Finance for Wine Business Flashcards
Name Porter’s 5 Forces
- Rivalry Amongst Existing Firms
- Threat of New Entrants
- Threat of Substitute Products
- Bargaining Power of Buyers
- Bargaining Power of Suppliers
Name sub components of Rivalry Amongst Existing Firms
- Industry growth
- Concentration
- Differentiation
- Switching costs
- Economies of Scale vs. Learning Costs
- Fixed and variable costs
- Excess capacity
- Exit barriers
Name sub components of Threat of New Entrants
- Economies of scale
- First mover advantage
- Distribution access
- Relationships
- Legal barriers
Name sub components of Threat of Substitute Products
- Relative Price and Performance
- Buyer’s willingness to switch
Name subcomponents of Bargaining Power of Buyers and Suppliers
- Differentiation
- Switching costs
- Importance of product for cost and quality (buyer’s opinion of product despite cost and quality)
- Volume per buyer
Name subcomponents of Bargaining Power of Suppliers
- Differentiation
- Switching costs
- Importance of product for cost and quality
(Buyer side not supply)
Suppliers have bargaining power when there are few substitutes and/or few suppliers relative to the number of customers demanding a product or service
What is a balance sheet?
A balance sheet, on a given date is a summary of the following:
1. All the assets the company holds
2. The company liabilities
How are assets and liabilities broken down on a balance sheet?
- Assets:
- Non current assets (long term assets that serve the company more than a year)
e.g. PPE (property, plant and equipment)
- Current assets (assets which serve the company less than one year)
e.g. inventory, receivables, cash and marketable securities - Liabilities
- Equity (long run, assets that serve the company for more than a year)
- Non current liabilities (long term debt)
- Current liabilities (short term debt, suppliers, accounts payables)
What is an income statement (earnings statement)
- What happened in a year, shows revenues, expenses and profitability over a period of time
Key formulas for income statement are:
- Gross profit = sales - cost of sales
- Operational profit = Gross profit - operational cost
- EBT (earnings before taxes) = Operational profit - interest cost
- EAT (earning after taxes) = EBT - tax
What is ROE and what is the ratio?
ROE means return on equity and is a good starting point to systematically analyze firm performance.
ROE = Net Income/Shareholder’s Equity
What is an alternative method for calculating ROE?
ROE = ROS (return on sales) x ATO (asset turnover) x LEV (leverage)
What is gross profit margin?
Gross profitability. Gross profit margin is the best indicator that people are willing to pay for your production.
Warren Buffet said that if a company has a stable gross profit margin the company has strategic competitive advantage and they know it.
What is gross profit margin an indicator of?
- The price premium that a firm’s product commands in the market
- The efficiency of a firm’s procurement and/or production process
How do you calculate GPM?
Gross Profit Margin = (Sales - Cost of Sales) / Sales
What are accounts Receivables?
You are being payed
What are accounts payables?
You are paying someone
How do you calculate inventories/payables/receivables days?
Sales / Receivables (or inv. or payables.) = xx then to get receivables days 365 / xx = number of days it takes to get paid (receivables)
A good financial position is typically being paid quicker than you have to be paid. Inventory is also key. How quickly are you selling your stuff?
What is the difference between solvency and liquidity?
Liquidity is short term
Solvency is long term
(it is possible to be solvent but not liquid)
What are the THREE key rations of financial leverage analysis?
- Liquidity ratio: current assets/ current liabilities AT LEAST 1 as that means company can pay its current liabilities
- Quick ratio (current assets - inventory)/current liabilities
Inventory is the liquid assets you have, for this ratio you are effectively removing this - Cash ratio (current assets - inventory -receivables ) / current liabilities
This removes inventory and receivables leaving you with just cash
- If there is a large decrease between 1 and 2 you have inventory issues
- If there is a decrease between 2 and 3 you have receivables issues
- if at 3 you still have something high/close to ratio 1 you have lots of disposable cash. Cash is king!
How do you calculate operating cash flow ratio?
operating cash flow ration = cash flow from operations / current liabilities
Why is it bad if your liabilities-to-equity ratio is higher than your total liabilities?
Because debt/equity ratio is an important metric that measures the dress to which a company is financing its operations with debt rather than its own resources
Why is it better to have 1. higher interest coverage (earning basis) and 2. interest coverage (cash flow basis)?
- higher is better as it means you have higher net profit
- higher is better as it means you have higher operational cash flow
