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1
Financial Analysis for
Management Consultants &
Business Analysts
Practical guide with case studies & real-life
examples
2
In business you have to make a lot of important decisions
During consulting projects you will have to do a lot of financial
analyses to see whether proposed changes make sense or not
3
In business you have to make a lot of important decisions
A lot of such analyses require some skills in Excel but also a specific
approach to available data. Usually they don’t teach that at the university
4
Luckily, there is a way to do fast and efficiently financial analyses in
Excel and I will show you how to do that in this course.
5
In business you have to make a lot of important decisions
Thanks to this presentation you will have a look at the most important essential financial
analysis you need to know to work without any problems during consulting projects
6
We will cover all the essential things that you need to know to work well during
consulting
Analyzing Financial
Statements Financial indicators Modeling P&L
Introduction to Valuation
Analysis of Business Units
Financial analysis related to
M&A Investments Analysis
7
What you will see in this presentation is a part of my online course where you
can find case studies showing analyses along with detailed calculations in Excel
Financial Analysis for Management
Consultants
$190
$19
Click here to check my course
8
General Analysis of Financial
Statements
9
General Analysis of Financial
Statements – Introduction
10
In this section we will discuss the following things
3 financial
statements –
overview
Amazon financial
statements – Analysis
in Excel
11
In this section we will discuss the following things
3 financial
statements –
overview
Amazon financial
statements – Analysis
in Excel
LPP financial
statements – Analysis
in Excel
Disney financial
statements – Analysis
in Excel
12
3 financial statements
13
There are 3 financial statements that you have to look at when
analyzing the firm
Profit & Loss /
Income Statement
Balance Sheet Cash flow
 Shows how much money you
have earned, and did you
make a profit or a loss?
 Shows how you did it, what
where the revenue and how
much you had to spend in
terms of costs to generate
them?
 Shows what you have / what
you need to have a
legitimate business
 Shows you also where you
got the money from to buy
the things you have
(shareholders, banks,
suppliers, other borrowers
etc.)
 Shows how much money the
firm has actually generated
and what has consumed the
cash on 3 levels
 You can see what the firm
spends the cash on:
investment, paying off debts,
buying back shares or maybe
paying of dividends
 Cash is divided into 3
streams: Operating CF,
Investing CF and Financing
CF
14
Financial analysis of indicators
15
Financial analysis of indicators –
Introduction
16
In this section we will discuss the following things
Profitability ratios Liquidity ratios Activity ratios
Debt ratios Case study
17
Profitability ratios –
Overview
18
There are plenty of profitability ratios used. Below the most popular
ones
% Gross Margin
% Gross Profit
% EBIT
Return on Sales ROS
% Net Income
% EBITDA
ROE
ROA
19
Let’s have a look at the definition of ratios and what they tell us
Gross Margin
% Gross Margin =
Net Sales
20
Let’s have a look at the definition of ratios and what they tell us
Operating Income EBIT
% EBIT
Return on Sales - ROS =
Net Sales
21
Let’s have a look at the definition of ratios and what they tell us
Net Income
Net Profit
% Net Income
Profit Margin =
Net Sales
22
Let’s have a look at the definition of ratios and what they tell us
EBITDA
% EBITDA =
Net Sales
23
Let’s have a look at the definition of ratios and what they tell us
Net Income
ROA
(Return on Assets) =
Assets
24
Let’s have a look at the definition of ratios and what they tell us
Net Income
ROE
(Return on Equity) =
Equity
25
ROE decomposition
26
ROE can be decomposed into other ratios. Below one example
Net Income
ROE =
Assets
x
Assets
Equity
ROE = xROA Equity Multiplier
Net Income
Equity
=
Net Income
Equity
=
27
ROE can be decomposed into other ratios. Below one example
Sales
=
Assets
x
Assets
Equity
Net Income
Sales
x
Net Income
Equity
ROE = xAsset Turnover Equity Multiplierx% Net Income
28
Liquidity ratios –
Overview
29
There are plenty of liquidity ratios used. Below the most popular ones
Current Ratio (CR)
Quick Ratio (QR)
Cash Ratio (CshR)
Operating Cash Flow
Ratio
30
Let’s have a look at the definition of ratios and what they tell us
Current Assets
