Essential Finance & Accounting for

Management Consultants & Business Analysts

Practical guide with case studies & real-life examples

1
In business you have to make a lot of important decisions

During consulting projects or at a managerial level you will need to be

able to analyze financial data and to draw conclusions out of it. 2
In business you have to make a lot of important decisions

Unfortunately, the financial data may look extremely confusing to you at

the beginning due to lack of consistence in naming and weird logic used3
In business you have to make a lot of important decisions

In this course I will teach you the most important things about accounting & finance
you need to know to work without any problems during consulting projects 4
 We will cover all the essential things that you need to know to work well during
consulting
Understanding the 3 financial
statements Financial indicators Modeling P&L Introduction to Valuation

Case studies & exercises

5
 Target Group What you will learn What you will get

 Students that did not have finance
& accounting at the university
 Management Consultants &
Business Analysts especially for
those that did not finish economic
or business school
 Managers
 How to read & analyze 3 main
financial statements
 Model Income Statement in Excel
 Analyze financial ratios
 Estimate the value of a firm
 Ready made analysis in Excel
 Outline / overview of most
important terms
 List of Recommended readings
(articles, books)

6
 This course will help you master the most
important things in finance & accounting on the
level of top management consultants

7
How the course is
organized

8
In business you have to make a lot of important decisions

In this course I will teach you the most important things about accounting & finance
you need to know to work without any problems during consulting projects 9
 Example of modeling
Profit & Loss / Income Balance sheet
P&L – FMCG business
statement statement
model

Analysis of financial Introduction to

Cash flow statement
indicators valuation & case study

10
Profit & Loss statement

11
Profit & Loss statement –
Introduction

12
In this section we will discuss the following things

How we can divide Different type of

What is P&L?
costs? costs

Examples of real P&L Why Depreciation is

Gross Profit
of famous firms a weird cost

13
3 financial statements

14
There are 3 financial statements that you have to look at when
analyzing the firm

Profit & Loss /

Balance Sheet Cash flow
Income Statement

 Shows how much money you  Shows what you have / what
have earned and did you you need to have a
make a profit or a loss? legitimate business
 Shows how you did it, what  Shows you also where you
where the revenue and how got the money from to buy
much you had to spend in the things you have
terms of costs to generate (shareholders, banks,
them? suppliers, other borrowers
etc.)
 Shows how much money the
firm has actually generated
and what has consumed the
cash on 3 levels
 You can see what the firm
spends the cash on:
investment, paying off debts,
buying back shares or maybe
paying of dividends
 Cash is divided into 3
streams: Operating CF,
Investing CF and Financing
CF

15
What is the role of P&L

16
As we said previously there are 3 financial statements that you have to
look at when analyzing the firm

Profit & Loss /

Balance Sheet Cash flow
Income Statement

17
In this section we will discuss the P&L

Profit & Loss /

Balance Sheet Cash flow
Income Statement

18
We have previously said that there are 2 main goals of P&L / Income
statements

How much you have

How you did it?
earned / lost?

19
So we can say that the purpose of the P&L is to show you how you got
from the Revenue to the Net Profit.

Revenue & Corporate Net Profit /

- Costs - =
Income Income Taxes Income

20
To understand better the business we will divide revenue and costs into
more granular categories in the next lectures

Revenue & Corporate Net Profit /

- Costs - =
Income Income Taxes Income

21
 Revenue –
General division

22
As we said the P&L consists of the following elements. Let’s get deeper
into Revenue

Revenue & Corporate Net Profit /

- Costs - =
Income Taxes Income

23
There are 3 ways in which you can get Revenue / incomes

You can get interest from

You can sell your own money you have or get other You can get other operating
products or goods from other income from financial income i.e. higher value of
firms activities your assets, grants, penalties

24
That is why the revenue can be presented as 3 separate streams

Revenue & Other operating

= Revenue + Interest income +
Income income

25
Let’s also look at the alternative names for those components of
Revenue

Revenue & Other operating

= Revenue + Interest income +
Income revenue

Other operating
Net Sales Finance Income
income

Turnover Financial Income

26
Revenue – Case Introduction

27
Let’s imagine that you have to estimate the revenues of a burger chain.
Using data try to estimate the 3 groups of revenue & income 28
 Using the below data try to estimate the revenue & income from 3
different sources

They sell 15 M of burgers for

USD 4 per piece

They will sell 200 old

refrigerators for USD 5 K each

They have cash from previous

years USD 100 M

They get 2% interest rate on the

cash at the bank 29
Costs – General division

30
As we said the P&L consists of the following elements. Let’s get deeper
into Costs

Revenue & Corporate Net Profit /

- Costs - =
Income Income Tax (CIT) Income

31
There are 3 main components of costs

Interest paid as well as other You can get other operating

financial costs i.e. gains due costs i.e. Lower valuation of
Operating Expenses to exchange rate differences your assets, penalties paid

32
The costs we can divide into 3 main groups

Operating Interest Other operating

Costs = + +
Expenses expenses expenses

33
Let’s also look at the alternative names for those components of Costs

Operating Interest Other operating

Costs = + +
Expenses expenses expenses

Other operating
Opex Finance expense
costs

Costs and
Financial costs
expenses

Financial
Operating costs
expenses

34
Costs – Case Introduction

35
We are back to our burger chain in Spain. Using data
try to estimate the 3 groups of costs / expenses. 36
 Using the data try to estimate the costs in 3 groups

Operating expense (excluding

other) is USD 2.3 per burger

Net book value (cost) of 1 fridge

is USD 3 K each

They have a little bit of debt. In

total USD 20 M

They pay 3% interest rate on the

debt to the bank
37
P&L – General structure

38
Just as reminder this is how the general income statements looks like

Revenue & Corporate Net Profit /

- Costs - =
Income Income Tax (CIT) Income

39
Since we can present revenue in the form of 3 main components…..

Revenue & Other operating

= Revenue + Interest income +
Income income

40
….corresponding to 3 elements in the costs. It means that we can get
everything together in the P&L / income statements

Operating Interest Other operating

Costs = + +
Expenses expenses expenses

41
 Now let’s get everything together and see different levels of Profit / Income

Other Other
Interest Operating Interest Corporate
Revenue + income
+ operating - Expenses
- operating - expense
- Tax (CIT)
= Net Profit
revenue expenses

Other Other
Operating Interest Interest Corporate
Revenue - Expenses
+ operating - operating + income
- expense
- Tax (CIT)
= Net Profit
revenue expenses

Interest expense net /

Regular operating profit Other operating profit Corporate
Tax (CIT) =
+ + Profit from financial - Net Profit
(loss) (loss)
activities

Interest expense net /

Corporate
Tax (CIT) =
Operating profit (loss) + Profit from financial - Net Profit
activities

