Transcript Financial analysis for Case Competitions

By Ian Kwan
University of Navarra
For Case Competition Club
November 2013
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
Case Competitions in General



Big Picture: financial analysis


Experience from HKUST case competition
General comments on Case Competitions
Understanding the basic financial statements
Usual Picture: financial analysis
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
Some exercises
Case practice: Tiffany’s & Co.
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
Set up:
 18 teams; 3 Divisions with 6 teams each;
 Our division: Thammasat; U.South Carolina; UBC; CBS; Reitsmeikan
 Division Round (six teams)
▪  1st place go directly to Final Round (three finalists)
▪  2nd place go to Challenge Round
 Challenge Round (three teams)
▪  1st place goes to Final Round (fourth finalist)
 Final Round (four teams)
▪  1st: HKUST; 2nd: Thammasat; 3rd National U. of Singapore; 4th U. South Carolina

Our performance:
 3rd in our Division; top half of the 18 teams
 1st and 2nd in our Division in Final: Thammasat & U. South Carolina
 Our division was toughest
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Case: Chow Tai Fook, China focused jewelry chain

Type of case: Growth strategy; very little financials

Keys to solve the case:
 CTF has been very successful for the past 80 years
 China is growing market with huge potentials
 Urban migration (people from country side moving to big cities)
 Increasing middle class; greater buying power; more will buy jewelry
 Changing tastes, changing habits; influence of internet

What would you change? How would you change it?
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What we did well:
 Speak very well
 Work well as a team
 Quick thinking in Q&A

Areas for improvement
 Power point is below the average standard: not professional
 Spelling mistakes in power point presentation
 Analysis of case lacks depth
 Too theoretical in case analysis
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Not all cases require detailed financial analysis
 You need to understand what type of case it is
 Financial analysis provides supporting information
 Usually do not give “THE ANSWER” to the case
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Different types of cases:
 Strategy – is the firm doing the right thing?
 Marketing – are the products positioned correctly?
 Finance – is the firm managing its financial resources well?
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Situation Analysis:
 What is the problem? Where are we?
 Different views: Strategy? Marketing?
 What does the financial situation tell us?
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Supporting
analysis
Solution Development:
 What are the alternatives?
 Which is the best? Why?
 How to implement? When?
 How much will it cost?
 How profitable?
Supporting
analysis
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Finance vs. Strategy Fit: Does the financial
situation of the firm fit the strategy it is taking or
thinking of taking?
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Finance vs. Market Size fit: Does the market size
that firm has or thinking about match with its
financial capabilities?
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Performance & Profitability: Is the firm profitable?
Is it doing well financially? What is driving the
profitability or sales?
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Information will be missing…deliberately or
accidently (especially if the case is not about
finance)

You need to make reasonable but logical
assumptions and state them explicitly

You need to make simple “back of the
envelop” calculations (see Tiffany examples)
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Financial analysis tells a BIG PICTURE story
1.
Story of the value drivers
2.
Story of the valuation of cash flows
3.
Story of the financial ratios
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Two Main Ideas:
1. The more
sustainable cash
flow that can be
generated from
operations, the
more value will be
created in the firm
2. The lower the
discount rate (or
cost of capital),
the greater will be
the value
generated.
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Free Cash Flows
Weighted Average Cost of
Capital or Discount rate
Source: Technical Financial Interview, 2008, p.7
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1.
Leverage ratios
1.
2.
3.
4.
2.
Interest burden
Interest coverage
Leverage
Compound leverage factor
3.
1.
2.
3.
4.
Total asset turnover
Fixed asset turnover
Inventory turnover
Days receivables
5.
Current ratio
Quick ratio
Cash ratio
Profitability ratios
1.
2.
3.
Asset utilization ratios
1.
2.
3.
4.
Liquidity ratios
Return on assets (ROA)
Return on equity (ROE)
Return on sales (ROS) = Profit
margin
Market price ratios
1.
2.
3.
Market-to-book (P/B)
Price-earnings ratio (P/E)
Earnings yield
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The following slides explain some of the details of the big picture.
Students need to self study these in more detail.
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The web has many free resources that:
 Summarize use of the financial statements
 Provide simple models for use in case analysis

Example: Technical Financial Interview (2008) by:
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Three basic financial statements:
 Income statement
 Balance sheet
 Statement of cash flow