Current Ratio (CR) =
Current Liabilities
31
Let’s have a look at the definition of ratios and what they tell us
Current Assets
Quick Ratio (QR) =
Current Liabilities
-
Inventory &
Prepayments
32
Let’s have a look at the definition of ratios and what they tell us
Cash & Cash
Equivalents
Cash Ratio (CshR) =
Current Liabilities
33
Let’s have a look at the definition of ratios and what they tell us
Operating Cash Flow
Operating Cash Flow
Ratio
=
Total Debt
34
Activity / Efficiency ratios –
Overview
35
There are plenty of activity / efficiency ratios used. Below the most popular
ones
Inventory conversion
period
Receivables
conversion period
Payables conversion
period
Cash Conversion
Cycle
Asset turnover
36
Conversion periods have alternative names that are widely used
Inventory conversion
period
Receivables
conversion period
Payables conversion
period
Days Inventory
Outstanding (DIO)
Days Sales
Outstanding (DSO)
Days Payable
Outstanding (DPO)
=
=
=
37
Let’s have a look at the definition of ratios and what they tell us
Inventory
Inventory conversion
period
=
COGS
x 365 days
38
Let’s have a look at the definition of ratios and what they tell us
Receivables
Receivables
conversion period
=
Net Sales
x 365 days
39
Let’s have a look at the definition of ratios and what they tell us
Account Payables
Payables conversion
period
=
COGS
x 365 days
40
Cash Conversion Cycle (CCC) we calculate using previous ratios
Cash Conversion
Cycle (CCC)
= -
Receivables
conversion period
Payables
conversion period
+
Inventory
conversion period
Cash Conversion
Cycle (CCC)
= -
Days Sales
Outstanding (DSO)
Days Payable
Outstanding (DPO)
+
Days Inventory
Outstanding (DIO)
41
Let’s have a look at the definition of ratios and what they tell us
Net Sales
Asset Turnover =
Assets
42
Debt ratios –
Overview
43
There are plenty of debt ratios used. Below the most popular ones
Debt Ratio
Debt to Equity ratio
(D/E)
Net Debt-to-EBITDA
Ratio
44
Debt Ratio can be defined in 2 ways
Debt
Debt Ratio =
Assets
Liabilities
Debt Ratio =
Assets
45
Let’s have a look at the definition of ratios and what they tell us
Debt
Debt to Equity ratio
(D/E)
=
Equity
46
Let’s have a look at the definition of ratios and what they tell us
Debt
Net Debt-to-EBITDA
Ratio
=
EBITDA
-
Cash & Cash
Equivalents
47
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Financial Analysis for Management
Consultants
$190
$19
Click here to check my course
48
Modeling of Profit & Loss
statement in practice
49
Modeling of Profit & Loss statement
in practice – Introduction
50
In business you have to make a lot of important decisions
You can learn a lot by analyzing the business model in Excel. This is
one of the most insightful yet also most difficult financial analysis
51
Modeling of the business in Excel should be done in stages. You first have to
understand the drivers
# transactions
Average
revenue per
transaction
Total revenuex
% Fee of the
marketplace
Average
transaction value
Total searches % conversion
x
x
Total Costs
Total margin
-
Rent
People
Cost of traffic
Ratio of visitors
to searches
Average cost of 1
visit
+
x
Development
52
In this section we will discuss the following things
How to model Retail
in Excel
How to model SMCG
businesses in Excel
Moving from SMCG
to selling services –
financial analysis
53
Main challenges in the business model
Main drivers / KPIs for the business model
The model of the business in Excel
Short introduction to the business model
For every business model we will do the following things
54
Main challenges in Retail
55
Let’s have a look at the main challenges in Retail
Margin Management
Stock / Inventory
Management
Multichannel Strategy
Managing price across
channels
Expansion to new
markets
Saturation of existing
markets
New product
development
Managing customer
experience across
channels
Format evolution
(possible death)
People rotation and
knowledge
management
Disruption esp. from
external forces /
business models
Automation
56
Business model of a Retailer
in Excel
57
The retail business model is driven by some basic KPIs
# Transactions
Average Value
Transaction
Total store revenue Total store costs
x
Store EBITDA
Average Value
Transaction of basic
purchase
Average Value
Transaction of
additional purchase
# of Visitors % Conversion
Rent
People
# of People
Average wages
+
x
x
Others
+
# of sq. m
Fee per sq. m x
% Gross Margin
Gross Margin generated
by the store
x -
58
Modeling SMCG Business Model in
Excel – Introduction
59
SMCG are all branded goods that you consume infrequently during your life.