Corporate
Tax (CIT) =
Profit (loss) before income tax - Net Profit

42
 Now let’s get everything together and see different levels of Profit / Income

Other Other
Interest Operating Interest Corporate Net
Revenue + income
+ operating - Expenses
- operating - expense
- Tax (CIT)
= Income
revenue expenses

Other Other
Operating Interest Interest Corporate Net
Revenue - Expenses
+ operating - operating + income
- expense
- Tax (CIT)
= Income
revenue expenses

Interest expense net /

Regular operating Other operating income Corporate Net
+ + - Tax (CIT) =
Profit from financial
income (loss) (loss) Income
activities

Interest expense net /

Corporate Net
+ - Tax (CIT) =
Operating income (loss) Profit from financial
Income
activities

Corporate Net
- Tax (CIT) =
Income (loss) before income tax
Income

43
 Now let’s get everything together and see different levels of Profit / Income

Other Other
Interest Operating Interest Corporate Net Profit
Revenue + income
+ operating - Expenses
- operating - expense
- Tax (CIT)
= / Income
revenue expenses

Other Other
Operating Interest Interest Corporate Net Profit
Revenue - Expenses
+ operating - operating + income
- expense
- Tax (CIT)
= / Income
revenue expenses

Interest expense net /

Regular operating profit / Other operating profit / Corporate Net Profit
+ + - Tax (CIT) =
Profit from financial
income (loss) income (loss) / Income
activities

Interest expense net /

Corporate Net Profit
+ - Tax (CIT) =
Operating profit / income (loss) Profit from financial
/ Income
activities

Corporate Net Profit

- Tax (CIT) =
Income / Profit (loss) before income tax
/ Income

44
Profit & Loss statement –
Case Introduction

45
Now let’s get the revenues and costs that you have estimated previously together.
Try using previous calculations to estimate the Profits / Income on different levels.
46
 Now try to estimate Profits / Income on different levels

Estimate the Operating Profit

Estimate Interest Expense net

Estimate Profit (loss) before

income taxes

Using tax rate of 23% estimate

Net Profit
47
Profit & Loss statement –
Case Solution

48
Now let’s see how we can present the evolution of revenue and profits on a slide.
This will be one of the ways you can show the Profit & Loss elements 49
 Below how you can present it in the form of a slide

Burger restaurant chain financial data

In millions of USD

34,5

60,0 0,4 1,4

6,3
25,5
25,9 27,3
21,0

Revenue Operating Operating Other operating Operating Interest Profit (loss) Tax Net Profit
expenses Income- regular income (loss) Income expense net before income
taxes

50
Alternative names for Income /
Profit

51
 Just as a reminder we had the following levels of profits

Other Other
Interest Operating Interest Corporate Net Profit
Revenue + income
+ operating - Expenses
- operating - expense
- Tax (CIT)
= / Income
revenue expenses

Other Other
Operating Interest Interest Corporate Net Profit
Revenue - Expenses
+ operating - operating + income
- expense
- Tax (CIT)
= / Income
revenue expenses

Interest expense net /

Regular operating profit / Other operating profit / Corporate Net Profit
+ + - Tax (CIT) =
Profit from financial
income (loss) income (loss) / Income
activities

Interest expense net /

Corporate Net Profit
+ - Tax (CIT) =
Operating profit / income (loss) Profit from financial
/ Income
activities

Corporate Net Profit

- Tax (CIT) =
Income / Profit before income tax
/ Income

52
Below some other naming of Operating income

Operating income (loss)

Operating profit (loss)

Earnings before Interest &

Taxes (EBIT)

EBIT

Income from operations

53
Let’s have a look at alternative names for Income before income tax

Income (loss) before income

taxes

Profit (loss) before income

taxes

Pre-tax profit (loss)

Earnings (loss) before

income taxes

EBT

54
Below some other naming of Interest Expense Net

Interest expense net

Financial income and

expenses - net

Financial expenses, net

Interest income, net

55
Division of Operating Expenses

56
There are 2 general ways in which you can divide the operational expenses /
costs to present them to the Board of Management & shareholders

By type of costs By stages

 In this approach you look  In this approach the type

only at the type of the of costs does not matter
cost. You don’t care where  You divide the costs by
it occurs. stages at which they
 There are 8 main occurred / were created
categories of costs

57
Let’s start with the division of operational expenses by type
Materials, Energy &
Utilities

Labor / Payroll costs

Social security & other

employee benefits

External Services
Operating Expenses
Depreciation &
Amortization
Cost of goods and
materials sold

Taxes & Charges

Other costs
58
Division of Operating Expenses
– by stages

59
As we said there are 2 ways in which you can divide the operational expenses. Let’s
look how it looks if we do it by stages

By type of costs By stages

 In this approach you look  In this approach the type

only at what type of cost of costs does not matter
 There are 8 main  You divide the costs by
categories of costs stages at which they
occurred / were created

60
 Let’s see how we divide operational expenses by stages

Cost of Goods Sold Cost of Goods Sold Cost of Goods Sold

(COGS) (COGS) (COGS)

Operating Expenses
Selling & Marketing
costs
Selling, general and
Selling, general, administrative
R&D costs
administrative and expenses (SG&A)
other expenses General &
administrative costs

Other costs Other costs

61
 In some cases (i.e. Retail. Operating Expenses don’t include COGS)

Cost of Goods Sold

(COGS)

Costs & Expenses

Operating Expenses

62
COGS alternative names

63
 COGS are important part of Operating Expenses

Cost of Goods Sold Cost of Goods Sold Cost of Goods Sold

(COGS) (COGS) (COGS)

Operating Expenses
Selling & Marketing
costs
Selling, general and
Selling, general, administrative
R&D costs
administrative and expenses SG&A
other expenses General &
administrative costs

Other costs Other costs

64
Below some other naming of Cost of Goods Sold that are used in reports

Cost of Goods Sold (COGS)

COGS

Cost of Sales

Cost of Products Sold

Cost of Revenue

65
What is Gross Profit

66
 Just as a reminder we had the following levels of profits. Quite often firms
introduce an intermediate level before the Operational Income

Other Other
Interest Operating Interest Corporate Net Profit
Revenue + income
+ operating - Expenses
- operating - expense
- Tax (CIT)
= / Income
revenue expenses

Other Other
Operating Interest Interest Corporate Net Profit
Revenue - Expenses
+ operating - operating + income
- expense
- Tax (CIT)
= / Income
revenue expenses

Interest expense net /

Corporate Net Profit
+ - Tax (CIT) =
Operating profit / income (loss) Profit from financial
/ Income
activities

Corporate Net Profit

- Tax (CIT) =
Income / Profit before income tax
/ Income

67
If we use the division of costs by stages we would have the following
results.

Revenue

- COGS

Selling, general and

-
administrative expenses (SG&A)

- Other costs

= Operating Income (loss) / EBIT

68
If we use the division of costs by stages we would have the following results.
Gross Profit is a intermediate step between Revenue and Operational Income.

