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Financial Statements (Balance Sheet (Not in the Balance sheet (Human…
Financial Statements
Balance Sheet
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Not in the Balance sheet
- Human Capital (Knowledge of their employees)
- Own Patents
- Own Brand name
(Note: Brand value of acquired companies are added because you have paid it)
- Relationship with customers
Free Cash Flow
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Definition: Amount of the cash is tied up. Cash straving can be a big problem during the growth stage of small companies.
Cash Cycle: Time A Company pays the cash and time when it receives the cash
FCF = EBIT - Taxes + Depreciation - increase in NWC - Capital Expenditure
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Income Statements
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Limitations
- Is depreciation really an expense?
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- What about inventory requirements? And capital expenditures?
FCF is the answer.
Income statement and FCF =>
- Summation of the cost (last row) has the same value; Timing may be different.
- FCF reveals the amount of money required, esp during investment stage and amount of return along with time.
Sensitivity Analysis
- Scenario analysis
[1. Additional Feature request may increase sales 2.Higher R&D investment may reduce production cost]
- Chart analysis
[Estimated values of key factors to understand break even points]
Spreadhseet model
I) Notation:
- Blue color text means static numbers (assumptions)
- Black color text means formula
II) Formula: Build formula with relative reference without '$' sign and absolute reference with '$' sign
- Freeze pane for heading row to remain visible
- Collapsible group feature to collapse detail to provide high level and then go through collapse to get in-depth detail
- Potential market size may grow or shrink
Profitability Index
- Financial Capital as constriant => NPV / Investment
- Human resource Constraint [NPV / Engineer]
Investor criteria
- How much money I am spending upfront?
- How much and when I will receive payment?
DCF / WACC Method
- Identify Incremental Earnings
- Estimate Free Cash Flow
- Cost of capital based on beta and debt/equity
- NPV
Key Principles
- Cash is King (Free Cash Flow)
- Sooner is better (Time Value Money) => Rewards for Patience
- Safer is better (Risk) => Rewards for taking Risk
Terms
- Risk Free Return => Cost of Capital
- Compund interest
I) Real Options [Decision points] to
a) Continue
b) Expand
c) Abandon
II) Decision tree for stage investments
(Drugs companies, Risky projects)