Dupont analysis
Is the business creating value? EWS!
Focus on how the business is creating value
- DuPont ratios breakdowns the levers of value creation
- Net Profit Margin
- Asset Turnover
- Financial Leverage
- Introduce COE, Cost of Equity
EV analysis
What’s the shareholder value? EWS!
Capital solutions
- Increase EV
- Reduce Net debt
- Result in more Equity
CF analysis
How is the cash allocated? Where have the cash flow in and out?
Adjusted WC
How efficient is WC? How to optimise?
AWC solutions
- Reduce currrent assets
- Increase current liabilities
- Result in lower adjusting working capital
Debt capacity
What are the repayment sources? Repay from within business or outside sources?
Two Questions
- Purpose of Financing (Cash flow out)
- Why do they need the money?
- Repayment Sources (Cash flow in)
- How are they going to repay?
- Between the 2 questions: Difference Comes from Commercial Activity aka UEA
Ultimate Economic Activity
- Investment decisions must make economic sense
- Appropriate returns to debt and equity capital providers
- Return on Assets minimally above return on debt
- Financing of transactions must be in support of true economic activities
- Not fabricated by borrowers through related party transactions
- This comes with an understanding of who the ultimate third party buyers and suppliers are
- UEA to be explained through
- Business model analysis, Management and Stakeholders, Industry Analysis
Understanding Business Risks
- Ultimate Economic Activity is represented by the Capital Life Cycle
- Understand how a business generates its Net Profits when financed by Debt and Equity
- Understand the differences in perspectives of business owners and bankers when distributing Net Profits
Structuring using 5 States of Cash
