Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

625 > CF& CA LN > Flashcards

CF& CA LN Flashcards

1
Q

Corporate Analysis

Step One: Understand The Big Picture 1

A 
--Type of company? 
S&P has 10 sectors (Materials, Energy, etc.)
--Industry Characteristics
Cyclical nature (Defensive or Cyclical)
Current trends in growth, competition and profitability
--Company’s growth stage
New venture, high growth, mature
--Business Risks
--State of the Economy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Corporate Analysis

Step One: Understand The Big Picture 2

A

–Perspective (debt or equity)

–What is your gut feeling about the company?
Do you like the company’s products and services?
Do you feel management has the right strategy?
Do you think the company is a long-term winner?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Corporate Analysis

Step One: Understand The Big Picture 3

A 
--Competitive Position:
Marketing/Sales
Technology
Efficiency
Management
Barriers to Entry
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Step 2: Financial AnalysisWhat to look for?

A

Balance Sheet

Income Statement

Cash Flow Statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Balance Sheet Focus 1

A 
--Capital Structure and Financial Leverage
Objective: Minimize WACC and Maintain financial flexibility
Ratios:
     Debt / Equity
     Debt / (Debt +Equity) 
     Debt / EBITDA
--Liquidity
Objective: Balance liquidity risk and profitability
Ratios:
    Current Ratio
    Short-term Debt / Free Cash Flow
    Cash on Balance Sheet
    Cash burn or build rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Balance Sheet Focus 2

A

–Asset and Liability Composition
Asset Liability Management (ALM)
Mark-to-Market: What is the true market value of assets, liabilities and equity? Volatility of valuations?
Credit, Currency, and Interest rate risks?

--Off-B/S risks
Derivative products
Litigation or Pending Lawsuits
Unfunded Pension Liabilities
Subsidiaries
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Example: Ruby Tuesday Inc. 10-k

A

See lecture note PPT
1st thing to look at is how leverage is the company +
2nd liqicty: CA-CL -
3rd Cash position
4th FCF
Goodwill impirment
If I see lot of Goodwill, I am concert. (usually auditor value if the good will worth as such.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Income Statement and Profitability

A

–Profitability Drivers
Revenue
Units sold (Volume)
Pricing Power
Cost
Variable cost of producing product or service (COGS)
Other overhead costs including: administrative, marketing, distribution, depreciation, etc.

--Income statement
 Sales
- COGS
=Gross Profit
- Administrative expenses
Operating Profit (or Operating Income)
 -Interest
 -Taxes
=Net Income

Note: Operating Profit is sometimes
referred to as EBIT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Income Statement Focus 1

A 
Sales Growth
Profit Margins
Trends – expanding or contracting
Ratios:
Gross = (Sales – COGS) / Sales
Operating = EBIT / Sales
Net = Net Income / Sales

Earnings Growth and key Drivers to Growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Income Statement Focus 2

A

–Quality of earnings
Stability and Sustainability
Level from core operations
–Returns
Return on Assets = Net Income/Total Assets
Return on capital = EBIT/Average Capital
Return on equity = Net Income/Common Equity
–EPS
NI available to common shareholders/# of shares
Growth in EPS is key

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Profitability Model 1

Return on Assets (ROA)

A

Case 1: High Profit Margins & Low Asset Turnovers Examples: products & services based on technological innovations
Case 2: Low Profit Margins & High Asset Turnovers Examples: commodity-type products & services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Profitability Model 2

Return on Equity (ROE)

A 
ROE=Asset Turnover * Net Profit Margin * Equity Multiplier
ROE =NI/CE =NS /TA * NI/NS * TA/CE
Assets ->Sales -> Profit->Earning
ROE Drivers
Are Assets generating Sales (Turnover)?
Are Sales generating Profits (Margins)?
Are Profits Levered (Capital Structure)?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Example: Ruby Tuesday Inc. Income Statement

A

We look at trands and conps:
1) sales goes down
2)bottom goes down more
=> MG is not good
What course it?
It may be one time restructure eg. closure and impairments and good will. it has negative impact.
Bright side: 2010 may have bigger on bottom line since goodwill was impairment and it may be one time only and the economic may gets better…

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Statement of Cash Flows 1

A

–Changes the picture from accrual to cash
Key step in financial analysis

–Shows Cash Flows divided into 3 categories:
Cash flow from operations
Cash flow from investments
Cash flow from financing activities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Statement of Cash Flows 2

A

Cash flows from operations
Net Income adjusted for non-cash items
+/- changes in working capital (e.g. money spent on inventories)

Cash flows from investing activities
(-) Purchase plant & equipment (Capital Expenditures or Capex)
(+) Sell fixed assets
Buy (cash out) or sell (cash in) short term investments

Cash flows from financing activities
Cash inflow if we borrow money (bonds and loans) or issue stock
Cash outflow if we pay off debt, buyback stocks or pay dividends

Cash position
Shows the change in the company’s beginning and ending cash position based on the cash flows from the 3 categories above