In this category we have cars, domestic appliances and other similar products
60
There are 2 ways in which you can model SMCG
SMCG – sold as a product SMCG – sold as a service
61
In this section I will talk about 3 main things
Main challanges in SMCG KPIs for SMCG business
Business models of SMCG
in Excel
62
Main challenges in SMCG
63
Brand Awareness
& Reach
Controling and
constantly lowering
production costs
Your strategy across
many channels
Managing customer
experience across
channels
Saturation point in
consumption and
penetration
Spreading beyond
original target group and
leveraging brand
Taking care of faulty
products
Managing older versions
of your product
Switch from product to
service
The software part of the
product / IoT
The value of your
customer base
Below a list of the most important aspect for SMCG business model
64
Main KPIs for the SMCG
business model
65
The SMCG business model is driven by some basic KPIs
# sold
Unit production
cost
Gross Margin Head office
Operational profit
Fixed Cost /
Quantity produced
Unit variable cost
+
Cost of sales &
marketing
Net Margin
-
-
Average price
Unit Gross Margin
-
x
Market share Market size
66
SMCG business model –
modeling in Excel
67
There are 2 ways in which you can model SMCG
SMCG – sold as a product SMCG – sold as a service
68
Vaccum cleaner producer – modeled
as product seller
Smartphone firm– modeled as a
provider of a service
We will go through those 2 approaches using different cases
69
SMCG business model in Excel –
basic assumptions
70
Vaccum cleaner producer – modeled
as product seller
Smartphone firm– modeled as a
provider of a service
Let's start with the modelling vacuum cleaner producer
71
Vaccum cleaner producer – modeled
as product seller
Smartphone firm– modeled as a
provider of a service
Let's start with the modelling vacuum cleaner producer
72
Let’s go through basic assumptions of the model. We want to get to the
operational profit
SMCG product MarketingSales Channels
 Vacuum cleaners
 1 production site
 Own e-commerce
 Retail chain
 TV ads
 Market research
 Social Media
 Mailing
 Loyalty program
 Outdoor campaigns
73
Modeling the SMCG as service –
Introduction
74
Vaccum cleaner producer – modeled
as product seller
Smartphone firm– modeled as a
provider of a service
We said we will do modelling for 2 different products and also in
different way
75
Vaccum cleaner producer – modeled
as product seller
Smartphone firm– modeled as a
provider of a service
We said we will do modelling for 2 different products and also in
different way
76
He currently sells around 600 K
smartphones and has a bas of around 1
M customers
He has to acquire new customers to
cover for the lost ones and grow
He considers switching to offering
annual subsription model
To make the change more obvious we will first do a case of a firm that moves
from product to service and wants to do calculate whether it makes sense
77
To make the change more obvious we will first do a case of a firm that moves
from product to service and wants to do calculate whether it makes sense
Why moving from
product to service
makes sense?
Case study of a
smartphone producer
Solution in Excel to
the case study
Modeling Head Office
costs
Modeling Head Office
profit & loss
statement
78
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Financial Analysis for Management
Consultants
$190
$19
Click here to check my course
79
Business Units Analyses
80
Business Units Analyses –
Introduction
81
In many cases the business you want to analyze are very complicated. You have to look
deeper. You have to analyze specific business units to understand the result and the future
82
This obviously means that you have to divide into business units that you
want to analyze separately and draw conclusions on their performance
83
In this section we will discuss the following things
Why analysis of Business
Units makes sense
Analysis of Business
Units – Disney
Analysis of Business
Units – Grocery
Discounter
84
Why analysis of Business Units
makes sense
85
Let’s have a look why it makes sense to look at business units in details
On aggregated level you have
averaging effect
Business units may have different
business models
Business units may have different
growth perspectives
Business units may have different
margins
Business units may require
different Capex
Business units may have different
competitors
Business units usually have
different drivers & KPIs
You can sell some business units
86
Overview of Business models
87
SaaS
E-commerce
Media site
2-sided market
User Generated Content
Mobile Applications
Retail
B2C Service
B2B Service
FMCG
SMCG
Commodity
There are 6 offline business models and 6 online models. Every business
model has its set of KPI
88
SaaS
E-commerce Media site2-sided market
UGC
B2B Service
B2C ServiceRetail
Bear in mind that big companies can operate many business models
89
Analysis of Business Units – Groceries
Discounter – Case Introduction
90
Imagine that you have to analyze the performance of difference concepts
and regions of a Grocery Discounter. You have data on the store level.
91
Let’s have a look at the data that we have on the Grocery Discounter
He currently has 700 stores
He operates 4 concepts: Mini,
Express, Regular, Big
He operates in 10 regions
Have a look at results on the level
of concepts & regions
Look at revenue and EBITDA per
store
92
Valuation
93
Valuation Case study–
Introduction
94
In this section we will discuss the following things
Introduction to
Valuation
Introduction to DCF
methods
Difference between FCFF
and FCFE
Introduction to using
multipliers for valuation
Case study
95
We are going back to our example of ceramic tiles producer and we will
see what kind of methods we can use to estimate its valuation.