Revenue
- Gross Profit
- COGS

Selling, general and

-
administrative expenses (SG&A)

- Other costs

= Operating Income (loss) / EBIT

69
If we squeeze Gross Margin after COGS we get the following result

Revenue

- COGS

= Gross Profit

Selling, general and

-
administrative expenses (SG&A)

- Other costs

= Operating Income (loss) / EBIT

70
When it comes to alternative names Gross Profit is often called Gross
Margin

Gross Profit

Gross Margin

GM

71
What is Net Margin

72
Some firms want to have additional intermediate step between Gross
Profit and Operating Income
Revenue

- COGS

= Gross Profit / Margin

- Net Margin
- Selling & Marketing costs

General & administrative costs

-
including R&D costs

- Other costs

= Operating Income (loss) / EBIT

73
If we squeeze Net Margin after Selling & Marketing costs we would get the following
result
Revenue

- COGS

= Gross Profit / Margin

- Selling & Marketing costs

= Net Margin

General & administrative costs

-
including R&D costs

- Other costs

= Operating Income (loss) / EBIT

74
 Gross Profit –
Case Introduction

75
We are back to our burger restaurant chain case study. You will be asked to
estimate the Gross Profit / Margin given more detailed data on costs 76
 Now try to estimate the Gross Profit

Estimate the Gross Profit /

Margin

Estimate the Net Margin

77
Gross Profit – Case Solution

78
Now let’s see how we can present the development of the Profit starting from
Revenue then moving on to Gross Profit / Margin to Net Profit / Income 79
 Below how you can present it in the form of a slide

Burger restaurant chain financial data

In millions of USD

28,5

3,6
3,0
61,0 1,4
6,3
32,5
28,9 25,9 27,3
21,0

Revenue Cost of Gross Margin Selling & Net Margin Other Operating Interest Profit (loss) Tax Net Profit
Goods Sold Marketing Operting Income expense net before
(COGS) costs Expenses income taxes

80
Depreciation / Amortization –
a weird cost

81
Depreciation is a weird cost because it is not a cash cost and its size depends on the
assumed accounting policy. It is crucial also for determining the value of non-current assets.82
Depreciation is trying to estimate to what extent a fixed asset was used in a
specific period, what part of it’s value was transferred on products produced /
sold?

Usage of a non-current asset that

Depreciation ≈
occurred in a specific period

83
 Let’s have a look how annual Depreciation can be calculated using straight line
deprecation

Salvage / Scrap value at

Asset Purchase price -
the end of the usage
Annual Deprecation =
Lifetime of usage in
years

Salvage / Scrap value at

= 0
the end of the usage

Asset Purchase price 1

Asset Purchase
Annual Deprecation = = x
Lifetime of usage in price Lifetime of usage in
years years

84
 Let’s have a look how annual Depreciation can be calculated using straight line
deprecation

Asset Purchase price 1

Asset Purchase
Annual Deprecation = = x
Lifetime of usage in price Lifetime of usage in
years years

1
Depreciation rate =
Lifetime of usage in
years

Asset Purchase price

Asset Purchase Depreciation
Annual Deprecation = = x
Lifetime of usage in price rate
years
85
Depreciation / Amortization –
a short example

86
 Assets that can be depreciated should be treated in the following
manner

Calculate the Calculate the value of

Pick the depreciation
Decide how many depreciation rate and the asset after
Buy the fixed asset / amortization
years you will use it deprecation for the depreciation for the
method
specific period given period

87
 Assets that can be depreciated should be treated in the following
manner

Calculate the Calculate the value of

Pick the depreciation
Decide how many depreciation rate and the asset after
Buy the fixed asset / amortization
years you will use it deprecation for the depreciation for the
method
specific period given period

88
 Let’s calculate the depreciation for a truck we have just bought

Calculate the Calculate the value of

Pick the depreciation
Decide how many depreciation rate and the asset after
Buy the fixed asset / amortization
years you will use it deprecation for the depreciation for the
method
specific period given period

 The truck was purchased  It will be used for 10  We will use the straight-
for USD 20 K years line depreciation
 We assume that at the
end of the 10 years that
track will be worth 0

89
 Let’s have a look how annual Depreciation can be calculated using straight line
deprecation

Asset Purchase price

Asset Purchase Depreciation
Annual Deprecation = = x
Lifetime of usage in price rate
years

20 K
Truck Annual
= = 2K
Deprecation
10

Truck Annual
= 20 K x 10% = 2K
Deprecation
90
 Assets that can be depreciated should be treated in the following
manner

Calculate the Calculate the value of

Pick the depreciation
Decide how many depreciation rate and the asset after
Buy the fixed asset / amortization
years you will use it deprecation for the depreciation for the
method
specific period given period

 The truck was purchased  It will be used for 10  We will use the straight-
for USD 20 K years line depreciation
 We assume that at the
end of the 10 years that
track will be worth 0
 Since we use the truck  We use the following
for 10 years and the truck formula for calculating
will be worth 0 at the end the value: Value at the
it means that every year end of the year = Value
that truck will “lose” 10% at the beginning of the
of its value year - Deprecation
 This means that we  At then end of the Year 1
calculate the annual the truck will be worth =
deprecation using the 20 K – 2 K = 18 K
following formula:
Depreciation = Value at
purchase x 10%
 In our case it will be USD
20 K x 10% = USD 2 K
91
Remember that when it comes to assets the problem is that they have 3
different components that you have to track. On top of that every asset has to
be tracked separately

Gross book value

Depreciation Net book value
(Cost of the Asset)

Sum of all
Gross book value
- (Accumulated) = Net book value
(Cost of the Asset)
Depreciation

92
Don’t mistake the Net book value of the asset with its market value,
which may be much bigger or much smaller

Net book value ≠ Market value

93
 Now try to estimate the Net book value of the truck. Below some useful
information

Truck will be used for 10 years

It’s worth 20 K at the beginning

Calculate Depreciation using 2

methods

Calculate Net Book value of the

truck for every year
94
Depreciation / Amortization –
Case Introduction

95
Let’s imagine that you are supposed to calculate the depreciation
& amortization for a firm that does hand-made clay products. 96
 A few information about the firm

They produce 4 groups of

products

They will depreciate assets

divided into 5 groups

For every group there is a

different depreciation rate

At the same time they do

investments into assets
97
Capex and Depreciation

98
When it comes to assets the problem is that they have 3 different components
that you have to track. On top of that every asset has to be tracked separately

Gross book value Depreciation Net book value

Sum of all
Gross book value - = Net book value
Depreciation

99
 When it comes to assets the problem is that they have 3 different components
that you have to track. On top of that every asset has to be tracked separately

