corporate bridge toolkit - financial modeling interiview.pdf

7/27/2019 Corporate Bridge Toolkit - Financial Modeling Interiview.pdf

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Financial

ModelingInterview

Prepared by

Dheeraj Vaidya, CFA, FRM

CEO & MD, Corporate Bridge, Ex- JPMorgan, CLSA India

Corporate Bridge Must Know

Toolkit

www.educorporatebridge.com


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Confidential: This material is strictly for the purpose of training and not for redistribution. Viola tions subject to Indian copyright regulations.

1

COMMON MODELING APPROACHES

INCOME STATEMENT: LINE ITEM DRIVERS

a) Revenues

For most companies revenues are a fundamental driver of economic performance. A well designed and logical revenue model

reflecting accurately the type and amounts of revenue flows is extremely important. There are as many ways to design a revenue

schedule as there are businesses.

Some common types include:

1. Sales Growth: Sales growth assumption in each period defines the change from the previous period. This is simple andcommonly used method, but offers no insights into the components or dynamics of growth.

2. Inflationary and Volume/ Mix effects: Instead of a simple growth assumption, a price inflation factor and a volume factor areused. This useful approach allows modeling of fixed and variable costs in multi product companies and takes into account

price vs volume movements.

3. Unit Volume, Change in Volume, Average Price and Change in Price: This method is appropriate for businesses whichhave simple product mix; it permits analysis of the impact of several key variables.

4. Dollar Market Size and Growth: Market Share and Change in Share Useful for cases where information is available onmarket dynamics and where these assumptions are likely to be fundamental to a decision. For Example: Telecom industry


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5. Unit Market Size and Growth: This is more detailed than the preceding case and is useful when pricing in the market is akey variable. (For a company with a price-discounting strategy, for example, or a best of breed premium priced niche player)

e.g. Luxury car market

6. Volume Capacity, Capacity Utilization and Average Price: These assumptions can be important for businesses whereproduction capacity is important to the decision. (In the purchase o f additional capacity, for example, or to determine whether

expansion would require new investments.)

7. Product Availability and Pricing8. Revenue driven by investment in capital, marketing or R&D9. Revenue based on installed base (continuing sales of parts, disposables, service and add-ons etc). Examples include

classic razor-blade businesses and businesses like computers where sales of service, software and upgrades are important.

Modeling the installed base is key (new additions to the base, attrition in the base, continuing revenues per customer etc).10.Employee based: For example, revenues of professional services firms or sales-based firms such as brokers. Modeling should

focus on net staffing, revenue per employee (often based on billable hours). More detailed models will include seniority and

other factors affecting pricing.

11.Store, facility or Square footage based: Retail companies are often modeled based on the basis of stores (old stores plus newstores in each year) and revenue per store.

12.Occupancy-factor based: This approach is applicable to airlines, hotels, movie theatres and other businesses with lowmarginal costs.


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Company XYZ FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY13E FY14E

Revenue Buildup

Case 1

Business Segment 1 843 964 1,021 1,103 1,191 1,286 1,389 1,500 1,620 1,750

YoY % 14% 6% 8% 8% 8% 8% 8% 8% 8%

Business Segment 2 345 365 423 457 493 533 575 622 671 725

YoY % 6% 16% 8% 8% 8% 8% 8% 8% 8%

Business Segment 3 128 178 212 254 300 348 397 453 507 568

YoY % 39% 19% 20% 18% 16% 14% 14% 12% 12%

Others 25 38 48 58 68 79 90 102 115 129

YoY % 52% 26% 20% 18% 16% 14% 14% 12% 12%

Total Revenues 1,341 1,545 1,704 1,872 2,052 2,246 2,451 2,677 2,913 3,171

Case 2

Production (mn tonnes) 1,500 1,575 1,630 1,712 1,848 2,033 2,100 2,100 2,100 2,100

YoY % 5% 3% 5% 8% 10% 3%

Maximum permissible growth YoY % 23% 23% 14% 3% 0% 0% 0%

Capacity (mn tonnes) 1,750 1,825 1,850 2,000 2,100 2,100 2,100 2,100 2,100 2,100

YoY % 4% 1% 8% 8% 0% 0% 0% 0% 0%

Capacity utilization (%) 86% 86% 88% 86% 88% 97% 100% 100% 100% 100%

Average Selling Price or ASP (USD per tonne) 800 825 850 893 937 1,003 1,073 1,148 1,228 1,314

YoY % 3% 3% 5% 5% 7% 7% 7% 7% 7%

Total Revenues (USD bn) 1,200 1,299 1,386 1,528 1,732 2,039 2,253 2,411 2,580 2,760