96
They have 4 groups of products
We have DCF models
Use DCF and multiplier method to
estimate their value
Just as a reminder a few information about the firm
97
Introduction to Valuation
98
You can try to estimate the value of 2 different categories
Enterprise Value
Equity Value Net Debt Value
99
For valuations you can use 2 groups of valuations methods
DCF methods
 DCF of Free Cash Flows to
Firm (FCFF)
 DCF of Free Cash Flows to
Equity (FCFE)
Multiplier methods
 EV/EBIT
 EV/EBITDA
 P/E ratio
100
Introduction to
DCF methods
101
In DCF model you use forecast of cash flows to estimate the value of the
company
Step 1 – Calculate the cash
flows
2018 2019 2020 2021 2022
𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022
t+1
𝐶𝐹𝑡+1
𝐶𝐹2018
(1 + 𝑟)
𝐶𝐹2019
(1 + 𝑟)2
𝐶𝐹2020
(1 + 𝑟)3
𝐶𝐹2021
(1 + 𝑟)4
𝐶𝐹2022
(1 + 𝑟)5
𝐶𝐹𝑡+1
(1 + 𝑟) 𝑡+1
𝒊=𝟏
𝒕
𝑪𝑭𝒊
(𝟏 + 𝒓)𝒊
Step 2 – Calculate the
present value of CF
Step 3 – Calculate the
Valuation
𝑻𝒆𝒓𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆
(𝟏 + 𝒓) 𝒕+𝟏
Step 3 – Calculate the
Valuation
+
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 =
𝐶𝐹𝑡+1
(𝑟 − 𝑔)
Step 3 – Calculate the
Valuation
Step 3 – Calculate
Terminal (Continuing)
Value
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
102
In the next lecture we will use 2 different methods for DCF valuation
Free Cash Flows to Firm
(FCFF)
Free Cash Flows to Equity
(FCFE)
Cash flow before financial
activities
103
Difference between
FCFF and FCFE
104
In the next lecture we will use 2 different methods for DCF valuation
Free Cash Flows to Equity
(FCFE)
 DCF Cash Flow before
financial activities
 As a discounting rate we use
Weighted Average Cost of
Capital (WACC)
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
 DCF Free Cash Flows to
Equity
 As a discounting rate we use
cost of equity
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
Free Cash Flows to Firm
(FCFF)
105
FCFF and FCFE evaluate different things
Enterprise Value
Net Equity Value Net Debt Value
 Cash flow before financial activities / Free Cash
Flows to Equity (FCFF) estimates the Enterprise
Value
 Afterwards using the Net Debt Value you can
estimate Equity
 Free Cash Flows to Equity (FCFF) estimates
Equity Value
106
Introduction to using
multipliers for valuation
107
For simplicity often valuation is calculated using multipliers. Multipliers also
help you check the valuation from DCF which is subject to many assumptions
EV/EBIT EV/EBITDA P/E ratio
108
Using the Multiplier method of valuation is relatively easy
Find comparable
companies
Estimate the
multipliers for the
comparable.
Eliminate outliers
Estimate the EBIT,
EBITDA and net profit
for the company and
adjust them
Apply the multiplier Estimate Equity Value
109
The methods we discussed estimate different values
Enterprise Value
Equity Value Net Debt Value
 Using EV/EBITDA multiplier and EV/EBIT you can
estimate the Enterprise Value
 Using P/E ratio you can estimate Equity Value
110
Below how we can use the EV/EBIT multiplier to estimate the Equity
Value in 2 steps
EV/EBIT
multiplier
x =
EBIT of the
company
Enterprise Value of
the company
Enterprise Value of
the company
- =
Debt of the
company
Equity Value of the
company
111
Using P/E ratio is even easier
P/E ratio x =
Net profit of the
company
Equity Value of the
company
112
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Financial Analysis for Management
Consultants
$190
$19
Click here to check my course
113
Financial analyses related to M&A
114
Financial analyses related to M&A
– Introduction
115
Many companies grow by acquiring other firms. In this cases consultants do a lot of financial
analyses related to M&A. We will discuss examples of such analyses in this section.
116
In this section we will discuss the following things
What kind of financial
analysis consultants do
when it comes to M&A
Estimating the impact of
expanding via M&A –
plywood producer case
study
Vertical Consolidation
via M&As – fitness
sector case study
Sell non-core assets –
general framework
Sell non-core assets –
case study
117
Financial analyses that consultants
do when it comes to M&A
118
Let’s have a look at different types of analyses management consultants
do
Estimation of Potential Synergies
Valuation of potential targets
Value Creation Plan in Excel
Comparison of M&A vs organic
growth options
Forecasting of the firm after the
M&A
Valuation of the firm after the
M&A
Divestment analyses
119
Expand via M&A –
Plywood – Introduction
120
Let’s have a look at plywood producer that has 2 factories and is
considering taken over another one
2 plants
Considers taking over a
plant in Lithuania
Try to estimate the possible
benefits
121
Expand via M&A –
Plywood – Solution
122
Let’s have a look at plywood producer that has 2 factories and is
considering taken over another one
2 plants
Considers taking over a plant in
Lithuania
Try to estimate the possible
benefits
123
There are plenty of potential benefits that you can expect from this
particular M&A
Reducing Head Quarters costs
Savings on Capex
Less competition on price
Cross-selling among customer
baes
Lower Purchasing price on wood
Exchange of best practices
124
From the analysis of benefits we can see that we can gain up to $17 M
from acquiring the Lithuanian factory
2 100
3 500
3 720
2 739
576
4 280
16 915
Reducing Head
Quarters costs
Savings on Capex Less competition on
price
Lower Purchasing
price on wood
Exchange of best
practices
Cross-selling among
customer baes
Total benefit from
M&A
Annual additional benefits from M&A
In million of USD
125
Vertical Consolidation via M&As –
Case Introduction
126
Let’s imagine that you have to help a fitness card operator decide what will be
the impact of M&A on his strategy to vertically integrate
Fitness card operator wants to have 40%
of his revenue delivered by his own
fitness clubs
He is considering 2 options: only organic
growth or M&A with organic growth
Check what will be the impact of both
options on Revenues, EBITDA and
Market Cap
127
Let’s have a look at value chain in the fitness segment
Operator of the
fitness card
Fitness Clubs HR Managers
Developers
Landlords
Equipment
Producers
Others
Producers of
raw materials
and
components
Financing Fitness Clubs
Elements of value chain
where he is currently
present
128
Investment Analysis
129
Investment Analysis –
Introduction
130
Firms do a lot of investment. During consulting project quite often you have to check whether
they make sense. We will discuss investment analysis in detail using different case studies.