FA Intangibles
 Depreciation
P&L
FA Buildings

CAPEX FA Machinery FA Summary

FA Transp eqmt

BS
FA Other  Net book
value

100
 Assumptions on fixed assets and depreciation

 Intangibles – 20%
 Buildings – 2,5%
Depreciation  Equipment and Machinery - 10%
and  Transportation – 20%
amortization  Others – 20%
rates

 The Company will do mainly replacement investment equal to depreciation from

previous year
Investment
 The new investment should be assumed to come into use in the middle of next year.
policy
 In 2018 the company plans to invest PLN 2 M in equipment and machinery

101
What is EBITDA

102
Let’s start with the definition of EBITDA

Earnings Before Interest Taxes, Deprecation &

EBITDA =
Amortization

103
We calculate it by adding back the Depreciation & Amortization

Operating Profit Depreciation &

+ = EBITDA
EBIT Amortization

104
Why we do it? As we have discussed Depreciation is one of the Operating Costs

Materials, Energy &

Utilities

Labor / Payroll costs

Social security & other

employee benefits

External Services
Operating Expenses
Depreciation &
Amortization
Cost of goods and
materials sold

Taxes & Charges

Other costs
105
The problem with the Depreciation & Amortization is that it is not a
cash cost

Depreciation &
≠ Cash costs
Amortization

106
That is why we quite often bring back the Depreciation & Amortization and
calculate on the bases of that EBITDA
Revenue

- COGS

= Gross Profit / Margin

Selling, general and

-
administrative expenses (SG&A)

- Other costs

= Operating Income (loss) / EBIT

+ Depreciation & Amortization

Earnings Before Interest, Taxes,

=
Depreciation & Amortization (EBITDA) 107
Why people look at EBITDA?

108
Just as reminder the Depreciation & Amortization are not cash costs

Depreciation &
≠ Cash costs
Amortization

109
Therefore, we can say that EBITDA is an estimation of Operating Profit if
we take into account only cash operating costs

Operating Profit Depreciation &

+ = EBITDA
EBIT Amortization

110
There are 3 main reasons why managers, investors, analysts look at
EBITDA
You want a Profit that is
impacted by cash costs
only
 Eliminates the effect of the
biggest non-cash expense –
the Depreciation &
Amortization
 Is not influenced by the
capital structure
It is a good proxy for
Cash generation
 It shows you roughly how
much cash can firm
generates from Operations,
provided the company does
not grow in revenues or the
growth does not require a lot
of working capital
 It shows you roughly how
much cash can company
generate for investors
(owners & banks) if big
Capex is not required
Used widely for
Valuation
 EBITDA is not influenced by
the assumed policy for
depreciation & amortization
 EBITDA is a proxy of
capability to generate Cash
 EBITDA multiplier used in
many industries to valuate
businesses
111
Modeling of Profit & Loss
statement for FMCG Firm

112
Modeling of Profit & Loss for
FMCG Firm – Introduction

113
In this section we will model the P&L statement for a cosmetics
firm. In this way I will show you how it is done in practice in Excel. 114
 A few information about the firm

They have 1 product line

1 production site

2 sales channel

They use a mix of traditional and

modern marketing
115
In this section we will discuss a few things

Difference between Main challenges in

Business drivers
FMCG and private label FMCG

Modeling P&L in Excel

116
Introduction to FMCG
Business Model

117
We can be talking about 2 different models here

Branded FMCG with strong brand

Private labels
awareness

Private
label

118
Main challenges in FMCG

119
For branded FMCG product I propose to have a look at the following
aspects

Reach (Weighted and Your strategy across

Brand Awareness
numeric distribution) many channels

Managing customer
Managing price across
experience across Product lifecycle
channels
channels

Spreading beyond Efficiency of marketing

Leveraging the brand
original target group activities

Lifecycle of your target

Seasonality
groups

120
Introduction to modeling
FMCG in Excel

121
In the modeling phase I will concentrate on branded FMCG products.
The model will be created for cosmetics

Branded FMCG with strong brand

Private labels
awareness

Private
label

122
 In the next lecture I will show you the main drivers of the FMCG model
and on the basis of this we will create a business model in Excel

Cost of traffic
x

Rent
Ratio of visitors +
Total searches % conversion to searches
People
Average cost of 1
x visit
Development
# transactions

x Total revenue Total Costs

Average
revenue per
transaction
-
x

% Fee of the Average

Total margin
marketplace transaction value

123
Drivers of FMCG Model

124
 The FMCG business model is driven by some basic KPIs

# sold

Market share Market size

Unit Gross Margin x

- Average price
Cost of sales &
Gross Margin Head office
marketing
Unit production
cost

-
+ -

Fixed Cost /
Unit variable cost Net Margin Operational profit
Quantity produced
125
FMCG business model –
modeling in Excel

126
 Let’s go through basic assumptions of the model

FMCG product Sales Channels Marketing

 Cosmetics – 1 product  Traditional small stores  TV ads

 1 production site  Retail chain  Market research
 Social Media
 Mailing
 Loyalty program
 Outdoor campaigns

127
Balance Sheet

128
Balance Sheet –
Introduction

129
As we said previously there are 3 financial statements that you have to
look at when analyzing the firm

Profit & Loss / Income

Balance Sheet Cash flow
Statement

130
In this section we will discuss the Balance Sheet

Profit & Loss / Income

Balance Sheet Cash flow
Statement

131
In this section we will discuss the following things

How Balance Sheet is Selected Items of

What is Balance Sheet
organized Balance Sheet

Examples of Balance
Exercises / Case study
Sheets of famous firms

132
What is a Balance Sheet?

133
There are 3 financial statements that you have to look at when
analyzing the firm

Profit & Loss /

Balance Sheet Cash flow
Income Statement

 Shows what you have / what

you need to have a
legitimate business
 Shows you also where you
got the money from to buy
the things you have
(shareholders, banks,
suppliers, other borrowers
etc.)

