14. Financial Statement Modelling Flashcards
Bottom-up analysis
nalysis of an individual company or reportable segments of a company
Top-down analysis
macroeconomic variable, often the expected growth rate of nominal GDP
growth relative to GDP growth
relationship between GDP and company sales could be modeled as “GDP growth plus x%”
market growth and market share
estimate of industry sales (market growth), and then company revenue is estimated as a percentage of industry sales (market share).
economies of scale
If the average cost of production decreases as industry sales increase
Cost of Goods Sold (COGS)
forecast COGS = (historical COGS / revenue) × (estimate of future revenue)
or
forecast COGS = (1 − gross margin)(estimate of future revenue)
Selling General and Administrative Costs (SG&A)
SG&A operating expenses are less sensitive to changes in sales volume
SG&A’s fixed cost component is generally greater than its variable cost component.
Selling and distribution costs, on the other hand, may be more directly related to sales volumes, because it is likely that more salespeople will be hired to support higher firm sales.
gross interest expense
the level of (gross) debt and market interest rates.
Net debt
gross debt minus cash, cash equivalents, and short-term securities.
Net interest expense
gross interest expense minus interest income on cash and short-term debt securities.
statutory rate
percentage tax charged in the country where the firm is domiciled.
effective tax rate
income tax expense as a percentage of pretax income on the income statement.
cash tax rate
cash taxes paid as a percentage of pretax income
Overconfidence bias
Having too much faith in one’s own work.
Illusion of control bias
A false sense of security in one’s forecasts.
Conservatism bias.
Also called anchoring, where the analyst makes only small adjustments to their prior forecasts when new information becomes available.
Representativeness bias
tendency to classify data based on past information and known classifications.
Confirmation bias.
seek out (or pay attention to) data that affirms their earlier convictions, and to disregard or underestimate information that disputes those opinions.
return on invested capital (ROIC)
net operating profit adjusted for taxes (NOPLAT) divided by invested capital (operating assets minus operating liabilities)
Porter’s five forces.
threat of substitute products
intensity of industry rivalry
bargaining power of suppliers
bargaining power of customers
threat of new entrants
cannibalization rate
Normalized earnings
expected mid-cycle earnings or, alternatively, expected earnings when the current (temporary) effects of events or cyclicality are no longer affecting earnings.
Inflection points occur due to changes in:
Overall economic environment.
Business cycle stage.
Government regulations.
Technology.
