Chapter 1 Flashcards
Dual - legal/economic nature of a company
A company is a combination of human, materials, and resources and permanently involved in merchant activities and in an organized and centralized way with a profit intent
Its environment
partners or shareholders but also other parties directly or indirectly involved in it or stakeholders
CFO
- To ensure and perpetuate the company’s necessary financings on an ongoing basis
- And to ensure and maintain an efficient allocation of those financial resources to the company’s needs
- So as to minimize the weighted average cost of capital - cfMIN(WACC) - and thus help maximize the return on equity - cfMAX(ROE)
WACC
k * e/(e+d) + i*(1-t) d/(e+d)
ROE
Re = (1-t) ra + (1-t) * (ra-i) * (d/e)
Balance Sheet
numerical (fixed) picture/ table showing the firms detailed/ itemized corporate wealth at a given point in time – as of 31st Dec – showing all its assets and liabilities at that time, in two distinct columns
B/S Spectrum
Spectrum of stock aggregates
Assets/Liabilities order
Shows the companies assets by increasing order/ degree of liquidity and its liabilities by increasing order/degree of repayment
P&L
a numerical (moving) table showing the firms detailed/ itemized corporate performance over a given period of time – one year – howling all its revenues and expenses during that period, also as a result, the corresponding net profit or loss generated in that period, in two distinct columns with equal totals
Spectrum of P/L
flow aggregates
Revenue and Expense order
Shows companies revenues and expenses starting with current operations, then financial items, then non-recurring items, and then tac items – with a caveat, so as to isolate the non cash expenses
Connection between B/S and P&L
Connection: the financial years bottom line (net profit or loss) is shown on the P&L and then carried forward in the B/S in the Balance Carried Forward Account
Retrospect
based on financial statements over the past 2-3 years
Prospective
based on projected documents
- medium term
- short term
supervision and monitoring
Medium Term
the business plan and the cash flow statement
Business plan
is a detailed and comprehensive document, having both a qualitative and quantitative nature, presenting the company in an organized and systematic manner in all its present and future dimensions
- strategy, organizational management
Cash Flow Statement
a double entry table showing all the projected stable or recurring uses and sources of funds on a multi-year basis (over 3-5 years)
Short term horizion
he budgeting process, in particular concerning the cash projections
Budgets
tables drafted function by function – the capex, sales, purchases budget, cash projections, and all forecasted figures over a given short period of time – a year/financial year which is usually divided into shorter sub periods
Supervision/ monitoring:
management charts/ control charts
The company’s management and control charts
tables drafted function by function for the capex, sales, purchases, sales projections. Comparing all the projected figures with all the recorded figures over a given period of time, to identify and analyze the potential gaps
Single Company
use the company or individual statements
Group
use the consolidated financial statements – based on the combined financial statements of the company
- The parent company P
- The subsidiaries S
- All strategic or significant affiliates A (typically showing a 20 to 50% interest held by the parent)
- Where 1) + 2) + 3) = the scope of consolidation or consolidation base = P + S + A
Reason for consolidation
not a simple addition of all relevant individual financial statements but implies a number of adjustments in various ways essentially to eliminate intra-group or inter-company bookkeeping entries and hence to eliminate undue duplications
KPI from Balance sheet
- Working Capital
- Working Captial Requirements
Working capital (W.C)
all stable financings - total net fixed assets
Working capital requirements (WCR)
operating assets - operating liabilities
Company Net Cash Position
Net Cash Position = WC - WCR
Key Solvency Test
the debt/equity or D/E ratio
P&L KPI
- Intermediate Operating Totals (IOT)
- The operating added value (OAV)
- The earnings before interest, taxes, depreciation, and amortization (EBITDA)
- The earnings before interest and taxes (EBIT)
- The net operating profit after tax (NOPAT)
Coverage Ratios
- The debt service coverage ratio = EBITDA/ p+i
- FCF = FCF/p+i
- Interest expense coverage ratio = EBIT/i
Operating Income Ratio/ Operating Margin Ratio
EBIT/Sales
Net Profit Ratio (NPR) or Net Margin Rate (NMR)
Net Income/Sales
Net Return on Equity (ROE)
Net Income / Equity
Turnover rate
Showing the company’s ability to turn operating items into cash
Inventory turnover rate
inventories / sales
Customer turnover rate
client receivables / sales
Supplier turnover rate
supplier payables / purchases
KPIS rationale
analyzed as a trend rather than only at a given point of time
- comparions with standard values or meansures
- computed statstically as a representation of given indsutry segment of a certain size and age of company
- geographically
Meet debt service payments
debt service = (p+i)
through recurring cash flwos
Use KPIs internally
- distressed company
- LBO
- finance structure