134
The balance sheet has 2 sides. The left one - Assets tells you what you have.
The right one - Liabilities & Equity tells you where you got your money from

Assets Liabilities & Equity

135
You have to remember 1 very important rule about the Total Assets and
Total Liabilities & Equity

Total Liabilities &

Total Assets =
Equity

136
Balance Sheet elements

137
Let’s discussed the components of both sides of balance sheet

Assets Liabilities & Equity

138
Assets we divide into 2 groups

Current Assets

Liabilities & Equity

Non-current Assets

139
The left side – the Liabilities & Equity we divide in 3 groups

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

140
In Europe we have a little bit different order for the left side and the
right side of the balance sheet

Assets Equity & Liabilities

141
Assets we order from the least liquid to the most liquid. Equity &
Liabilities we ordered by maturity period

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

142
In some cases we use different naming for the liabilities. Long-term
instead of non-current and short-term instead of current

Equity
Non-current Assets

Long-term liabilities

Current Assets
Short-term liabilities

143
Also in some cases instead of Non-current asset you can have Fixed
Assets

Equity
Fixed Assets

Non-current liabilities

Current Assets
Current liabilities

144
Non-current assets –
General overview

145
Just as a reminder Non-current assets are a part of Assets. In USA you
can find them in the lower part of the Assets

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

146
In Europe you can find them in the top part of the Assets

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

147
Let’s see what is included in non-current assets

Property, plant and Tangible fixed assets

equipment net net

Goodwill

Intangible fixed assets

Intangible assets net
net
Long-term receivables
Non-current Assets
& loans
Long-term
investments
Other non-current
assets

Deferred Income Tax Deferred tax assets

148
Current assets –
General overview

149
Just as a reminder current assets are a part of Assets. In USA you can
find them in the top part of the Assets

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

150
In Europe you can find them in the lower part of the Assets

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

151
 Let’s see what is included in non-current assets

Inventories Inventory

Trade receivable

Accounts receivable Receivables

Income tax receivable

Other short-term
receivables & loans
Current Assets
Other financial current
assets
Other non-financial
current assets

Prepayments

Cash and cash

equivalents
152
Equity – Main sources

153
Before we move on to specific elements of Equity a few basic facts
about Equity
Capital paid in by
Shareholders
 Shareholder pay in capital to get the
shares in the firm
 They do it when they establish the firm
or when new shares are issued
 A special case of issuing the shares is
going public – IPO. In this case you not
only issue new share but the shares can
be publicly traded
Retained earnings
 Quite a lot of firms at some point
generate profit
 This profit can be shared with the
shareholders (Dividend) or it can be kept
in the firm as the company needs capital
to grow its business
 This is decided by shareholders
 You will find here the retained earnings
from previous years and the profit from
current year
154
Equity – Price of shares

155
When you are issuing share you have to remember that they have 2
different prices

Selling price of a share Face value of a share

50 1

156
 Due to the difference in the prices most firms will split in Equity the capital they
have gathered from shareholders into 2 parts

Selling price of a
Capital gathered = # of shares x share

Face value of a Selling price – face

Capital gathered = # of shares x share + # of shares x value a share

Capital gathered = Common Stock + Additional paid-in capital USA

Capital gathered = Share capital + Share premium Europe

157
 Let’s see what happens if we issue 1 000 common shares. With a face value 1
and sales price of 50

Selling price of a
Capital gathered = # of shares x share = 1 000 x 50 = 50 000

Face value of a Selling price – face

Capital gathered = # of shares x share + # of shares x value a share

Capital gathered = 1 000 x 1 + 1 0000 x (50-1)

Common Stock /
Share Capital = 1 000

Additional paid-in
capital / Share = 49 000
premium
158
Instead of face value we quite often have the term par value

Face value of a
share

Par value

159
Equity – General overview

160
Just as a reminder Shareholder’s Equity is a part of Liabilities & Equity.
In USA you can find them in the lower part of Liabilities & Equity

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

161
In Europe you can find them in the top part of the Equity & Liabilities

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

162
In USA you would have roughly the following division of Equity

Preferred stock

Common stock

Treasury stock

Shareholders’ Equity Additional paid-in capital

Accumulated other
comprehensive income loss

Retained earnings

Others

163
In Europe we would have a bit different structure of Equity

Share capital

Share premium

Equity Treasury stock / share

Retained earnings

Others

164
In Europe we would have a bit different structure of Equity

Share capital

Share premium

Treasury stock / share

Equity Capital redemption reserve

Employee Benefit Trust

shares

Retained earnings

Other i.e. reserves

165
Non-current liabilities –
General overview

166
Just as a reminder non-current liabilities is a part of Liabilities & Equity.
In USA you can find them in the middle part of Liabilities & Equity

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

167
In Europe you can find them also in the middle part of the Equity &
Liabilities

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

168
Below the most typical elements that are included in non-current
liabilities

Bank loans and

Long-term debt
borrowings

Deferred Income taxes Deferred tax liabilities

Employee liabilities
Non-current liabilities
Long-term Provisions

Long-term Accruals

Other long-term Other non-current

liabilities liabilities

169
Current liabilities –
General overview

170
Just as a reminder current liabilities is a part of Liabilities & Equity. In
USA you can find them in the top part of Liabilities & Equity

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

171
In Europe you can find them in the lower part of the Equity & Liabilities

Equity
Non-current Assets

Non-current liabilities

Current Assets
Current liabilities

172
 Let’s have a look at how current liabilities are divided
Bank loans and
Short-term debt
borrowings
Trade and other Trade and other
Accounts payable
payables liabilities

Deferred revenue Unearned revenue

Deferred income taxes Income tax payable Income tax liabilities

Current liabilities
Employee liabilities

Provisions

Accrued expenses and Accrued and other

Accruals
other liabilities
Other current
liabilities
173
Balance Sheet – Short Exercises –
Introduction

174
Imagine that we would have to trace the changes in the balance sheet for
a ceramic tiles producer. Try to solve the exercises on your own. 175
 Below a few information about ceramic tiles producer

The ceramic tiles producer is strong in

the Eastern Europe

Still, he is using the USA setup for the

balance sheet

Try to solve 10 exercises on your own

176
 Below the exercies that you have to try and reflect in the balance sheet

 You bought Inventory for USD 2 M. You paid cash

Exercise 1

 You decided to buy a new building. For that you took long-term loan. The building costs
Exercise 2 USD 10 M.

 Your customer repaid old receivables worth USD 1 M

Exercise 3

 You issued new shares and got cash thanks to that. You have issued common shares
Exercise 4 worth USD 20 M

 You renegotiated with your suppliers that you can pay him later for the materials he is
Exercise 5 supplying. This will help you increase the level of the materials you have at your factory
by 50%
177
 Below the exercies that you have to try and reflect in the balance sheet

 You have decided to pay out a dividend to your shareholder worth USD 2 M
Exercise 6

 You renegotiated with the bank – part of your short-term debt (USD 2 M) was
Exercise 7 transformed into a long-term debt

 Your customer repaid old receivables worth USD 1 M

Exercise 8

 Due to change in value you decide to depreciate additionally your machines by USD 1
Exercise 9 M

 You were unable to pay your long term debt so the bank agreed to convert it into
Exercise 10 Equity. The amount was USD 5 M

178
Deferred Income Tax

179
Accounting rules the firm uses hardly every are the same as the tax
rules

Accounting rules ≠ Tax rules

 Approach to Depreciation
 Some costs are not treated as
costs by the Tax Law
 Some revenues can be
recognized at different timing

180
This difference leads to difference in Tax that has to be paid vs tax according to
the accounting rules. The Difference is shown as Deferred Income Taxes