Five types of financial ratios:
 Leverage
 Asset utilization
 Liquidity
 Profitability
 Market price
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Source: Technical Financial Interview, 2008
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Source: Technical Financial Interview, 2008
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̶
=
̶
=
̶
=
̶
̶
=
̶
=
̶
̶
=
Sales Revenue
Cost of Goods Sold (COGS)
Gross Margin
Sales General & Admin (SG&A)
EBITDA
Depreciation & Amortization
EBIT
Financing expenses
Extraordinary expenses
EBT
Income tax expense
Net Income
Investments
Dividends
Retained Earnings
Also called
Gross profit
Operating profit
Taxable income
Earnings
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measure of cash
generating ability
of firm, but not a
substitute for
cash flow
Net sales
LESS Cost of Goods Sold (COGS)
EQUALS Gross Profit (Gross Margin)
LESS Selling, General & Administrative Expenses (SG&A)
EQUALS Earnings Before Interest Taxes Depn & Amortz (EBITDA)
LESS Depreciation and Amortization
EQUALS Earnings from operations (Operating Income)
LESS Non-operating income & expenses
EQUALS Earnings Before Interest & Tax (EBIT)
LESS Financing income & expenses
LESS Taxes
EQUALS Net earnings (Net Income)
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ASSETS
Current Assets
LIABILITIES
Current Liabilities
Non-current Assets
Non-current Liabilities
EQUITY
Paid-in capital
Retained Earnings
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Source: Technical Financial Interview, 2008
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See Slide
called Big
Picture 2
Free Cash Flow (not to be confused with Statement of Cash Flow)
= [1] Cash flow from operations
+ [2] Cash flow from capex investments
+ [3] Cash flow from changes or investments in working capital
[1] Cash flow from operations
= EBITDA – Taxes
= EBIT(1-Tax rate) + Depn & Amortz – Chg in NWC – Capex Investmt
[2] Cash flow from capex investments
= Cash spent on capital projects (e.g. new manufacturing plant)
[3] Cash flow from investments in working capital
= Cash spent on working capital (e.g. inventory of new mfg plant)
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Source: Technical Financial Interview, 2008, p.8
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Source: Technical Financial Interview, 2008, p.8
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Leverage ratios measure the ability for a firm to pay back its debt
(also called leverage).
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Asset utilization ratios measure the efficiency by which are firm is using
its assets.
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Liquidity ratios measure the ability for a firm to turn its assets into cash.
Cash is an important measure of a firm’s ability to react to business
opportunities, however too much idle cash means poor management of
this resource.
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Profitability ratios measure the performance of a firm.
Performance is measure at a firm-level (equity and debt) or at an equity
investor level only.
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Market price ratios measure how the market perceives the performance
of the firm.
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Most case competitions are NOT about finance! The BIG PICTURE is
therefore NOT the USUAL PICTURE, which I talk about now.
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Controlling
better these
parts in your
solution to the
case, is usually
what most case
competitions
require.
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1.
Leverage ratios
1.
2.
3.
4.
2.
Interest burden
Interest coverage
Leverage
Compound leverage factor
3.
1.
2.
3.
4.
Total asset turnover
Fixed asset turnover
Inventory turnover
Days receivables
5.
Current ratio
Quick ratio
Cash ratio
Profitability ratios
1.
2.
3.
Asset utilization ratios
1.
2.
3.
4.
Liquidity ratios
Return on assets (ROA)
Return on equity (ROE)
Return on sales (ROS) = Profit
margin
Market price ratios
1.
2.
3.
Market-to-book (P/B)
Price-earnings ratio (P/E)
Earnings yield
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
In case competitions, the financial analysis comes
down to making “back of the envelop” calculations
that show your logical and creative thinking to solve
the problem.

We practice this using “Case Interview” problems
from a good book called:
“Case In-Point” by Cosentino (2005)
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From “Case In Point”, Cosentino (2005)
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Solve the problem.

Our interest is HOW, not the solution itself.
 Set up a logical framework of HOW
 Ask for information that you might need
 Make reasonable simplifying assumptions
 Make simple back of the envelope calculations
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
A pharmaceutical company has invented a drug that cures
baldness. After three months of taking a pill, you can re-grow
your hair to the same thickness as when you were 15 years
old. Estimate the size of the US market for this pill and
describe how you would price the drug.


What information do you need to answer this question?
What assumptions will you need to make to simplify the
estimation?
Source: Cosentino, Case In Point, 2005, p.55
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
To find market size, you should want to know:
 Is it for men, women, or both
 Is it covered by medical insurance
 Are there medical side-effects

To price the drug, you should want to know
 Are there competitors
 What is the price of the competition
 Do you want market share or profit
 What pricing strategy is appropriate
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Source: Cosentino, Case In Point, 2005, p.56-57
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
GE has developed a new light bulb for street lights that will
never burn out. It could last 500 years without even going
dim. The director of marketing at GE asks you how you
would price this bulb.


What information do you need to answer this question?
What assumptions will you need to make to simplify the
estimation?
Source: Cosentino, Case In Point, 2005, p.122
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
Competition
 What are have competitors done
 What are the nearest competitor products

Costs
 How much R&D have we spent
 Cost of the a conventional light bulb
 Is the light bulb the only cost to be considered
 Is labor cost significant in changing light bulbs
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
If material costs, such as manufacturing and distribution
were the only issues, then it would not be worth selling the
ever-lasting light bulb.

But since there is a huge labor cost involved as well, the
savings on an ever lasting light bulb will be significantly
greater, which becomes an opportunity for GE and its
potential customers.
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
You are working for a Brazilian soda manufacturer that is
experiencing a decline in profitability over the last two years.
What is causing the decline? What options are there to
improve profitability? What’s the market size of the soda
market?


What information do you need to answer this question?
What assumptions will you need to make to simplify the
estimation?
Source: Cosentino, Case In Point, 2005, p.129
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Using the numbers that appear in the tables and text of the Tiffany case, answer the
following questions:

What is driving the sales and profits of Tiffany?
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Which are the successful products? Stores?

What is the jewelry market size in US? Japan? Non-US?

Based on your financial analysis, do you agree with Peltz that Tiffany is
undervalued? Why?

Based on these numbers, what should Tiffany do?
NOTE: There may not be sufficient financial information in the case, so you either do
not need it, or you need to make reasonable justifiable assumptions.
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