Transcript Document

SCG Workshop #3:
More FSA and some TVM
Agenda
Review of Fin Statements
The BS and IS
The Statement of Cash Flows
The
Looking at health and profitability
BS Accounts
We have 3 types of accounts in the
balance sheet:
Assets: Resources of the business we will use to generate
revenues
Liabilities: Money we owe to creditors or “debt-holders” that
have funded our business
Equity: Money we got from people who bought stock from
the company in return for voting power and a share of the
profits
Assets = Liabilities + Owner’s Equity
Value of resources in the business = Money we got from creditors + money we got from shareholders
In other words, everything in the business was either bought with money from shareholders or creditors.
The Accounts Within: Assets
Cash
Accounts
Receivable
(Short term IOU’S)
Investments
Inventory
Land
Buildings
Equipment
“Property, Plant, and
Equipment” or PP&E
The Accounts Within: Liabilities
Accounts Payable
(short term debt to
suppliers)
Bonds
Payable
Bank Loans
Unearned
Revenue
(prepaid
sandwiches)
The Accounts Within: Equity
Common Stock
Additional
Paid-In
Capital
Preferred Shares
Treasury Stock
Retained Earnings
Exercise
Companies have a lot of funky names for
their accounts, so based on your
knowledge of the base accounts and what
each category is, what is each account
classified under?
Assets
Earnings
Employed in
the business
Liabilities
Certificates of
Deposit (CD’s)
Equity
Cash and Cash
Equivalents
Raw Materials
Construction
in Progress
Trade
Receivables
Dividends Payable
Short Term
Borrowings
Intangible
Assets (Patents)
Common
Stock Held in
Treasury
The Income Statement
Tells us the revenue generating and
expense generating activities of the
business over the course of the reporting
period (year or quarter)
Two Classifications to Know
Revenues: Dollar value of sales a company
generates
Expenses: Costs associated with generating the
revenue.
After all expenses have been taken out of our
pool of revenue, what’s left is taxed.
Stepping to the side:
Depreciation and Amortization, what are they?
When you buy a car for
$50,000 and try to sell it a
year later, you can’t get the
same value you paid for it,
you get less.
Accountants adjust the value
of the long term assets the
company is holding at the
end of every period to reflect
what they believe is the new
value.
We call this
“depreciation” for
physical assets and
“amortization” for
intangible assets
(like patents)
The Uselessness of the Income
Statement
• Typically, investors don’t use Operating
income to a profit measurement, we have
EBITDA, EBIT, EBT, and E.
Earnings Before Interest Taxes Depreciation and Amortization
How we get to Earnings
Revenue
-Cost of Goods Sold
Gross Profit
-Selling, General, and Admin Expense
-Other Expenses
+Depreciation and Amortization
EBITDA
-Depreciation and Amortization
EBIT
-Interest
EBT
-Taxes
Earnings
Most of the time
D&A is already
looped in with
COGS or in
Expenses
Most of the time, this
is the same as
Operating Income
Statement of Cash Flows
Tell us about where we earned and spent cash
during the reporting period, as well as our cash
balances.
Important because a company can earn billions
of dollars in revenue but through the usage of
accounts receivable, never see a dollar. This can
be a problem because you have to pay debts
with cash not another IOU.
This statement will be our best friend
during DCF modeling in a few lessons.
Form of the Statement of Cash Flows
Beginning Cash
$100
Net Income
$437.50
+Net Cash Flows from Operations
$550
+Net Cash Flows from Investing
-$50
+Net Cash Flows from Financing
$400
+Net Cash Flows
$900
Ending Cash
$1000
Idea Behind it:
We want to take our net income and add back
any cash generating activities, then take back
out any cash using activities to find how much
cash was generated by the business.
We like cash because finance people think
accountants can manipulate numbers (they can)
so cash gives us the clearest picture of the
reality of the business.
Cash Flows from Operating Activities
Cash generated or used up from the everyday activities of the
business like:
Cash collections from Accounts Receivables
Cash Sales
Cash Expenditures
Changes in Current Assets
Changes in Current Liabilities
Add back Depreciation and Amortization
Essentially how
much cash you take
in minus your bills.
Depreciation and Amortization are already in
Net income, so to get to cash, we need to add
it back (remember, we don’t actually pay any
cash on D&A), it’s an accounting gimmick.
Cash Flows from Investing Activities
Covers purchases and sales of long-term assets and investments.
What we see in the statement:
Buying a building is a cash outflow
Selling land is a cash inflow
Buying Investments is a cash outflow
Selling investments is a cash inflow
Important to remember that you’re dealing with cash, so buying assets
will decrease your cash and vice versa
We refer to the acquisition of long-term assets as “Capital Expenditures”
Cash Flows from Financing
Covers cash flows that are related to raising capital for the business, both by
debt and equity.
Paying interest is a cash outflow
Paying back principal of a loan is a cash outflow
Receiving a loan’s funds is a cash inflow
Receiving funds from a issuance of stock is a cash inflow
Having a positive number in cash flows from financing means you are taking on
more debt or issuing stock faster than you are paying it back.
So if we go back…
Beginning Cash
$100
Net Income
$437.50
+Net Cash Flows from Operations
+Net Cash Flows from Investing
+Net Cash Flows from Financing
+Net Cash Flows
$900
Ending Cash
$1000
Cash in - Bills
Buying/Selling LT
Assets $550
Taking in/paying
off
-$50
capital from investors
and creditors
$400
How does all this apply to picking
better stocks and valuation?
Eyes on the prize: This is all leads to DCF
modeling and valuation.
Although balance sheets and cash flow
statements alone can’t tell you how much a
company is worth, we can look at it to see if the
company is “healthy”.
An Introduction to Present Value
Would you rather have $100 today or $110
dollars a year from now?
We have a choice…
Today
$100
1-Year from Now
$110
5% InterestWhat if there was a way to figure out how
much money in the future is worth in
Rate
today’s terms…
Future Value = Present Value(1+Interest Rate)^(Number of Years)
FV= PV*(1+i)^n
FV= 100*(1+.05)^(1)
FV= $105
How about now?
Today
$100
5-Years from Now
$105
FV=PV*(1+i)^n
FV=100*(1+.0067)^(5)
FV=$103.39
Going back to the future
We can also do the opposite of
calculating future value. We can
discount a future value back to the
present value to make direct
comparisons:
FV
(1 + i) ^ n
=
PV * (1 + i) ^ n
(1 + i) ^ n
FV
(1 + i) ^ n
We also refer to this as the
“discount rate”
= PV
The previous example:
Today
$100
5-Years from Now
$105
FV
PV =
(1 + i) ^ n
105
PV =
(1 + .0067) ^ 5
PV = $101.55
So…
A dollar today is worth more than a dollar in the
future because we can invest the dollar today
and get interest by the time the future comes
around. We refer to this as the time-value of
money.
But…
When will a stranger ever offer me the choice of having
$100 now or $105 later? What use do I have for this
stuff?
We use present value to calculate
terminal value and cash flow value of a
company in order to form a DCF, and can
use it to calculate internal rate of return.