Case 3

No of Rooms 2,500 2,750 3,000 3,250 3,500 4,000 4,500 5,000 5,000 5,000

YoY % 10% 9% 8% 8% 14% 13% 11% 0% 0%

No of days 365 365 365 365 365 365 365 365 365 365

Occupancy (%) 80% 75% 78% 80% 80% 80% 80% 80% 80% 80%

Average Rent per room per day 1,000 1,100 1,050 1,200 1,260 1,323 1,389 1,459 1,532 1,608

YoY % 10% -5% 20% 5% 5% 5% 5% 5% 5%

Total Revenues (INR mn) 730 828 897 1,139 1,288 1,545 1,825 2,130 2,236 2,348Case 4

No of employees 2,500 2,750 3,000 3,250 3,500 4,000 4,500 5,000 5,000 5,000

YoY % 10% 9% 8% 8% 14% 13% 11% 0% 0%

No of average work days 330 330 330 330 330 330 330 330 330 330

No of billable hours per day 8 8 8 8 8 8 8 8 8 8

YoY % 0% 0% 0% 0% 0% 0% 0% 0% 0%

Average Billing rate - USD (per hour) 50 55 55 58 56 59 62 64 65 68

YoY % 10% 0% 5% -3% 5% 5% 3% 2% 5%

Total Revenues (USD mn) 330 399 436 498 517 623 737 845 858 898

Historical Forecast

Applicable for Metals & mining companies, Oil & Gas companies

Applicable for companies with multiple segments; Most commonly used method by research analysts

Applicable for hotels; same logic can be applied to airlines, restaurants etc

Applicable for ITES, IT companies

Used Data val idation

to ensure production

is below capacity


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B) COSTS

Drivers include:

1. Percentage of Revenues: Simple but offers no insight into any leverage (economy of scale or fixed cost burden2. Costs other than depreciation as a percent of revenues and depreciation from a separate schedule: This approach is

really the minimum acceptable in most cases, and permits only partial analysis of operating leverage.

3. Variable costs based on revenue or volume, fixed costs based on historical trends and depreciation from a separateschedule: This approach is the minimum necessary for sensitivity analysis of profitability based on multiple revenue scenarios

c) Operating e xpenses

1. General and Administrative: Generally treated as % of Revenues2. Sales and Marketing: Generally modeled as % of Revenues. In some cases, it is actually a revenue driver and not driven byrevenues. For example, brokerage business or pure plays trading and marketing firms.

3. R&D: Generally R&D costs are treated as % of revenues.d) Interest expense (or Net interest expense):

1. This is one of the few income statement items that is driven by balance sheet information. A interest schedule is generallydeveloped to i) calculate interest received on cash and short term investments and ii) calculate interest expenses arising from

all types of debt. Interest rate assumptions are needed.

2. Ending balance of previous year can be used to calculate interest expenses to avoid circular reference in excel3. Average balance can be used as well (it will give circular reference though)

e) Income taxes:

1. Effective tax rate is generally used. Effective rate is calculated as Taxes paid / Pre-Tax income. For future years, either themarginal tax rate equivalent to the country of incorporation is taken or if the effective rate is much lesser than the marginal tax


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ate then during the initial years, tax rate can be low but gradually would have to be moved to marginal tax rate. For example,

In India, marginal corporate tax rate is 33%.

BALANCE SHEET: LINE ITEM DRIVERS (ASSETS)

1. Cash and Cash Equivalents:1.1.Linked to cash from Cash Flow Statement

2. Accounts Receivable (Part of Working Capital Schedule):2.1.Generally modeled as Days Sales Outstanding;2.2.Receivables turnover = Receivables/Sales * 3652.3.A more detailed approach ma include aging or receivables by business segment if the collections vary widely by segments2.4.Receivables = Receivables turnover days/365*Revenues

3. Inventories (Part of Working Capital Schedule):3.1.Inventories are driven by costs (never by sales);3.2.Inventory turnover = Inventory/COGS * 365; For Historical3.3.Assume an Inventory turnover number for future years based on historical trend or management guidance and then compute

the Inventory using the formula given below

3.4.Inventory = Inventory turnover days/365*COGS;For Forecast4. Other Current Assets (Part of Working Capital Schedule):

4.1.Modeled as % of sales5. Fixed Assets (Property, Plant and Equipment)

5.1.Separate schedule is prepared taking into account various components5.2.Ending Balance for PPE = Beginning balance + Capex Depreciation - Adjustment for Asset Sales5.3.Sample Schedule is shown below:


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Fixed Assets (Property, Plant and Equipment) Sample Snapshot


Depreciation Schedule

Net Sales 3,002 3,408 4,069 4,395 4,746 5,126 5,536 5,979 6,457 6,974

Capital Expenditures 220 230 161 190 175 179.4 193.8 209.3 226.0 244.1

Capital Expenditures as % of Net Sales 7.3% 6.7% 4.0% 4.3% 3.7% 3.5% 3.5% 3.5% 3.5% 3.5%

Beginning Net PP&E 965.6 1,000.8 1,008.9 1,008.6 1,008.2 1,006.8 1,003.7

Capital Expenditures 190.0 175.0 179.4 193.8 209.3 226.0 244.1

(Depreciation Expense) (154.8) (166.9) (179.7) (194.2) (210.6) (229.2) (250.0)

(Asset Sales and write offs) - - - - - - -

Ending Net PP&E 851.9 941.3 965.6 1,000.8 1,008.9 1,008.6 1,008.2 1,006.8 1,003.7 997.8

Existing Net PP&E, net 965.6 From:

Land 19.3 Existing PP&E 131.0 121.3 111.6 101.9 92.2 82.5 72.8

Depreciable PP&E, net $946.3 Years

Useful Life 13.5 Years

SYD 97.5 13.5 12.5 11.5 10.5 9.5 8.5 7.5

Capex Useful Life

2008 $190.0 8.0 Years 23.8 23.8 23.8 23.8 23.8 23.8 23.8

2009 175.0 8.0 21.9 21.9 21.9 21.9 21.9 21.9

2010 179.4 8.0 22.4 22.4 22.4 22.4 22.4

2011 193.8 8.0 24.2 24.2 24.2 24.2

2012 209.3 8.0 26.2 26.2 26.2

2013 226.0 8.0 28.3 28.32014 244.1 8.0 30.5

Total Depreciation Expense 101.9 127.5 135.5 154.8 166.9 179.7 194.2 210.6 229.2 250.0

Depreciation as % of PP&E, net 12.0% 13.5% 14.0% 15.5% 16.5% 17.8% 19.3% 20.9% 22.8% 25.1%

Depreciation as % of Capex 46.3% 55.5% 84.0% 81.5% 95.4% 100.1% 100.2% 100.7% 101.4% 102.4%

Historical Forecast


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BALANCE SHEET: LINE ITEM DRIVERS (LIABILITIES)

6. Current Liabilities -6.1.Accounts Payables (Part of Working Capital Schedule): 6.2.Payables turnover = Payables/COGS * 365; For Historical6.3.Assume Payables turnover days for future years based on historical trend or management guidance and then compute the

Accounts Payables using the formula given below

6.4.Accounts Payables = Payables turnover days/365*COGSComplete working Capital Schedule will look like an example given below:


Working Capital Schedule

Net Sales 3,001.7 3,407.9 4,069.3 4,394.8 4,746.4 5,126.1 5,536.2 5,979.1 6,457.5 6,974.0Cost of Sales (excluding D&A) 2,068.9 2,333.5 2,739.1 2,944.5 3,180.1 3,434.5 3,709.3 4,006.0 4,326.5 4,672.6

Working Capital Balances

Accounts Receivable, net 462.9 473.7 473.0 505.7 546.2 589.9 637.0 688.0 743.0 802.5

Inventory 327.0 350.2 383.8 411.4 444.3 479.9 518.3 559.7 604.5 652.9

Other Current Assets 87.4 82.8 83.5 90.2 97.4 105.2 113.6 122.7 132.5 143.1

Total Non Cash Current Assets 877.3 906.7 940.3 1,007.3 1,087.9 1,174.9 1,268.9 1,370.4 1,480.1 1,598.5

Accounts Payable 206.4 221.4 279.1 298.5 322.4 348.2 376.0 406.1 438.6 473.7

Accrued Liabilities 180.7 161.3 176.7 190.0 205.1 221.6 239.3 258.4 279.1 301.4

Other Current Liabilities 68.3 62.8 81.8 88.3 95.4 103.0 111.3 120.2 129.8 140.2

Total Non-Debt Current Liabilities 455.4 445.5 537.6 576.8 622.9 672.8 726.6 784.7 847.5 915.3

Net Working Capital/ (Deficit) 421.9 461.2 402.7 430.5 465.0 502.2 542.4 585.7 632.6 683.2

(Increase)/ Decrease in Working Capital (39.3) 58.5 (27.8) (34.4) (37.2) (40.2) (43.4) (46.9) (50.6)

Ratios & Assumptions

Accounts Receivable, net (Collection period in days) 56.3 50.7 42.4 42.0 42.0 42.0 42.0 42.0 42.0 42.0

Inventory (Days outstanding) 57.69 54.78 51.14 51.0 51.0 51.0 51.0 51.0 51.0 51.0

Other Current Assets (% of Net Sales) 2.9% 2.4% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%

Accounts Payable (Days Payable) 36.41 34.63 37.19 37.0 37.0 37.0 37.0 37.0 37.0 37.0

Accrued Liabilities (% of COGS) 8.7% 6.9% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%

Other Current Liabilities (% of COGS) 3.3% 2.7% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Historical Forecast


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BALANCE SHEET: LINE ITEM DRIVERS (LIABILITIES)

7. Current Liabilities (contd.)7.1.Short Term Debt: Usually modeled as part of debt schedule7.2.Accrued Liabilities: Kept constant most often; Can be modeled as % of sales7.3.Deferred taxes: Kept constant most often; Can be modeled as % of sales7.4.Other Current Liabilities: Can be modeled as % of COGS or as % of Sales

8. Long term Liabilities:8.1.Deferred taxes: Kept constant most often; Can be modeled as % of sales8.2.Post retirement Pension Cost: Kept constant most often8.3.Long term Debt: Usually modeled as part of debt schedule (please refer debt schedule on next page)

8.3.1. Key feature of the debt schedule is to use the Revolver facility and how it works so that the minimum cash balance ismaintained and ensures that the Cash account does not become negative in case the operating cash flow is negative

(Companies in investment phase who need lot of debt in initial years of operation Telecom cos for example)

8.3.2. Overall range of Debt to equity ratio should be maintained if there is any guidance by the management8.3.3. Debt balance can also be assumed to be constant unless there is a need to increase the debt8.3.4. Notes to the accounts would give repayment terms and conditions which need to be accounted for while building the

debt schedule

8.3.5. For some industries, like Airlines, Retail etc Operating Leases might have to capitalized and converted to debt.However, this is a complex topic and beyond the scope of discussion at this point


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Debt Schedule - Sample


Debt Schedule

Cash Flow Available for Financing Activities 278.9 338.8 387.1 429.7 474.1 520.1 569.4

Proceeds from/ (Repurchase of) Equity (116.8) (132.3) (149.7) (169.1) (190.0) (212.3) (237.0)

Dividends (84.3) (93.1) (102.7) (113.0) (123.6) (134.4) (145.9)Option Proceeds 20.0 20.0 20.0 20.0 20.0 20.0 20.0

Effects of Exchange Rates on Cash - - - - - - -

+ Beginning Cash Balance 28.6 25.0 25.0 41.4 75.4 212.7 371.0

- Minimum Cash Balance (25.0) (25.0) (25.0) (25.0) (25.0) (25.0) (25.0)

Cash Available for Debt Repayment 101.4 133.4 154.6 183.9 231.0 381.0 552.5

Long Term Debt Issuance - - - - - - -

Long Term Debt (Repayments) (140.2) (95.4) (24.5) (133.5) (43.3) (35.0) (30.0)

Cash Available for Revolving Credit Facility (38.8) 38.0 130.1 50.4 187.7 346.0 522.5

Revolving Credit Facility

Beginning Balance 112.9 151.7 113.7 - - - -

Discretionary (Paydown)/ Borrowings 38.8 (38.0) (113.7) - - - -

Ending Balance 55.5 112.8 112.9 151.7 113.7 - - - - -

Long Term DebtBeginning Balance 586.7 446.5 351.1 326.6 193.1 149.8 114.8

Issuance - - - - - - -

(Repayment/ Amortization) (140.2) (95.4) (24.5) (133.5) (43.3) (35.0) (30.0)

Ending Balance 547.6 557.8 586.7 446.5 351.1 326.6 193.1 149.8 114.8 84.8

Revolving Credit Facility Average Balance 132.3 132.7 56.8 - - - -

Interest Rate 7.0% 7% 7% 7% 7% 7% 7%

Interest Expense 9.3 9.3 4.0 - - - -

Long Term Debt Average Balance 516.6 398.8 338.9 259.9 171.5 132.3 99.8

Interest Rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%

Interest Expense 43.9 33.9 28.8 22.1 14.6 11.2 8.5

Total Interest Expense 53.2 43.2 32.8 22.1 14.6 11.2 8.5

Cash Balances Average Balance 26.8 25.0 33.2 58.4 144.1 291.9 459.3Interest Rate 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

Total Interest Income Interest Income 0.7 0.6 0.8 1.5 3.6 7.3 11.5

Historical Forecast

corporate bridge toolkit - financial modeling interiview.pdf

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