Accounting rules ≠ Tax rules

Accounting Net Income ≠ Taxable Net Income

Tax according to Accounting Rules ≠ Tax according to Tax Rules

181
If the Tax according to Accounting Rules is bigger than Tax according to Tax Rules
than we have a Deferred Income Tax in the Liabilities (Deferred Tax Liability)

Tax according to Accounting Rules > Tax according to Tax Rules

Deferred Tax Liability

182
If the Tax according to Accounting Rules is smaller than Tax according to Tax Rules
than we have a Deferred Income Tax in the Assets (Deferred Tax Asset)

Tax according to Accounting Rules < Tax according to Tax Rules

Deferred Tax Asset

183
Deferred income taxes are the result of the difference between your accounting
rules and the tax rules. They may appear both in Assets and in Liabilities

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

184
If it appears in the Assets it means that the Tax was paid now but it refers to future
period from the point of view of our accounting policy (mainly due to different
approach to costs and revenues)

Current liabilities
Current Assets

Deferred Income Tax

Non-current liabilities

Non-current Assets
Shareholder’s Equity

185
It also means that in the future the firm will show less taxes in financial statement.
That is why we create an asset that will be used in the future

Current liabilities
Current Assets

Deferred Income Tax

Non-current liabilities

Non-current Assets
Shareholder’s Equity

186
Deferred Income Tax may appear as a part of Non-current Assets as well, if the
tax difference relates to longer than 1-year period

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

Deferred Income Tax

187
If it appears in the Liabilities it means that the Tax was not paid. It will be paid
in the future

Current liabilities
Current Assets

Non-current liabilities

Deferred Income Tax

Non-current Assets
Shareholder’s Equity

188
In other words the Net Income we show in the books was impacted by it but we still
have to pay it so in other words we owe the cash to the government / state

Current liabilities
Current Assets

Non-current liabilities

Deferred Income Tax

Non-current Assets
Shareholder’s Equity

189
Accrual Accounting

190
 Accrual Accounting has impact both on costs as well as revenues
Costs
 Costs have to be recorded when they are
incurred
 Costs have to be recognized as costs at a
specific month to which they are linked
 The month in which you recognize the
costs does not have to be the same as the
month in which you pay for the cost
 You can pay the money before the costs is
recognized (Prepayment / Prepaid
Expenses). You pay ahead of time for the
whole period of usage i.e. software
 You can pay the money after the cost is
recognized (Accrued Expenses). You got
the materials from your supplier but you
still have not paid for them.
Revenues
 Revenue has to be recorded when it’s
earned
 Revenue has to be recognized as revenue
for a specific month to which it is linked
 The month in which you recognize the
revenue does not have to be the same as
the month in which you receive the money
 You can get the money before the revenue
is recognized – you still have not delivered
the good / services (Unearned Revenue). A
good example are advanced payments
 You can get the money after the revenue is
recognized (Accrued Revenue). You have
delivered the good but you still have not
got the money
191
Let’s see where we put those accruals in the Balance sheet

Assets Liabilities & Equity

Prepayment / Prepaid
Accrued Expenses
Expenses

Accrued Revenue Unearned Revenue

192
 We can also show the accruals in the following way

Money paid or received Money paid or received

BEFORE AFTER

 Costs Prepayment / Prepaid

Accrued Expenses
Expenses

 Revenue
Unearned Revenue Accrued Revenue

193
Prepayments – Short Exercise –
Introduction

194
Imagine that we would like to see what will be the impact of prepayment
for a software on the balance sheet of the ceramic tile producer. 195
 Now try to reflect the purchase of the software and subsequent gradual
transfer of the prepayment into costs

Ceramic tiles producer buys a

software for cash

The software is worth 12 M

You are allowed to put 1/12 of the

prepayment into cost every month
196
Working Capital

197
Working Capital
– Introduction

198
So far we have looked at asset and liabilities separately. However, quite often
analysts and manager are interested in the difference between certain type of
assets and liabilities

Current liabilities
Current Assets

Non-current liabilities

Non-current Assets
Shareholder’s Equity

199
You can approach Working Capital in many ways. Below 2 most popular
ones

Working Capital = Current Assets - Current Liabilities

Current Liabilities without

Working Capital = Current Assets -
bank loans

200
There are quite a lot of reasons why it makes sense to calculate the
working capital

Provides a rough estimation of the Helps you forecast the required cash
adjustments to EBITDA in CF for growth

Helps you forecast the required cash

Gives you actionable tips
for growth

Gives you actionable tips

201
In the next lectures I will show you in details how to calculate the
working capital

Hand made ceramic tiles

202
Working Capital –
Case Introduction

203
Let’s imagine that you are supposed to calculate the working capital for a
ceramic tiles producer. We have some data on his sales and costs. 204
 A few information about the firm

They prduce 4 groups of products

They need quite detailed working capital

We have P&L data and balance sheet

from previous years

Use data to forecast how working capital

will change
205
In the case study we will analyze 4 major groups of balance sheet
positions to calculate the Working Capital
Cash and
Working Capital
equivalents

Inventory Receivables Liabilities

Payments in advance
Materials Trade liabilities
for deliveries

WIP Prepayments for

Trade receivables
deliveries

Finished Products Receivables resulting Liabilities resulting

from taxes, subsidies from salaries

Goods Liabilities resulting

Other receivables
from taxes, charges

Short term accruals Accruals

206
We will draw data from other profit and loss sheets and on the basis of the
data we will calculate the working capital positions that in turn will be fed
into Balance and sheet as assets or liabilities

 Assets
P&L BS - Assets

M&E

Sales Working Capital

External
Services
BS - Liabilities
Other  Liabilities

207
 When it comes to assets the problem is that they have 3 different
components that you have to track. On top of that every asset has to be
tracked separately

Basis i.e. sales / Position of Working

Turnover rotation in
operating costs / x days ÷ 365 = capital i.e. inventory /
materials receivables

208
 Assumptions on working capital

 Turnover rotation in days will go down by 5 days in 2018 due to better production
WIP organization

Inventory of  Turnover rotation in days will go down by 10 days in 2018 due to better production
finished organization
products

 Will remain on the same level as in 2015

The rest of
positions

209
Cash flow

210
Cash flow – Introduction

211
As we said previously there are 3 financial statements that you have to
look at when analyzing the firm

Profit & Loss /

Balance Sheet Cash flow
Income Statement

212
In this section we will discuss the Cash flow statement

Profit & Loss /

Balance Sheet Cash flow
Income Statement

213
In this section we will discuss the following things

What is the purpose of Details on each and

3 part of Cash Flow
Cash Flow statement every part of CF

Examples of real Cash

Flows

214
What is the purpose
of the Cash Flow?

215
There are 3 things we have to remember about P&L positions

Cost / Expense ≠ Cash outflow

Revenue ≠ Cash inflow

Net Income ≠ Cash generated

216
We previously mentioned that to some extent an EBITDA is a simplified
estimator of the cash generated from Operations

