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Notes - An Introduction To Financ, Accouting, Modeling, and Valuation

The document provides an introduction to key financial concepts including the balance sheet, income statement, cash flow statement, and financial modeling and valuation. It explains that the balance sheet outlines a company's assets and liabilities, the income statement shows revenues and expenses, and the cash flow statement reconciles net income to cash. The document then discusses financial ratio analysis, discounted cash flow valuation, and other valuation metrics such as price-to-earnings and price-to-revenue ratios.

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79 views8 pages

Notes - An Introduction To Financ, Accouting, Modeling, and Valuation

The document provides an introduction to key financial concepts including the balance sheet, income statement, cash flow statement, and financial modeling and valuation. It explains that the balance sheet outlines a company's assets and liabilities, the income statement shows revenues and expenses, and the cash flow statement reconciles net income to cash. The document then discusses financial ratio analysis, discounted cash flow valuation, and other valuation metrics such as price-to-earnings and price-to-revenue ratios.

Uploaded by

per
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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An introduction to finance, accounting,

modeling and valuation


- Balance sheet: What do I own?
- Income statement: How much do I make?
- Cash-flow statement: How much do I really make?

Income statement analysis

Revenue – expenses = income

Depreciation is part of expenses

Example:

Sell six apples for 2 euros per year. An apple


costs you 1 euro. Selling these six apples costs
you 1 euro in labor costs and one euro in truck
depreciation (truck costs 10 new and lasts 10
years). This depriciation makes you pay less tax.
Instead of 5 euros being taxable, now 4 euros
are taxable.

Balance sheet analysis

What stuff do I have? Vs. Who owns it?

Assets = stuff your own


Liabilities = banks that own your stuff
Equity = people that own your stuff

Assets = liabilities + equity

Short term < 1 year - long term > 1 year

Cashflow analysis

 Tells you what is accurate and inaccurate about income statement.


 To make it you need balance sheet and income statement

Cash on Bs @ end year 2 – cash on Bs @ end year 1 =/ income


Explain the cash balance from year 1 to 2
 Start with net income
 + non cash items from the income statement
 + / - non cash items from the balance shee

Structure of the CFs:


1. Cash flow from operations
a. Stuff that has a duration of under 1 year (current assets and current liabilities
except debt)
2. Cashflow from investing
a. From long term assets – like machines or land
3. Cash flow from financing (from debt or changes in common stocks)

How are they connected?

Retained earnings (Bs) = net income (Is) unless dividends are payedout
Change in cash from year 1 – 2 (Bs) = total cash flow (Cs)

Financial modeling

Investor relations
 companies’ website where we can find a lot of information about the company
 find it by typing <company> investor relations on google
 earnings releases
 conferences
 quarterly numbers
 Bs, Is, Cs

Sec.gov
 10-Q = quarterly reports
 10-K = annual reports
 8-K = important press releases
 S-1 = IPO prospectus
 3, 4, 5 and 13-D = who owns shares

Yahoo finance
 A lot of information

Quarterly earnings call


 CEO talks qualitative
 CFO talks quantitative

TAM = total addressable market

Case study Linked in


For linkedin:
1. Enterprise market
a. 40 million new companies yearly (found on the world bank)
b. Average HR employees per company = 6 (financial times)
c. 2,4 % of companies has HR executive
d. 40 mn * 6 * 2,4% * 50K (average salary HR) = 288 Bn
2. Pro-sumer market
a. 3 bn potential users (linked in goal)
b. 29,99 monthly payment
c. 3 bn * 29.99 = 1,08 Tn
3. Advertising market
a. 58 bn

Total addressable market = 1,4 tn


Valuation
Growth vs value investing

- Price / revenue (growth investors)


- Price / earnings (growth + value)
- Discounted cash flow (value investors)

V = ( price / revenue + discounted cash flow + price / earnings ) / 3

Discounted cash flow (DCF)


What is 5 in 10 years worth today? 5 / (1,07)^10

Capital expenditures = capex. (property or plant or equipment)

Free cash flow = Operating cash flow – capex. (note: this will make the FCF less)

We will discount the forecasted cashflows until today

In excel: NPV (interest, value1, value2, ….)

But what about future earnings that are not forecasted? We use the terminal value for this.
For this we need the interest rate, for example 7%. And the long term growth rate which we
can assume is 2%.

Terminal value formula = final year FCF * (1 + long term growth rate) / (interest rate – long
term growth rate)
This value has to be discounted to today. Because we used final FCF, it goes back from that
date to today.

Before we assumed that the interest rate was 7%. Now we will calculate that. This is called
weighted average cost of capital (W.A.C.C.).

WACC = cost to use debt * (1-tax rate) * % of capital that is debt


+ cost to use equity * % of capital that is equity

Note: only debt, not all liabilities

Cost to use equity = risk free rate + how volatile the stock is (beta) * (what we think the stock
market will do – 2,5%)

Risk free rate = 1, 2, or 3% (government rate of interest)


Price to revenue
- Market cap / revenue
- Later moment discounten

Damn easy…

Price to earning
A company usually trades on a P/E basis in line with its earnings growth rate. For example, a
company that has earnings growing at 20% per year likely trades at 20x’s earnings.

The stock market usually trades around 15x as the average earnings grow 15%

P/E = market cap /net income

PEG ratio measures P/E relative to its growth rate. PEG below 1 are cheap and PEG above 2
is expensive.

Company with 20x P/E and 20% growth has a PEG of 1


Company with 20x P/E and 40% growth has a PEG of 0,5
Company with 20x P/E and 10% growth has a PEG of 2
Other valuation metrics:

- Price to cash flow


- Price to book (what is the value of the company if you would sell everything)

Formulas to asses financials


4 categories: profit, competition, time, debt

profit
- How profitable is a company for every dollar they sell of inventory before expenses?
Cost of goods sold / revenue = gross margin
- How profitable is a company for every dollar they sell of inventory after most
expenses?
EBITDA / revenue = operating margin
- How profitable is a company for every dollar they sell of inventory after all expenses?
Net income / revenue = net profit margin
- How profitable is a company for every dollar they have of assets?
Net income / assets = return assets
- How profitable is a company for every dollar they have of equity?
Net income / equity = return on equity

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