131
In this section we will discuss the following things
Time value of money NPV & IRR
Investment – General
thoughts
Replacement
Investment – case study
Required by customer
investment – case study
Investment in
bottleneck removal –
case study
Cost reduction
Investment – Retail –
case study
Cost reduction
Investment – Ceramic
Tiles – case study
132
Time value of money
133
Let’s first start by calculating what is the future value of 100 USD
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Future Real Value of 100
that we have today 100 105 110
Nominal
Value x (𝟏 + 𝒓) 𝟏 Nominal
Value x (𝟏 + 𝒓) 𝟐
134
Now imagine that the you are getting 100 USD every year. You want to
calculate the Present value of the money
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Present Value
100 95 91
Nominal
Value
(𝟏 + 𝒓) 𝟏
Nominal
Value
(𝟏 + 𝒓) 𝟐
135
NPV
136
Let’s start with a short definition
 NPV stands for Net Present Value
 NPV is the difference between the present value of cash
inflows and the present value of cash outflows over a
period of time usually related to some investment
 It’s used to determine whether something (action,
investment etc.) makes sense or not
NPV =
137
Just as a reminder Present Value of money is different than the Nominal
Value
100 100
Today After 1 year
100
After 2 years
Nominal Value
Interest rate you can earn
every year 5% 5%
Present Value
100 95 91
Nominal
Value
(𝟏 + 𝒓) 𝟏
Nominal
Value
(𝟏 + 𝒓) 𝟐
138
Let’s have a look at the NPV for a small investment
- 1 000 300
Year 1 Year 3
300
Year 5
Cash flows generated by
the investment in nominal
value
300
Year 2
300
Year 4
- 1 000 272 247
Present value of cash
flows generated by the
investment for interest
rate r=5%
286 259
64
NPV 5 year for the end of
Year 1; rate r=5%
300
(𝟏 + 𝟓%) 𝟏
Formula for the present
value calculations using
interest rate r=5%
300
(𝟏 + 𝟓%) 𝟐
300
(𝟏 + 𝟓%) 𝟑
300
(𝟏 + 𝟓%) 𝟒
139
NPV enables you to make decisions about specific investment
NPV 0>
 The investment can generate more cash than it
requires. Can be considered to be done
NPV 0<
 The investment will be eating away cash. Rather
consider not doing it
NPV 0=
 Neither creates nor destroys value. Look for
other criteria i.e. strategic, tactical factors
140
Let’s have a look at the NPV for a small investment
- 1 000 300
Year 1 Year 3
300
Year 5
Cash flows generated by
the investment in nominal
value
300
Year 2
300
Year 4
- 1 000 272 247
Present value of cash
flows generated by the
investment for interest
rate r=5%
286 259
64
NPV 5 year for the end of
Year 1; rate r=5%
300
(𝟏 + 𝟓%) 𝟏
Formula for the present
value calculations using
interest rate r=5%
300
(𝟏 + 𝟓%) 𝟐
300
(𝟏 + 𝟓%) 𝟑
300
(𝟏 + 𝟓%) 𝟒
141
IRR
142
Let’s start with a short definition
 IRR stands for Internal Rate of Return
 IRR is a discount rate that makes the net present value (NPV)
of all cash flows from a particular project equal to zero
 IRR tells us how much you would have to earn on saving
account every year to get to the same results as from the
investment you are analyzing
IRR =
143
If you want to decide on whether to do certain investment or not
compare IRR with the right interest rate
IRR
Interest
rate
>
 The investment can generate higher returns than
the alternatives. Can be considered to be done
IRR
Interest
rate
<
 The investment will generate lower returns than the
alternatives. Rather consider not doing it
IRR
Interest
rate
=
 The investment is as good as other alternatives.
Look for other criteria i.e. strategic, tactical factors
144
NPV and IRR gives you the same directional information
NPV 1 NPV 2>
 Investment 1 is better than Investment 2
IRR 1 IRR 2>
 Investment 1 is better than Investment 2
145
NPV – How to calculate it in
Excel
146
Investments –
General thoughts
147
Apart from capacity increase there are 4 main reasons why you do
investment
Investments
Replacement
Required by the
customer
Reducing costs Removing bottlenecks
Total cost of Ownership /
Usage – comparison
Margin that may be lost if you
don’t do the investment
Margin that can be gained if
you do the investment
Change in labor costs
Change in materials and
related costs
Change in energy & other
utilities costs
Margin gained thanks to the
removal of the bottlenecks
Reduction of costs related to
production
Reduction of other costs (not
related to production)
Change in maintenance costs
148
To decide whether something makes sense or not we compare Capex and
Benefits
Capex Benefits?
Cash outflow /
Negative cash flow
Cash inflow /
Positive cash flow
?
149
We usually use the NPV or IRR to decide whether the investment makes
sense
NPV IRR
150
In the next lectures we will go through different case studies
Replacement Investment –
Furniture Production
Required by customer
investment – Food Industry
Investment in bottlenecks
removal – Plywood
151
In the next lectures we will go through different case studies
Cost reduction Investment –
Retail
Cost reduction Investment –
Ceramic Tiles
152
Replacement Investment –
Introduction
153
Imagine that you work for a furniture producer that operates in Europe
10 factories
Sells most of his production to
France & Germany
You have to calculate whether the
investment in new forklifts makes
sense
154
Replacement Investment –
Solution
155
Just as a reminder you work for a furniture producer that operates in
Europe
10 factories
Sells most of his production to
France & Germany
You have to calculate whether the
investment in new forklifts makes
sense
156
Let’s have a look how to show the results of investment in replacing
forklifts in the Power Point
3 691
7 185
10 875
8 182
2 694
NPV of Difference in Maintenance
Costs
NPV of Difference in Fuel / Electricity
Costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments
In thousands of USD
157
Required by customer investment –
Introduction
158
We will now have a look at a company selling branded juice in Romania.
They were asked to start using plastic bottles
Currently they sell juice in glass,
tetra pak and aluminum cans
One of the customers (a
discounter) wants to get juice in
plastic (PET) bottles
This will require significant
investment
159
Required by customer investment –
Solution
160
Just as a reminder we have to estimate wheter it makes sense to get
into PET bottles as we were asked by the customer
Currently they sell juice in glass,
tetra pak and aluminum cans
One of the customers (a
discounter) wants to get juice in
plastic (PET) bottles
This will require significant
investment
161
Let’s have a look how to show in Power Point the results of PET
investment
34 804
12 489
22 315
13 182
9 133
NPV of Additional margin from PET NPV of fixed costs related to PET NPV of Net Benefit NPV of Capex NPV of the whole Investment
NPV of benefits and investments – 10 year perspective
In thousands of USD
162
Investment in bottlenecks removal –
Introduction
163
Let’s have a look at a plywood producer that considers removing a
bottleneck for one of the factories he has
3 plants
They have a bottleneck in 1 of
the factory
They have a demand for
products from this factory
164
Below you can see the capacity for the factory in question by stages. As
you can see sanding is the bottleneck
200
100
90
80
120
100
50
90
120
Preparation of
the wood
Peeling Drying Repairing Cold Press Hot Press Sanding Foil Triming &
Packing
Production Capacity by stages
In thousands of cubic meters (m3)
165
Just
166
Investment in bottleneck removal –
Solution
167
Just as a reminder we are working for a plywood producer that
considers removing a bottleneck for one of the factories he has
3 plants
They have a bottleneck in 1 of
the factory
They have a demand for
products from this factory
168
Let’s have a look how to show in Power Point the results from the
improvement of sanding line
6 565
1 004
5 561
209
5 352
NPV of Additional margin from
higher sales
NPV of Additional fixed costs NPV of Net Benefit NPV of Capex NPV of the whole Investment
NPV of benefits and investments – 10 year perspective
In thousands of USD
169
Cost reduction investment – Retailer
– Introduction
170
Imagine that you are working for a fashion discounter that operates a
retail chain in Easter Europe
The retailer has 2 000 stores in
Europe
The retailer uses traditional lighting
He wants to switch to LED lighting
171
Cost reduction investment – Retailer
– Solution
172
Just as a reminder you are working for a fashion discounter that
operates a retail chain in Eastern Europe
The retailer has 2 000 stores in
Europe
The retailer uses traditional lighting
He wants to switch to LED lighting
173
Let’s have a look how to show the results from the change to LED bulbs
in the Power Point
15 624
1 250
620
17 494
3 636
13 858
NPV of Difference in electricity
costs
NPV of Difference in bulb costs NPV of Difference in labor
costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments – 10 year perspective
In thousands of USD
174
Cost reduction investment – ceramic
tile producer – Introduction
175
Imagine that you are working for a ceramic tiles producer that has 10
factories in Eastern Europe
He has 10 factories
Every factory on average has 15
production lines
Currently loading the tiles is done
mannually (2 people per line)
176
Cost reduction investment – ceramic
tile producer – Solution
177
Just as a reminder you are working for a ceramic tiles producer that has
10 factories in Eastern Europe
He has 10 factories
Every factory on average has 15
production lines
Currently loading the tiles is done
mannually (2 people per line)
178
Let’s have a look how to show in Power Point the results from the
introduction of robots to ceramic tiles factory
156 890
37 566
16 657
102 668
27 273
75 396
NPV of Difference in labor
costs
NPV of Difference in electricity
costs
NPV of Difference in
maitenance costs
NPV of Total Benefit NPV of Capex NPV of the whole investment
NPV of benefits and investments – 10 year perspective
In thousands of USD
179
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Financial Analysis for Management
Consultants
$190
$19
Click here to check my course
180
Badass
Consultants
Blog
Subscribe to our channels:
181
Project Management for
Management Consultants
Practical Guide
presentation
Check also my other presentations
182
How to solve problems like
Management Consultants
Practical Guide
presentation
Check also my other presentations
183
KPIs for Management
Consultants & Business Analysts
Practical Guide
presentation
Check also my other presentations
184
Essential Accounting & Finance
for Management Consultants
Practical Guide
presentation
Check also my other presentations
185
Strategy for Management
Consultants & Business Analysts
Practical Guide
presentation
For more information on Strategy check also my other presentation

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Financial Analysis for Management Consultants & Analysts

  • 1. 1 Financial Analysis for Management Consultants & Business Analysts Practical guide with case studies & real-life examples
  • 2. 2 In business you have to make a lot of important decisions During consulting projects you will have to do a lot of financial analyses to see whether proposed changes make sense or not
  • 3. 3 In business you have to make a lot of important decisions A lot of such analyses require some skills in Excel but also a specific approach to available data. Usually they don’t teach that at the university
  • 4. 4 Luckily, there is a way to do fast and efficiently financial analyses in Excel and I will show you how to do that in this course.