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Cash Flow Measures

A
  • -Cash flow has many Definitions depending on at what level in your company’s operations/business cash flow is measured. Three key measures include:
  • -Funds from Operations (FFO) = Net Income adjusted for non-cash items such as depreciation and impairments. FFO is your CF prior to investments in working capital and fixed assets (Capex)
  • -(Net) Cash from Operating Activities (CF Ops) = FFO +/- changes to working capital requirements. CF Ops is a firm’s CF prior to investments in new plant and equipment (Capex) and it appears at the bottom of the first section of the CF Statement.
  • -Free Cash Flow (FCF) = CF Ops - investments in new plant and equipment (Capex). Also referred to as Levered FCF or FCF to Equity.
17
Q

Example Ruby Tuesday Statement of CF

A

A few things to increase CF:
1) can I make my WC more efficient? eg. shirking inventory, A/R shorter
2) Look at the leverage of the
Well, I need fund. should I raise debt, should I raise equity, how much and when
3) cut back Capex, selling asset, burn cash balance. (hope we don’t need to do 3)

18
Q

Cash Flow Issues 1

A

Cash flow is the key number in corporate analysis
Is company building or burning CF and at what level?
FFO
CF from Ops
FCF
What are the key drivers of company’s CFs?
Sales growth
Profitability (Margins)
Working Capital
Capex requirements
Look forward anticipating CF and funding requirements over next 5 years
Analyze CF relative to business’ growth stage

19
Q

Cash Flow Issues 2

A

–How does or will company finance negative FCF
More efficient use of working capital – internal funding
New debt or equity issues
Amounts
Timing
Sell Assets
Reduce Capex
Burn Cash balances
–What does company do with positive FCF:
Pay dividends or Repurchase Stock
Repay debt
Build Cash balances and invest in marketable securities
Increase Capex or M&A

20
Q

Cash Flow Management

Liquidity: The Cash Conversion Cycle

A

Cash Conversion Cycle = Days Sales outstanding + Days of sales in inventory - Days of payables outstanding

Improve Free Cash Flow, Increase Asset Turnover and Reduce funding requirements by Shortening your Cash Conversion Cycle!

21
Q

Cash Flow Issues 3

A 
--Financial Policies and Strategies for managing CF
Cash Conversion Cycle (CCC)
Capex
Dividends
Capital Raising (Debt or Equity)
Cash Position

–Key business decisions based on FCF
What projects to invest in (capital allocation)?
What is the optimal method of financing a company (capital structure)?
When and how much financing will be necessary?
Working capital management

22
Q

Importance of Cash Flows

A 
FCF drives:
Equity Valuations
Ability to raise debt and equity capital
Growth
Dividends and other returns to owners

Bottom Line: Does business’ long-term after-tax free cash flow provide a good risk-adjusted return to investors?

23
Q

Connectivity of Financials

A

Income Statement->Balance SheetCash Flow Statement
Income Statement ->Cash Flow Statement

Financial Model for venture business is a good skill to have in a long run. very helpful

24
Q

Financial Ratio Analysis 1

A

–Perspective
Equity
Debt

–To make ratios meaningful we need:
Trends across time
Comparisons with other firms’ and industry average

25
Q

Financial Ratio Analysis 2

A

Ratios can help us:

  • Identify deficiencies and take corrective actions.
  • Evaluate performance (employees, divisions, etc.)
  • Prepare financial projections
  • Measure credit risk (making loans and buying bonds)
  • Make equity investments
26
Q

Credit Analysis and Financial Ratios

A

–Analyze a company’s financial ratios to determine credit risk and appropriate spread. We are analyzing from debt (not equity) perspective

--From a Debt perspective the focus is on
Cash flow
Leverage and capital structure
Profitability
Liquidity
27
Q

S&P Credit Analysis

A

Total Debt / (Total Debt + Equity) : leverage: more debt has more financial risk since it has more debt. we don’t how which one has more one has more operateing and industry risk by looking at this.

FCF / Total Debt and FFO / Total Debt

EBIT / Average Capital

Cash Position and FCF relative to Short-term Debt

Note: For Total Debt S&P focuses on interest bearing debt not all liabilities
28
Q

Case Study: An S&P Credit Analysis

A

We need to know how to valuate a company

29
Q

Other Credit Considerations

A

Industry volatility
Current economic cycle
Availability of collateral (real estate, inventories)
Debt terms and conditions (Sub/Senior, Maturity, Covenants, etc)
P/E ratio, stock price trend, EPS growth
Hedging Activities: Forex, credit, interest rate risk
Dividend policy and Stock buybacks

30
Q

Issues when rating Asian Corporate Debt

A

Main bank and group support
Industrial Policy / Exports
Equity ownership structure

31
Q

Compare and Contrast Asian versus U.S. Corporate Finance

A 
Ownership
Capital Investment in P&E vs Outsourcing
Operating Leverage
M&A / Goodwill and Intangibles
Conglomerates and Spinoff Opportunities
Profitability 
Cash flow (CF from Ops and FCF)
Trade Account: A/R and A/P
WACC and Profitability
Stock repurchases and Dividend Policy
Interest Rates and Required Rates of Return
32
Q

Asian Company FinancesWhat to watch for?

A 
Equity exposures particularly with financials
Relatively high level of short-term debt
Relatively high Operating Leverage
Foreign exchange risk
Subsidiary risk and performance
ALM

625 (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions