The document provides an overview of a course on financial modelling for company valuation. It discusses the following key points: - The course covers building financial models, developing case studies, modelling different financial concepts, and using models to perform valuation. - Financial ratio analysis helps analyze relationships between financial variables and compare performance over time, against competitors, and industry norms. - Key ratios are discussed to measure profitability, operating efficiency, liquidity, solvency, and valuation. - The DuPont analysis framework breaks down return on equity into operating efficiency, asset utilization, and financial leverage. - Profitability analysis should consider metrics at different levels like product, market, and customer to optimize overall profits.

1. Financial Modelling for Company Valuation
Class 5
Varun Gupta
MBA, CA, CFA

2. Course Agenda
 Financial modelling is a Tool to represent a firms financial performance and
position for investment analysis and various other decision-making. The
course on Financial modelling is structured in following sections:
 Section 1 - Understanding financial modelling and financial statement -
Income Statement, Balance Sheet, Cash Flow Statement
 Section 2 – Building a Financial Model – Step by step understanding and
developing a financial model including forecasting business assumption
and drivers, forecasting financial statement, linking financial statements,
and understanding complex financial concepts such as DTl/DTA,
Consolidation, etc
 Section 3 – Developing an end to end basic case study applying the
knowledge developed above
 Section 4 – modelling carry forward losses, interest income, etc
 Section 5 – Ratio and Financial Statement Analysis
 Section 6 – Valuation using DCF and Relative valuation, Sensitivity Analysis,
SoTP (Sum of the parts)
 Section 7 – Comprehensive Case Study for understanding and building an
end to end financial model and valuation taking Media industry as example

3. Steps of Financial Statement Analysis
1. Determine the
Objective and
Context
(Resources and
time available)
2. Gather Data
(Management;
Customer;
Supplier)
3. Process the
Data
(Adjustment;
Ratios)
4. Analyze and
interpret the
data
5. Report the
Conclusions or
Recommendations
6. Update the
Analysis

4. Financial Ratios
 Describe relationships between different variables used in financial
accounts
 Ratios can be interpreted in context to a benchmark
Its own historical performance (Time Series Analysis)
Competitors in the industry (Cross-Sectional Analysis)
 Should be interpreted in the light of
Company goals and strategies
Industry Norms
• Company’s with several lines of business may have its aggregate
financial ratios distorted
Economic Conditions
 At best gives us the right direction for analysis

5. Classification of Ratio
Activity Ratio Indicator of how well a company utilizes its resources
Liquidity Ratio
Solvency Ratio
Profitability Ratio
Valuation Ratio
Indicator of the ability to pay cash expenses in the short term as they
come due. e.g. Current ratio, Quick ratio, Cash ratio
Indicator of the firm's financial leverage and ability to meet its longer-
term obligations.
Helps us understand the return generated by company on its sales and
investments
Helps in analyzing and computing the market value of a company
• The classification is not very rigid
• These different categories are not mutually exclusive and supports each other in
effective analysis

6. Categories of Ratios
Profitability Ratios (1/3)
 Net profit margin (Return on Sales)
 How well a company is controlling its costs and turning revenue into bottom line
 The profitability of a company taking only direct expenses into consideration
 EBITDA margin is very important for analysis as it is closest to the cash profit
Revenue
Income
Net
Margin
Profit
Net 
Revenue
Profit
Gross
Margin
Profit
Gross 

7. Categories of Ratios
Profitability Ratios (2/3)
Revenue
EBIT
Or
Revenue
Income
Operationg
Margin
Profit
Operation 
Revenue
EBT
Margin
Pretax 
Overall operations efficiency without regard to how they are financed or what
taxes the company may be liable for
We can compare it to Net Income Margin to understand the Tax Burden on the
company
Productivity Measures
Sales or Profit Per Employee

8. Categories of Ratios
Profitability Ratios (3/3)
Assets
Total
Average
Income
Net
)
Assets(ROA
On
Return 
This ratio shows how well our company is using its assets to generate profits
Equity
Total
Average
Income
Net
Equity
On
Return 
Measures the return earned by the company for its equity shareholders
Capital
Total
Average
EBIT
Capital
Total
On
Return 
Efficiency with which we are utilizing our capital invested in the business

9. Categories of Ratios
Operating/Activity/Utilization/Turnover Ratios (1/2)
• It helps in understanding how fast the company collects cash from its customers
• High Receivables Turnover indicates efficiency in collection process but it can also signal
stringent credit policy and possibility of sales loss to a competitor with more lenient
terms
Receivable Days/
Days of Sales Outstanding
Payable Days
• Average number of days the company takes to pay its suppliers
• A high payable days can indicate favorable credit terms from suppliers but can also
indicate company’s inability to make payment to its suppliers
Inventory Days
• Days taken to convert its Inventory to Sales
• Low inventory days can indicate inadequate inventory and shortages hurting revenue or
can indicate advanced Inventory management system
• High Inventory days can help a company meet sudden demand

10. Categories of Ratios
Operating/Activity/Utilization/Turnover Ratios (2/2)
 Cash conversion cycle (Net Operating Cycle)
 =days of inventory on hold + day of sales outstanding - days of
payables
• Measures efficiency of Fixed assets utilisation
• High Ratio indicated higher revenue produced for a given unit of Fixed asstes but also
carries the risk of depreciated assets which needs replacement in near future
• CCC helps understand the net operating cycle of an organisation. The day it takes to
complete full working capital cycle from inventory to sales to cash collection net of
payables

11. Categories of Ratios
Liquidity Ratio
 Helps measure the ability of the company to meet its short term
obligation

12. Categories of Ratios
Solvency/Financial Leverage Ratio
 Ability of the company to meet its long term obligation
No one would like to lend money to a company whose profit is not high enough
to meet its interest obligation
Higher D/E ratio makes your company vulnerable to a downturn in the
industry

13. Categories of Ratios
Cash Flow Ratios
Cash To Income
Helps understand the ability of the company to convert its profit to Cash

14. Valuation Ratio
P/E (Price Earning Ratio)
A higher ratio indicates high expectation of the market wrt future earning
capabilities
Book Value Per Share (BVPS)

15. DU-Pont Analysis









equity
income
net
equity
on
return















equity
revenue
revenue
income
net
equity
on
return





















equity
assets
assets
sales
sales
income
net
equity
on
return
   
ratio
leverage
turnover
asset
in
m
profit
net
equity
on
return arg


16. Profitability Analysis
 Analyze profitability by Products, Markets, Channels, Consumers
 We might rate some customers in Top categories based on sales value
but when we attribute the costs at customers level we might find them
less profitable or at times even loss-making
 Shared costs should be allocated on reasonable basis
 Design your performance metrics to optimize overall profitability