ECONOMIC VALUE Flashcards
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What makes companies different from each other?
Their ability to generate value on a sustainable basis. The inability of companies to create value on a sustainable basis take them to their end. It’s a matter of economic System corporations or other economic systems must and it’s not should must generate a return greater than the cost of capital they emplpyed. Generating a profit is not sufficient if your profit is not enough to compensate the capital you employed.
What drives economic value?
One is Cashflow related the other is cost of capitalcashflow is driven by two things1 Retun on investment 5% or 10% etc2 Revenue growthSwiss air had Revenue growth but lack of ROI
What is ROI
We calculate the ROI by dividing the profit by the amount invested.For every added dollar of added revenue (For every additional dollar in additional sales), you should be able to convert that into free cash flow that would generate an ROI. Even if you have a return on invested capital but failed to generate sufficient revenue growth that would have diversified its value creation base, that’s problematic.ROI and revenue growth are important. They are related to the strategic choices of the company.
What’s cost of capital?
The ability to compensate investors for the risk they take and inflation
What two things drive the ROI?
1‚ EBITDA Margin: Ability generate a margin from operation: sales minus operating expenses. Then you generate an ebitda margin. You cut cost or increase price2‚Äì Capital Turnover: the ability to sell more without adding more capital stock into something like Budget airlines.they use the same aircraft but fly them more frequently per day, extended hours. They rotate the capital investment more frequently EBITDA MARGIN IS ABOT OPERATIONAL EFFICIENCY CAPITAL TURNOVER IS ABOUT ASSET MGMT EFFICIENCY THEY ARE IMPORTANT AND HAVA KEY ROLE IN STRATEGIES FOR INTERNATIONALIZATION STRATEGIES
What are the limitations for ebitda.
You can decrease the amount of capital invested: outsource the chart to Poland or outsource IT to India but it has limits
What is the revenue growth?
Two elements: market share and price premium MARKET SHARES; competItion for market shares in an established existing market or new market development PRICE PREMIUM: although this is related to ebitda margin it also drives the revenue growth
What Is Free Cash Flow (FCF)?
Free cash flow (FCF)For every euro or swiss frank of added revenue they were not able to convert that into free Cashflow that would generate a return on invested capital.In other words, free cash flow is the cash left over after a companypays foritsoperating expenses (OpEx)andcapital expenditures (CapEx).
What Are NPV and IRR?
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Or how much is your investment worth today.The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
Which is better NPV or IRR?
IRR is useful when comparing multiple projects against each other or in situations where it is difficult to determine a discount rate.NPV is better in situations where there are varying directions of cash flow over time or multiple discount rates.
What is Ebitda?
An assessment of Ebitda is a Std financial reporting method and a common measure of the profit of or loss of business.This also allows comparisons between businesses.
