Business Valuation Using Financial Analysis to Measure a Company's Value

by Parmentier, Guy; Cuypers, Bart

• ISBN13: 9781780680163
• ISBN10: 1780680163
• Format: Paperback
• Copyright: 2012-01-30
• Publisher: Intersentia

Summary

What determines a company's financial health and what drives company value? Knowledge on financial analysis and business valuation is not always accessible for non-financial specialists such as managers with a more strategic focus. Nevertheless, having this intellectual skill-set can leverage your ability to make better strategic decisions. Therefore, the authors have structured this book in a way that enables non-specialists to grasp all relevant financial information using tools that allow efficient financial analyses.

Author Biography

Guy Parmentier is a Belgian certified public accountant. He runs a renowned valuation practice and is executive professor at the University of Antwerp Management School (2008) and lecturer at the Karel De Grote Hogeschool-College of Higher Education Antwerp. Bart Cuypers is a financial analyst in an international banking group with vast valuation expertise.

Table of Contents

Introduction	p. 1
Financial Analysis	p. 11
The Balance Sheet	p. 13
Introduction to balance sheets	p. 13
The yin and yang of accountancy	p. 14
Assets	p. 15
Non-current or net fixed assets	p. 16
Current assets	p. 16
Reinterpreting 'assets equal equity plus liabilities'	p. 18
Shareholders: suppliers of equity capital	p. 19
Debt holders: suppliers of interest-bearing capital	p. 19
Shareholders' equity: a residual value	p. 20
Liabilities and shareholders' equity	p. 22
Long-term financing	p. 23
Short-term financing	p. 24
Returning to balance sheets as a box of blocks	p. 25
Net long-term financing	p. 27
Introduction	p. 27
Net long-term financing	p. 28
Risks of negative net long-term financing	p. 28
Matching strategy versus aggressive strategy	p. 29
Impact of purchases on net long-term financing	p. 30
Mirroring net long-term financing	p. 33
Review and conclusions	p. 36
Net long-term financing revisited	p. 37
Working Capital Requirements, Managerial Balance Sheets and Matching	p. 43
Working Capital Requirements	p. 43
Introduction	p. 43
Positive working capital requirements	p. 45
Negative working capital requirements	p. 47
Always work with working capital requirements before cash	p. 48
Managerial Balance Sheets	p. 49
Intermezzo: How not to look at the net short-term financing	p. 52
Working capital requirements: net long-term and short-term financing	p. 53
Matching strategies	p. 54
Review and conclusions	p. 57
Managerial Balance Sheets	p. 58
Balance Sheets and Strategic Decision-Making	p. 59
Step one: Measuring net long-term financing (NLF)	p. 60
Step two: Calculating and monitoring working capital requirements	p. 60
Advantages of applying working capital requirements	p. 61
WCR-to-sales ratios	p. 62
Calculating working capital requirements	p. 63
Additional management considerations	p. 65
Liquidity levels and financial structures: NLF & WCR	p. 68
Conventional liquidity ratios	p. 68
Formula for assessment of structural liquidity positions	p. 70
Combining liquidity ratios and net treasury	p. 70
Additional strategic and management considerations	p. 72
Short-term financing dependence: a potentially vicious cycle	p. 72
Review and conclusions	p. 74
"WCR-ratios"	p. 75
Profit and Loss Statements	p. 77
Balance sheets and profit and loss statements	p. 77
Exploring profit and loss statements	p. 80
From sales to gross profits	p. 80
Operating profits	p. 81
Costs and revenues for extraordinary items	p. 82
Earnings Before Interest and Taxes (EBIT)	p. 83
Regular profits	p. 84
Earnings Before Taxes (EBT) and Earnings After Taxes (EAT)	p. 84
Return on equity and sustainable growth rates	p. 85
Review and conclusions	p. 85
Profit and Loss Statements and Strategic Decision-Making	p. 87
Step four: EBIT and EBITDA developments	p. 88
Step five: Net Operating Cash Flow	p. 93
Step six: Debt repayments and Net Operating Cash Flow	p. 95
Net Operating Cash Flow Coverage	p. 97
Net cash flow from investing activities	p. 99
Net cash flow from financing activities	p. 100
Adjusted cash flow statements for strategic decision-making	p. 105
Review and conclusions	p. 109
Forecasts for Managerial Balance Sheets and Profit and Loss Statements	p. 111
Profit and loss statements: budgets and forecasts	p. 111
Managerial balance sheet: budgets and forecasts	p. 113
Forecasting equity	p. 114
Fixed assets	p. 114
Working capital requirement and cash	p. 115
Long-term and short-term financial debt	p. 118
Review and conclusions	p. 120
A Seven-Step Sequence and Conclusion	p. 123
Company Valuation	p. 127
Key Valuation Concepts	p. 135
Equity versus entity valuation approaches	p. 135
Return on equity and economic profits	p. 137
Return on equity and required return on equity	p. 137
Equity and economic profits	p. 138
Return on invested capital and economic profits	p. 139
Return on invested capital	p. 139
Entity approaches to economic profits	p. 142
Adjusted Book Values	p. 143
Economic profits and discounted free cash flow	p. 146
Economic profit models	p. 146
Net Present Value	p. 147
Discounted cash flow models	p. 150
Review and conclusions	p. 151
Four Main Valuation Methods	p. 155
Equity cash flow	p. 155
Additional investments in fixed assets	p. 159
Changes in working capital requirements	p. 160
Changes in financial debt	p. 161
Free cash flow (FCF)	p. 164
Free cash flow and equity cash flow	p. 165
From EB1T to NOPLAT	p. 166
NOPLAT versus NOPAT	p. 166
From NOPLAT to free cash flow	p. 167
Economic Profits	p. 169
Equity approaches to Economic Profits	p. 170
Entity approaches to Economic Profits or Economic Value Added	p. 173
Conclusions regarding the main valuation methods	p. 178
Weighted Average Cost of Capital	p. 183
Required returns on debt (Kd) and equity (Ke)	p. 184
Required return on debt	p. 184
Required return on equity	p. 185
Capital Asset Pricing Model and beta	p. 187
Beta and (un)systematic risk	p. 187
Business risk and financial risk	p. 189
Calculating the Weighted Average Cost of Capital	p. 192
Review and conclusions	p. 193
Adjusted Present Value and required return on equity	p. 195
Adjusted Present Value model	p. 195
Alternative calculations of required return on equity rates	p. 197
Valuation with Discounted Cash Flow and Economic Profits	p. 205
Discounted equity cash flows	p. 206
Calculating equity cash flows	p. 206
Calculating equity betas for required return on equity rates	p. 207
Calculating equity values	p. 208
How to assess calculated equity values	p. 209
Important equity cash flow considerations	p. 209
Equity approach to Economic Profits	p. 211
Entity approaches to Economic Profits, or EVA™	p. 213
NOPLAT calculations	p. 214
Calculating the WACC	p. 215
Economic Profit calculations with entity approaches	p. 216
Management implications of Economic Profits	p. 217
Discounted free cash flow valuation	p. 222
Calculating net investments	p. 223
Calculating free cash flows	p. 224
Estimating growth rates	p. 225
Calculating WACC as discount rate	p. 226
Calculating entity values and indirect equity values	p. 227
Impact of selected growth rates	p. 227
Working capital requirements and free cash flow	p. 228
Review and conclusions	p. 229
NOPLAT and ROIC adjustments	p. 232
Corrections to Invested Capital and ROIC	p. 232
EBIT DEBIT model	p. 240
Financial Analysis and Company Valuation	p. 245
Conclusion	p. 257
Bibliography	p. 263
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