  • 5. 5 In business you have to make a lot of important decisions Thanks to this presentation you will have a look at the most important essential financial analysis you need to know to work without any problems during consulting projects
  • 6. 6 We will cover all the essential things that you need to know to work well during consulting Analyzing Financial Statements Financial indicators Modeling P&L Introduction to Valuation Analysis of Business Units Financial analysis related to M&A Investments Analysis
  • 7. 7 What you will see in this presentation is a part of my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
  • 8. 8 General Analysis of Financial Statements
  • 9. 9 General Analysis of Financial Statements – Introduction
  • 10. 10 In this section we will discuss the following things 3 financial statements – overview Amazon financial statements – Analysis in Excel
  • 11. 11 In this section we will discuss the following things 3 financial statements – overview Amazon financial statements – Analysis in Excel LPP financial statements – Analysis in Excel Disney financial statements – Analysis in Excel
  • 13. 13 There are 3 financial statements that you have to look at when analyzing the firm Profit & Loss / Income Statement Balance Sheet Cash flow  Shows how much money you have earned, and did you make a profit or a loss?  Shows how you did it, what where the revenue and how much you had to spend in terms of costs to generate them?  Shows what you have / what you need to have a legitimate business  Shows you also where you got the money from to buy the things you have (shareholders, banks, suppliers, other borrowers etc.)  Shows how much money the firm has actually generated and what has consumed the cash on 3 levels  You can see what the firm spends the cash on: investment, paying off debts, buying back shares or maybe paying of dividends  Cash is divided into 3 streams: Operating CF, Investing CF and Financing CF
  • 15. 15 Financial analysis of indicators – Introduction
  • 16. 16 In this section we will discuss the following things Profitability ratios Liquidity ratios Activity ratios Debt ratios Case study
  • 18. 18 There are plenty of profitability ratios used. Below the most popular ones % Gross Margin % Gross Profit % EBIT Return on Sales ROS % Net Income % EBITDA ROE ROA
  • 19. 19 Let’s have a look at the definition of ratios and what they tell us Gross Margin % Gross Margin = Net Sales
  • 20. 20 Let’s have a look at the definition of ratios and what they tell us Operating Income EBIT % EBIT Return on Sales - ROS = Net Sales
  • 21. 21 Let’s have a look at the definition of ratios and what they tell us Net Income Net Profit % Net Income Profit Margin = Net Sales
  • 22. 22 Let’s have a look at the definition of ratios and what they tell us EBITDA % EBITDA = Net Sales
  • 23. 23 Let’s have a look at the definition of ratios and what they tell us Net Income ROA (Return on Assets) = Assets
  • 24. 24 Let’s have a look at the definition of ratios and what they tell us Net Income ROE (Return on Equity) = Equity
  • 26. 26 ROE can be decomposed into other ratios. Below one example Net Income ROE = Assets x Assets Equity ROE = xROA Equity Multiplier Net Income Equity = Net Income Equity =
  • 27. 27 ROE can be decomposed into other ratios. Below one example Sales = Assets x Assets Equity Net Income Sales x Net Income Equity ROE = xAsset Turnover Equity Multiplierx% Net Income
  • 29. 29 There are plenty of liquidity ratios used. Below the most popular ones Current Ratio (CR) Quick Ratio (QR) Cash Ratio (CshR) Operating Cash Flow Ratio
  • 30. 30 Let’s have a look at the definition of ratios and what they tell us Current Assets Current Ratio (CR) = Current Liabilities
  • 31. 31 Let’s have a look at the definition of ratios and what they tell us Current Assets Quick Ratio (QR) = Current Liabilities - Inventory & Prepayments
  • 32. 32 Let’s have a look at the definition of ratios and what they tell us Cash & Cash Equivalents Cash Ratio (CshR) = Current Liabilities
  • 33. 33 Let’s have a look at the definition of ratios and what they tell us Operating Cash Flow Operating Cash Flow Ratio = Total Debt
  • 34. 34 Activity / Efficiency ratios – Overview
  • 35. 35 There are plenty of activity / efficiency ratios used. Below the most popular ones Inventory conversion period Receivables conversion period Payables conversion period Cash Conversion Cycle Asset turnover
  • 36. 36 Conversion periods have alternative names that are widely used Inventory conversion period Receivables conversion period Payables conversion period Days Inventory Outstanding (DIO) Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) = = =
  • 37. 37 Let’s have a look at the definition of ratios and what they tell us Inventory Inventory conversion period = COGS x 365 days
