.5 2008 2009 2010 2011 2012 2013 2014 Total Depreciation Expense Depreciation as % of PP&E. Corpora te Bri dge Page 6 .1% 194.5 13.2) 1.0 121.6 190.0% 84.2% 210.395 190 4.0 25.2 26.0% 46.4% 154.5 8.3% 23.0 3.3% 6.0 175.4% Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution.6 1.5 Capex 13.536 5.8 15.008.2 22.8 226.6 193.408 230 4.9 92.0% 4.8 (194.9 22.3 (210.2 209.002 220 3.5 250. Violations subject to Indian copyright regulations.0 (154.7% 1.003.2 26.1% 102.2 209.8% 101. net Land Depreciable PP&E.8 3.000.0 (166.6 Fixed Assets (Property.3 23.2) 1.0 8.8 21.8 13.7) 1.6 101.4% 179.974 FY12E FY13E FY14E Net Sales Capital Expenditures Capital Expenditures as % of Net Sales 179.5 14.4 24.3 From: 965.5 9. Plant and Equipment) – Sample Snapshot Company XYZ Depreciation Schedule FY05 FY06 Historical 3.008.5 10.4 193. net Depreciation as % of Capex $190.746 175 5.0 127.979 6.3% 965.0 179.9 179.000.8 23.3 $946.5% 95.9 22.008.8 Beginning Net PP&E Capital Expenditures (Depreciation Expense) (Asset Sales and write offs) Ending Net PP&E Existing Net PP&E.9 12.0 244.8 21.8 226.003.8 21.5% 55.0 Years 8.2 28.8 3.008.9 193.7 244.8 209.9) 1.8 21.9% 100.5% 1.0) 997.5% 1. net Useful Life SYD 851.0 8.4 24.

Violations subject to Indian copyright regulations.0 51.0% 688.2 221.5 4.5 42.0% 743.5 (27.2) 42.7 1.3 2. net (Collection period in days) Inventory (Days outstanding) Other Current Assets (% of Net Sales) Accounts Payable (Days Payable) Accrued Liabilities (% of COGS) Other Current Liabilities (% of COGS) 56.0 51.0 51.1% 37.126.4 406.3 97.1 176.1% 37.78 2.0 4.5% 3.19 6.6) 42.457.1% 37.7 585.739.8 2.9) 42.4 205.1 4.2 (50.0 2.536.180.0% 505.3 206.2 444.3 62.434.0% 546.4) 42.746.370.9 479.3 683.5% 3.672.9 473.1% 37.0 2.3 113.41 8.0 383.9% 2.3 5.3.6 103.3% 50.5 FY07 FY08E FY09E FY10E FY11E Forecast 5.2.4 180.8 445.8 430.0% 802.5 473.1.2 1.8 537.394.2 (37.8) 42.9 327.0 2.8 906.5 652.979.9 2.6 542.5 190.1 258.4.9 FY06 Historical 3. Assume Payables turnover days for future years based on historical trend or management guidance and then compute the Accounts Payables using the formula given below 6.1% 37.1% 37.3 576.0 6.1% 37.333.0 604.14 2.068.268.9% 36. net Inventory Other Current Assets Total Non Cash Current Assets Accounts Payable Accrued Liabilities Other Current Liabilities Total Non-Debt Current Liabilities Net Working Capital/ (Deficit) 462.5 1. Corpora te Bri dge Page 7 .0 51.5 461.0 2.1% 37.5% 3.3 111.0 672.9 322.69 2.4 161.0 6.7% Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution.7 2.7 221.3 279.4 1.4 (40. Accounts Payables = Payables turnover days/365*COGS Complete working Capital Schedule will look like an example given below: Company XYZ Working Capital Schedule FY05 3.2 784.7 54.4 90.7 350.0 6.0% 637.001.0% 589.2 915.1 1.974.3 455.8 83.7 122.0 88.0 559.4) 42.087.4 51.5% 3.1 95.5 6.4 140.5% 3.3) 473.1 5.4% 34.7 58.0 518.63 6.9 376.6 279.5% 3.6 FY12E FY13E FY14E Net Sales Cost of Sales (excluding D&A) Working Capital Balances Accounts Receivable.7 301.0 51.709.007.480.326.7 68.0 6.0 2.407.6 1.5 132.2 1.1 129.4 421.7% 3.006.5% 3.9 465.4 120. Current Liabilities 6.8 847.069.1 4.4 877.0 239.0 2.6 402.3 298.0 87.3 726.1 3. For Historical 6. Accounts Payables (Part of Working Capital Schedule): 6.4 3.0 6.9 348.0 51.9 105.944.7 411.6 (46.5% 3.0 51.8 502.5 940. Payables turnover = Payables/COGS * 365.0 6.598.2 (39.9 143.7 (43.7 81.2 3.174.0 6.2 82.5 632.0% (Increase)/ Decrease in Working Capital Ratios & Assumptions Accounts Receivable.2) 42.4 622.1 438.3 57.0 6.5 4.5 4.0 2.0 (34.7 BALANCE SHEET: LINE ITEM DRIVERS (LIABILITIES) 6.

