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Full Description
What determines a company's financial health and what drives company value? Knowledge on financial analysis and business valuation is not always accessible for non-financial specialists such as managers with a more strategic focus. Nevertheless, having this intellectual skill-set can leverage your ability to make better strategic decisions. Therefore, the authors have structured this book in a way that enables non-specialists to grasp all relevant financial information using tools that allow efficient financial analyses. For the non-financial experts the book starts by presenting the essentials of financial analysis and business valuation in a structured way. However, this book is not only written for non-financial specialists as also more experienced readers may find new perspectives for conducting financial analyses. Professionals who work with relatively 'static' financial data concerning solvability and debt will welcome the more dynamic financial toolset incorporated in this book. This toolset will enable them to get to the heart of the (financial) matter faster by focusing on relevant data.By making the relevant financial analyses this book gives the reader a better insight in the company's value.Not just by explaining theory, but by also showing how you can use the output of the financial analyses to challenge the forecasted data that will determine the price you get or have to pay.
Contents
CONTENTSIntroduction PART ISHEET 1.1. Introduction to balance sheets 1.2. The yin and yang of accountancy 1.3. Assets 1.3.1. Non-current or net fixed assets1.3.2. Current assets 1.4. Reinterpreting 'assets equal equity plus liabilities' 1.4.1. Shareholders: suppliers of equity capital 1.4.2. Debt holders: suppliers of interest-bearing capital 1.4.3. Shareholders' equity: a residual value 1.5. Liabilities and shareholders' equity 1.5.1. Long-term financing 1.5.2. Short-term financing 1.6. Returning to balance sheets as a box of blocks 1.7. Net long-term financing 1.7.1. Introduction 1.7.2. Net long-term financing1.7.3. Risks of negative net long-term financing 1.7.4. Matching strategy versus aggressive strategy 1.7.5. Impact of purchases on net long-term financing 1.7.6. Mirroring net long-term financing 1.8. Review and conclusions Appendix Chapter 1: Net long-term financing revisited CHAPTER 2: WORKING CAPITAL REQUIREMENTS, MANAGERIAL BALANCE SHEETS AND MATCHING 2.1. Working Capital Requirements 2.1.1. Introduction 2.1.2. Positive working capital requirements 2.1.3. Negative working capital requirements 2.1.4. Always work with working capital requirements before cash 2.2. Managerial Balance Sheets 2.2.1. Intermezzo: How not to look at the net short-term financing 2.2.2. Working capital requirements: net long-term and short-term financing 2.3. Matching strategies 2.4. Review and conclusions Appendix Chapter 2: Managerial Balance Sheets CHAPTER 3: BALANCE SHEETS AND STRATEGIC DECISION-MAKING 3.1. Step one: Measuring net long-term financing (NLF) 3.2. Step two: Calculating and monitoring working capital requirements 3.2.1. Advantages of applying working capital requirements 3.2.2. WCR-to-sales ratios 3.2.3. Calculating working capital requirements 3.2.4. Additional management considerations 3.3. Liquidity levels and financial structures: NLF & WCR 3.3.1. Conventional liquidity ratios 3.3.2. Formula for assessment of structural liquidity positions 3.3.3. Combining liquidity ratios and net treasury 3.3.4. Additional strategic and management considerations 3.3.5. Short-term financing dependence: a potentially vicious cycle 3.4. Review and conclusions Appendix Chapter 3: 'WCR-ratios' CHAPTER 4: PROFIT AND LOSS STATEMENTS 4.1. Balance sheets and profit and loss statements 4.2. Exploring profit and loss statements 4.2.1. From sales to gross profits 4.2.2. Operating profits 4.2.3. Costs and revenues for extraordinary items 4.2.4. Earnings Before Interest and Taxes (EBIT) 4.2.5. Regular profits 4.2.6. Earnings Before Taxes (EBT) and Earnings After Taxes (EAT) 4.2.7. Return on equity and sustainable growth rates 4.3. Review and conclusions CHAPTER 5: PROFIT AND LOSS STATEMENTS AND STRATEGIC DECISION-MAKING 5.1. Step four: EBIT and EBITDA developments 