Advanced Corporate Finance

Session 1
Interpreting and Analysing Financials
• 3 Financials : Income Statement, Balance Sheet, Cash Flow Statement

• 3 purposes :
• Income Statement : where the wealth is measured, where the profitability is judged
• Balance Sheet : a picture of what I owe and what I own
• Cash Flow Statement : a mp4, where I can understand if the operating cycle generated
cash, how much the company decided to invest and how the company financed its
operating and investment cycles

• 3 different representation of the reality:

• Balance sheet is about commitments (given, received)
• Cash flow Statement is about cash-ins and cash outs
• Income Statement is hybrid, recording both commitments and cash.
Income Statement Analysis
Top Line vs Bottom Line : which one do you prioritize?
• Top Line Growth priority means you are in a conquering strategy
• Consequences could be : downgrading your profitability margins (gross, EBITDA,….)
• When and Why would you do that?
• You would do that in a young to early stage of your development
• You may be valued no thgat much on how profitable you are but how fast your growth is.

• Bottom Line Growth priority means you are focused on profitability and not that much on
top line growth
• Consequences could be :
• a much better margin level and a lower reliance on external cash flows (banks, market) to
fund your growth
• An independance over time
Balance Sheet Analysis
• What I own (asset side) and what I owe (Liabilities side)
• Fundamental equation that balances the BS : Assets – Liabilities = Shareholders Equity.
• Assets:
• What is there is supposed to create value in the future (otherwise, it is expensed): this principle is valid for
tangibles intangibles and financials.
• Goodwill should be looked at carefully as it could be reassessed in case acquisitions are not profitable
enough
• R&D and its evolution as well : if R&D does not create value, then it should have been expensed and if not,
it should then be deducted from Shareholders’ equity (impairment test).
• Inventory and account Receivables are cash drags and should be minimized. They contribute to the working
capital need.
• In business model of subscriptions, where cash is received upfront and turnover is gradually recognized on
the P&L, deferred revenue makes the bridge between the two (billed and cash).
Balance Sheet Analysis
• Liabilities:

• Trade and commercial debt (Account Payable, Deferred Revenue) complete financial debt
(short, mid and long term debt).
• Account payable should be maximized as it participates to the reduction of the working
capital need.
• Deferred Revenue shows up the company’s debt as it relates to the portion of the
turnover received upfront (in cash) for which no service has yet be rendered (subscription
models). Portion over a year is current, portion in excess is long term.
• Financial debt include market debt (convertibles, straight bond,…) and bank debt.
Balance Sheet Analysis
• Stockholders Equity:

• Assets minus Liabilities

• Contains Common stock nominal value
• Add paid in (our French Prime d’émission) paid by investors (not generated by the
business itself.
• Treasury Stock (stock you own which is yours)
• And the testimony of past and current profitability (Retained Earnings and Current Net
Income not distributed)
Cash Flow Statement Analysis
• Cash Flows from Operations:
• Cash flows from Operations : this level measures the cash generated out of the operations of the
company
• Usually adjust EBITDA or NOPAT for working capital variation

• Cash Flows from Investing:

• Cash flows from investing records assets sales and investment during the year

• Free Cash Flows correspond to the sum of the above. Ops is supposed to fund partially
Investment side

• Cash Flow from Financing : how much do you ask the funding (external sources) to fuel
your growth
• Will you prefer debt or equity
• You also need to cope with your external constraints (dividends, repayment of principal of past debt).
GAAP VS NON GAAP VS IFRS
• Generally Accepted Accounting Principles are similar to a language. Each country has its
GAAP ane each company may decide to set up its financials in accordance with country’s
GAAP or not.
• IFRS (International Financial Reporting Standards) are mandatory since 2005. Every
company wishing to raise fund in the EU needs to publish in IFRS.
• IFRS may conflict with local GAAP.
• GAAP vs non GAAP offers possible arbitrage for companies.
• Non GAAP tends to treat Stock Based Compensation, goodwill differently and exclude them partially
from Cost of Revenue
• R&D, Sales & Mkt charges are also affected positively by change of standards
• All those adjustments contribute to form a better net operating income at the end.