EBITDA ≈ Cash generated from Operations

217
That is why we need a separate place where we look at real cash generated
from all activities. That is why we need a Cash Flow statement

Cash outflow

Cash inflow

218
There are number of things you want to achieve by creating and
analyzing Cash Flow (CF)

Estimate how much money was

Forecast & plan cash requirements
generated

Understand what generates the CF is a great starting point for a

cash discussion with the Shareholders

Understand where the cash is CF is a great starting point for a

going / on what is spent discussion about strategic decisions

219
3 part of Cash Flow

220
We want to see how the Cash Flow have altered the cash position
during the period. We divide the Cash Flows into 3 streams

Cash at the beginning of the period

+ CF from Operating Activities:

+ CF from Investing Activities:

+ CF from Financing Activities:

= Cash at the end of the period

221
Cash Flow from Operating
Activities

222
Just as a reminder we divide the Cash Flows into 3 streams

Cash at the beginning of the period

+ CF from Operating Activities

+ CF from Investing Activities

+ CF from Financing Activities

= Cash at the end of the period

223
Let’s see how we calculate the Cash Flow from Operating Activities

Net Income

Depreciation & Amortization

Removing costs & revenues that are not related to

operational activities

Removing others costs & revenues that are not

cash based (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

224
Let’s see some examples of costs & revenues not related to the
operational activities

Net Income

Depreciation & Amortization

Removing from costs & revenues that are not

related to operational activities

Removing from costs & revenues that are not cash

costs (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

225
Below some examples of costs & revenues not related to the
operational activities

Gains on acquisitions and dispositions

Interest expenses net

226
Let’s go back to the general overview of the CF from Operating Activities

Net Income

Depreciation & Amortization

Removing from costs & revenues that are not

related to operational activities

Removing from costs & revenues that are not cash

costs (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

227
Let’s see some examples of costs & revenues that are not cash costs

Net Income

Depreciation & Amortization

Removing from costs & revenues that are not

related to operational activities

Removing from costs & revenues that are not cash

costs (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

228
Below some examples

Stock-based compensation

Deferred income taxes

229
Let’s go back to the general overview of the CF from Operating Activities

Net Income

Depreciation & Amortization

Removing from costs & revenues that are not

related to operational activities

Removing from costs & revenues that are not cash

costs (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

230
The biggest changes in cash flow from operating activities is usually due
to changes in working capital

Net Income

Depreciation & Amortization

Removing from costs & revenues that are not

related to operational activities

Removing from costs & revenues that are not cash

costs (similar to Depreciation)

Changes in the working capital

Other adjustments

= CF from Operating Activities

231
Below some examples of changes due to changes in the working capital

Changes in Inventories

Changes in Accounts Receivable

Changes in other Assets

Changes in Account Payables

Changes in other current liabilities, excluding
bank loans and borrowings
Changes in Prepayments and Accruals

232
Cash Flow from Investing
Activities

233
Just as a reminder we divide the Cash Flows into 3 streams

Cash at the beginning of the period

+ CF from Operating Activities

+ CF from Investing Activities

+ CF from Financing Activities

= Cash at the end of the period

234
Cash Flow from Investing Activities we would calculate using the
following elements

Capital expenditures / Investment in

non-current assets

Proceeds from asset sales

Acquisitions, net of cash acquired

Purchases of short-term investments

Sales & maturities of short-term

investments

Other

= CF from Investing Activities

235
Cash Flow from Financing
Activities

236
Just as a reminder we divide the Cash Flows into 3 streams

Cash at the beginning of the period

+ CF from Operating Activities:

+ CF from Investing Activities:

+ CF from Financing Activities:

= Cash at the end of the period

237
Cash Flow from financing activities consist of the following elements

Proceeds from issuance of shares

Dividends to shareholders

Repurchases of stock / Treasury stock

purchases

Proceeds from debt and other

Repayments of debt and other

Interest expense net

Other

= CF from Financing Activities

238
How to calculate Cash flow in
practice

239
In Cash flow you try to divide the CF into 4 parts

Operating
activities CF

Investment CF
CF

Financial CF

CF to / from
shareholders

CF

240
We will try to get from Net profit to the Cash position

Net profit

CF

Change in Cash and Change in Cash and

cash equivalents = cash equivalents
BS

241
 We will estimate CF on 4 different levels

FA Summary P&L BS

 Deprecation  Difference between Interest earned  Change in inventories, receivables

and paid  Change in provisions, short-term
liabilities, prepayments and accruals
 Other adjustments

CF – Operating
Activities

 Disposal of intangible and Investment CF

 Capital expenditure
CF – before tangible fixed assets
CAPEX
financial activities

 Interest paid and earned

 Change in bank and other Financial CF
CF – Free cash loans
P&L
flows to equity

 Shareholder-related payments
and contributions CF – Free cash CF related to
SC shareholders
 Gross dividend paid flows to firm

242
Financial analysis of indicators

243
Financial analysis of indicators –
Introduction

244
In this section we will discuss the following things

Profitability ratios Liquidity ratios Activity ratios

Debt ratios Case study

245
Profitability ratios –
Overview

246
There are plenty of profitability ratios used. Below the most popular
ones

% Gross Margin
% EBITDA
% Gross Profit

% EBIT
ROE
Return on Sales ROS

% Net Income ROA

247
Let’s have a look at the definition of ratios and what they tell us

Gross Margin
% Gross Margin =
Net Sales

248
Let’s have a look at the definition of ratios and what they tell us

Operating Income EBIT

% EBIT
Return on Sales - ROS =
Net Sales

249
Let’s have a look at the definition of ratios and what they tell us

Net Income
Net Profit
% Net Income
Profit Margin =
Net Sales

250
Let’s have a look at the definition of ratios and what they tell us

EBITDA
% EBITDA =
Net Sales

251
Let’s have a look at the definition of ratios and what they tell us

Net Income
ROA
(Return on Assets) =
Assets

252
Let’s have a look at the definition of ratios and what they tell us

Net Income
ROE
(Return on Equity) =
Equity

253
ROE decomposition

254
 ROE can be decomposed into other ratios. Below one example

Net Income Net Income Assets

ROE = = x
Equity Assets Equity

Net Income
ROE = = ROA x Equity Multiplier
Equity

255
 ROE can be decomposed into other ratios. Below one example

Net Income Net Income Sales Assets

= x x
Equity Sales Assets Equity

ROE = % Net Income x Asset Turnover x Equity Multiplier

256
Liquidity ratios –
Overview

257
There are plenty of liquidity ratios used. Below the most popular ones

Operating Cash Flow

Current Ratio (CR)
Ratio

Quick Ratio (QR)