5.2. Step five: Net Operating Cash Flow 5.3. Step six: Debt repayments and Net Operating Cash Flow 5.3.1. Net Operating Cash Flow Headroom 5.3.2. Net cash flow from investing activities 5.3.3. Net cash flow from financing activities 5.3.4. Adjusted cash flow statements for strategic decision-making 5.4. Review and conclusions CHAPTER 6: FORECASTS FOR MANAGERIAL BALANCE SHEETS AND PROFIT AND LOSS STATEMENTS 6.1. Profit and loss statements: budgets and forecasts 6.2. Managerial balance sheet: budgets and forecasts 6.2.1. Forecasting equity 6.2.2. Fixed assets 6.2.3. Working capital requirement and cash 6.2.4. Long-term and short-term financial debt 6.3. Review and conclusions CHAPTER 7: A SEVEN-STEP SEQUENCE AND CONCLUSION PART II: COMPANY VALUATION CHAPTER 8: KEY VALUATION CONCEPTS 8.1. Equity versus entity valuation approaches 8.2. Return on equity and economic profits 8.2.1. Return on equity and required return on equity 8.2.2. Equity and economic profits 8.3. Return on invested capital and economic profits 8.3.1. Return on invested capital 8.3.2. Entity approaches to economic profits 8.4. Adjusted Book Values 8.5. Economic profits and discounted free cash flow 8.5.1. Economic profit models 8.5.2. Net Present Value 8.5.3. Discounted cash flow models 8.6. Review and conclusions CHAPTER 9: FOUR MAIN VALUATION METHODS 9.1. Equity cash flow 9.1.1. Additional investments in fixed assets 9.1.2. Changes in working capital requirements 9.1.3. Changes in financial debt 9.2. Free cash flow (FCF) 9.2.1. Free cash flow and equity cash flow 9.2.2. From EBIT to NOPLAT9.2.3. NOPLAT versus NOPAT 9.2.4. From NOPLAT to free cash flow 9.3. Economic Profits 9.3.1. Equity approaches to Economic Profits9.3.2. Entity approaches to Economic Profits or Economic Value Added 9.4. Conclusions regarding the main valuation methods CHAPTER 10: WEIGHTED 10.1.1. Required return on debt 10.1.2. Required return on equity 10.2. Capital Asset Pricing Model and beta 10.2.1. Beta and (un)systematic risk 10.2.2. Business risk and fi nancial risk 10.3. Calculating the Weighted Average Cost of Capital 10.4. Review and conclusions Appendices Chapter 10: Adjusted Present Value and required return on equity CHAPTER 11: VALUATION WITH DISCOUNTED CASH FLOW AND ECONOMIC PROFITS 11.1. Discounted equity cash flows 11.1.1. Calculating equity cash flows 11.1.2. Calculating equity betas for required return on equity rates 11.1.3. Calculating equity values 11.1.4. How to assess calculated equity values 11.1.5. Important equity cash flow considerations11.2. Equity approach to Economic Profits 11.3. Entity approaches to Economic Profits, or EVA(TM) 11.3.1. NOPLAT calculations 11.3.2. Calculating the WACC 11.3.3. Economic Profit calculations with entity approaches 11.3.4. Management implications of Economic Profits 11.4. Discounted free cash flow valuation 11.4.1. Calculating net investments 11.4.2. Calculating free cash flows 11.4.3. Estimating growth rates 11.4.4. Calculating WACC as discount rate 11.4.5. Calculating entity values and indirect equity values 11.4.6. Impact of selected growth rates 11.4.7. Working capital requirements and free cash flow 11.5. Review and conclusions Appendix Chapter 11: NOPLAT and ROIC adjustmentsCHAPTER 12: FINANCIAL ANALYSIS AND COMPANY VALUATION CHAPTER 13: ADDITIONAL VALUATION INFO AND TIPS FOR ADVANCED USERS 13.1. Derived formula for the residual value 13.2. The arithmetic vs. the geometric average 13.2.1. The arithmetic average 13.2.2. The geometric average 13.2.3. When to use geometric averages and arithmetic averages 13.2.4. Why use the arithmetic average when calculating average risk premiums? 13.3. What's in a name: nominal vs. real rates 13.4. Historic risk premia 13.5. The three stages of growth model 13.6. Volatility of turnover into cashflows: a beta tool for a risk assessment due diligence13.6.1. General components of correlation and correlation betweenturnover and EBIT 13.6.2. Correlation between turnover and FCF 13.6.3. Correlation between turnover and ECF 13.6.4. Conclusions 13.7. Abnormal Working Capital Accruals (AWCA) 13.7.1. AWCA #1: vs. sales 13.7.2. AWCA #2: vs. purchases (cost of goods sold) 13.7.3. AWCA #3: vs. gross margin 13.7.4. AWCA #4: vs. invested capital CHAPTER 14: CONCLUSION Bibliography