Post retirement Pension Cost: Kept constant most often 8. For some industries. Retail etc Operating Leases might have to capitalized and converted to debt.3. Deferred taxes: Kept constant most often. like Airlines.1. Long term Liabilities: 8. Can be modeled as % of sales 7.3.5. Corpora te Bri dge Page 8 .1. Key feature of the debt schedule is to use the Revolver facility and how it works so that the minimum cash balance is maintained and ensures that the Cash account does not become negative in case the operating cash flow is negative (Companies in investment phase who need lot of debt in initial years of operation – Telecom cos for example) 8.3. Other Current Liabilities: Can be modeled as % of COGS or as % of Sales 8. this is a complex topic and beyond the scope of discussion at this point Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution.3. Violations subject to Indian copyright regulations.2.2.8 BALANCE SHEET: LINE ITEM DRIVERS (LIABILITIES) 7.4.3.1. Can be modeled as % of sales 8. Can be modeled as % of sales 7.3. Current Liabilities (contd.2.4. Accrued Liabilities: Kept constant most often. Deferred taxes: Kept constant most often. However. Short Term Debt: Usually modeled as part of debt schedule 7.3. Overall range of Debt to equity ratio should be maintained if there is any guidance by the management 8. Notes to the accounts would give repayment terms and conditions which need to be accounted for while building the debt schedule 8. Long term Debt: Usually modeled as part of debt schedule (please refer debt schedule on next page) 8. Debt balance can also be assumed to be constant unless there is a need to increase the debt 8.) 7.3.

3) 20.3) 187.8 (30.0) 114.8 7% 4.5 114.1 (149.3 7.6 FY12E 474.2 291.7) 20.5% 8.50% 11.6 (133.1) 20.8 (132. Corpora te Bri dge Page 9 .0) 183.6 14.Minimum Cash Balance Cash Available for Debt Repayment Long Term Debt Issuance Long Term Debt (Repayments) Cash Available for Revolving Credit Facility Revolving Credit Facility Beginning Balance Discretionary (Paydown)/ Borrowings Ending Balance Long Term Debt Beginning Balance Issuance (Repayment/ Amortization) Ending Balance Revolving Credit Facility FY05 FY06 Historical FY07 FY08E 278.5) 50.5 8.2 Average Balance Interest Rate Interest Income 26.8 32.8 2.7 193.0) 231.1 (190.6 8.50% 0.8 112.5% 28.5 (95.3 516.4) 38.3 398.4 (25.8 FY11E Forecast 429.8 151.3) (93.5% 11.0 75.7 586.0) 381.4 2.7 Average Balance Interest Rate Interest Expense Average Balance Interest Rate Interest Expense Long Term Debt Total Interest Expense Cash Balances Total Interest Income Corporate Bridge Confidential: This material is strictly for the purpose of training and not for redistribution.0) 101.3 8.9) 20.5 171.5 459.5 FY14E 569.9 53.0) 154.6 557.8 7% 132.9 (116.4 (25.0 (43.0 2.9 2.1 2.2 25.9 547.8 7% 99.7 (38.0 151.50% 0.4 (237.8 8.1 113.5% 43.8) 112.4 (95.1 7% 259.6) 20.2 11.6 144.7 FY09E 338.5 (30.7) 351.50% 0.5% 22.6 (24.6 (25.7 (113.1) (113.9 43.0) 20.1 132.0) 113.4) 351.50% 1.8 33.1 (24.0 28.5% 33.8 (35.0 149.7 (25.1 (43.8 586.5) 130.0% 9.0 25.3 2.9 Debt Schedule .7 7% 9.Sample Company XYZ Debt Schedule Cash Flow Available for Financing Activities Proceeds from/ (Repurchase of) Equity Dividends Option Proceeds Effects of Exchange Rates on Cash + Beginning Cash Balance .8 8.9 (133.7 446.2 2.0 371.0 (35.6 FY10E 387.50% 7.0 212.5) 193.3) (134.4) 20.4 326.0) 346.9 8.0 (25.0 (25.3) 149.7 (169.2) (38.6 56.0 338.0) 84.0) 552.4 (140.8) (84.5 132.0 (25.0) 133.5% 14.0) 522.0 41.50% 3.9 8.1 58.9 38.8 7% 55.3 FY13E 520.5 8.0) (123.7) (102.5) 326.7 (140.0) (145.2) 446.1 (212.1 22.0 25. Violations subject to Indian copyright regulations.5 112.