Cash Ratio (CshR)

258
Let’s have a look at the definition of ratios and what they tell us

Current Assets
Current Ratio (CR) =
Current Liabilities

259
 Let’s have a look at the definition of ratios and what they tell us

Inventory &
Current Assets -
Prepayments
Quick Ratio (QR) =
Current Liabilities

260
Let’s have a look at the definition of ratios and what they tell us

Cash & Cash

Equivalents
Cash Ratio (CshR) =
Current Liabilities

261
Let’s have a look at the definition of ratios and what they tell us

Operating Cash Flow

Operating Cash Flow
=
Ratio
Total Debt

262
Activity / Efficiency ratios –
Overview

263
There are plenty of activity / efficiency ratios used. Below the most popular
ones

Inventory conversion Cash Conversion

period Cycle

Receivables
Asset turnover
conversion period

Payables conversion
period

264
Conversion periods have alternative names that are widely used

Inventory conversion Days Inventory

period = Outstanding (DIO)

Receivables Days Sales

=
conversion period Outstanding (DSO)

Payables conversion Days Payable

=
period Outstanding (DPO)

265
Let’s have a look at the definition of ratios and what they tell us

Inventory
Inventory conversion
= x 365 days
period
COGS

266
Let’s have a look at the definition of ratios and what they tell us

Receivables
Receivables
= x 365 days
conversion period
Net Sales

267
Let’s have a look at the definition of ratios and what they tell us

Account Payables
Payables conversion
= x 365 days
period
COGS

268
 Cash Conversion Cycle (CCC) we calculate using previous ratios

Cash Conversion Inventory Receivables Payables

= + -
Cycle (CCC) conversion period conversion period conversion period

Cash Conversion Days Inventory Days Sales Days Payable

= + -
Cycle (CCC) Outstanding (DIO) Outstanding (DSO) Outstanding (DPO)

269
Let’s have a look at the definition of ratios and what they tell us

Net Sales
Asset Turnover =
Assets

270
Debt ratios –
Overview

271
There are plenty of debt ratios used. Below the most popular ones

Debt to Equity ratio Net Debt-to-EBITDA

Debt Ratio
(D/E) Ratio

272
Debt Ratio can be defined in 2 ways

Debt
Debt Ratio =
Assets

Liabilities
Debt Ratio =
Assets

273
Let’s have a look at the definition of ratios and what they tell us

Debt
Debt to Equity ratio
=
(D/E)
Equity

274
Let’s have a look at the definition of ratios and what they tell us

Cash & Cash

Debt -
Net Debt-to-EBITDA Equivalents
=
Ratio
EBITDA

275
Analyses of the Financial Model

276
Analyses of the Financial Model
– Introduction

277
Let’s imagine that you will use the financial model of ceramic products
producer to analyze his current position & draw conclusion from it. 278
 A few information about the firm

They produce 4 groups of products

They have 1 production site

Check their P&L, CF and BS

Suggest what can be improved in their

business
279
Valuation

280
Valuation Case study–
Introduction

281
In this section we will discuss the following things

Introduction to Introduction to DCF Difference between FCFF

Valuation methods and FCFE

Introduction to using
Case study
multipliers for valuation

282
We are going back to our example of ceramic tiles producer and we will
see what kind of methods we can use to estimate its valuation. 283
 Just as a reminder a few information about the firm

They have 4 groups of products

We have DCF models

Use DCF and multiplier method to

estimate their value

284
Introduction to Valuation

285
You can try to estimate the value of 2 different categories

Enterprise Value

Equity Value Net Debt Value

286
For valuations you can use 2 groups of valuations methods

DCF methods Multiplier methods

 DCF of Free Cash Flows to  EV/EBIT

Firm (FCFF)  EV/EBITDA
 DCF of Free Cash Flows to  P/E ratio
Equity (FCFE)

287
Introduction to
DCF methods

288
 In DCF model you use forecast of cash flows to estimate the value of the
company

2018 2019 2020 2021 2022 t+1

Step 1 – Calculate the cash

𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022 𝐶𝐹𝑡+1
flows

Step 2 – Calculate the 𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022 𝐶𝐹𝑡+1

present value of CF (1 + 𝑟) (1 + 𝑟)2 (1 + 𝑟)3 (1 + 𝑟)4 (1 + 𝑟)5 (1 + 𝑟)𝑡+1

Step 3 – Calculate the 𝐶𝐹𝑡+1

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
Terminal
Valuation(Continuing) (𝑟 − 𝑔)
Value

𝒕
Step 3 – Calculate the 𝑪𝑭𝒊 𝑻𝒆𝒓𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆
+
Valuation (𝟏 + 𝒓)𝒊 (𝟏 + 𝒓)𝒕+𝟏
𝒊=𝟏

289
In the next lecture we will use 2 different methods for DCF valuation

Free Cash Flows to Firm Free Cash Flows to Equity

(FCFF) (FCFE)

Cash flow before financial

activities

290
Difference between
FCFF and FCFE

291
In the next lecture we will use 2 different methods for DCF valuation
Free Cash Flows to Firm
(FCFF)
 DCF Cash Flow before
financial activities
 As a discounting rate we use
Weighted Average Cost of
Capital (WACC)
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
Free Cash Flows to Equity
(FCFE)
 DCF Free Cash Flows to
Equity
 As a discounting rate we use
cost of equity
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
292
FCFF and FCFE evaluate different things

 Cash flow before financial activities / Free Cash

Flows to Equity (FCFF) estimates the Enterprise
Value
 Afterwards using the Net Debt Value you can
estimate Equity

Enterprise Value

Net Equity Value Net Debt Value

 Free Cash Flows to Equity (FCFF) estimates

Equity Value

293
 Introduction to using
multipliers for valuation

294
For simplicity often valuation is calculated using multipliers. Multipliers also
help you check the valuation from DCF which is subject to many assumptions

EV/EBIT EV/EBITDA P/E ratio

295
 Using the Multiplier method of valuation is relatively easy

Estimate the Estimate the EBIT,

Find comparable multipliers for the EBITDA and net profit
Apply the multiplier Estimate Equity Value
companies comparable. for the company and
Eliminate outliers adjust them

296
The methods we discussed estimate different values

 Using EV/EBITDA multiplier and EV/EBIT you can

estimate the Enterprise Value

Enterprise Value

Equity Value Net Debt Value

 Using P/E ratio you can estimate Equity Value

297
Below how we can use the EV/EBIT multiplier to estimate the Equity
Value in 2 steps

EV/EBIT EBIT of the Enterprise Value of

x =
multiplier company the company

Enterprise Value of Debt of the Equity Value of the

- =
the company company company

298
Using P/E ratio is even easier

Net profit of the Equity Value of the

P/E ratio x =
company company

299