  • 38. 38 Let’s have a look at the definition of ratios and what they tell us Receivables Receivables conversion period = Net Sales x 365 days
  • 39. 39 Let’s have a look at the definition of ratios and what they tell us Account Payables Payables conversion period = COGS x 365 days
  • 40. 40 Cash Conversion Cycle (CCC) we calculate using previous ratios Cash Conversion Cycle (CCC) = - Receivables conversion period Payables conversion period + Inventory conversion period Cash Conversion Cycle (CCC) = - Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) + Days Inventory Outstanding (DIO)
  • 41. 41 Let’s have a look at the definition of ratios and what they tell us Net Sales Asset Turnover = Assets
  • 43. 43 There are plenty of debt ratios used. Below the most popular ones Debt Ratio Debt to Equity ratio (D/E) Net Debt-to-EBITDA Ratio
  • 44. 44 Debt Ratio can be defined in 2 ways Debt Debt Ratio = Assets Liabilities Debt Ratio = Assets
  • 45. 45 Let’s have a look at the definition of ratios and what they tell us Debt Debt to Equity ratio (D/E) = Equity
  • 46. 46 Let’s have a look at the definition of ratios and what they tell us Debt Net Debt-to-EBITDA Ratio = EBITDA - Cash & Cash Equivalents
  • 47. 47 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
  • 48. 48 Modeling of Profit & Loss statement in practice
  • 49. 49 Modeling of Profit & Loss statement in practice – Introduction
  • 50. 50 In business you have to make a lot of important decisions You can learn a lot by analyzing the business model in Excel. This is one of the most insightful yet also most difficult financial analysis
  • 51. 51 Modeling of the business in Excel should be done in stages. You first have to understand the drivers # transactions Average revenue per transaction Total revenuex % Fee of the marketplace Average transaction value Total searches % conversion x x Total Costs Total margin - Rent People Cost of traffic Ratio of visitors to searches Average cost of 1 visit + x Development
  • 52. 52 In this section we will discuss the following things How to model Retail in Excel How to model SMCG businesses in Excel Moving from SMCG to selling services – financial analysis
  • 53. 53 Main challenges in the business model Main drivers / KPIs for the business model The model of the business in Excel Short introduction to the business model For every business model we will do the following things
  • 55. 55 Let’s have a look at the main challenges in Retail Margin Management Stock / Inventory Management Multichannel Strategy Managing price across channels Expansion to new markets Saturation of existing markets New product development Managing customer experience across channels Format evolution (possible death) People rotation and knowledge management Disruption esp. from external forces / business models Automation
  • 56. 56 Business model of a Retailer in Excel
  • 57. 57 The retail business model is driven by some basic KPIs # Transactions Average Value Transaction Total store revenue Total store costs x Store EBITDA Average Value Transaction of basic purchase Average Value Transaction of additional purchase # of Visitors % Conversion Rent People # of People Average wages + x x Others + # of sq. m Fee per sq. m x % Gross Margin Gross Margin generated by the store x -
  • 58. 58 Modeling SMCG Business Model in Excel – Introduction
  • 59. 59 SMCG are all branded goods that you consume infrequently during your life. In this category we have cars, domestic appliances and other similar products
  • 60. 60 There are 2 ways in which you can model SMCG SMCG – sold as a product SMCG – sold as a service
  • 61. 61 In this section I will talk about 3 main things Main challanges in SMCG KPIs for SMCG business Business models of SMCG in Excel
  • 63. 63 Brand Awareness & Reach Controling and constantly lowering production costs Your strategy across many channels Managing customer experience across channels Saturation point in consumption and penetration Spreading beyond original target group and leveraging brand Taking care of faulty products Managing older versions of your product Switch from product to service The software part of the product / IoT The value of your customer base Below a list of the most important aspect for SMCG business model
  • 64. 64 Main KPIs for the SMCG business model
  • 65. 65 The SMCG business model is driven by some basic KPIs # sold Unit production cost Gross Margin Head office Operational profit Fixed Cost / Quantity produced Unit variable cost + Cost of sales & marketing Net Margin - - Average price Unit Gross Margin - x Market share Market size
  • 66. 66 SMCG business model – modeling in Excel
  • 67. 67 There are 2 ways in which you can model SMCG SMCG – sold as a product SMCG – sold as a service
  • 68. 68 Vaccum cleaner producer – modeled as product seller Smartphone firm– modeled as a provider of a service We will go through those 2 approaches using different cases
  • 69. 69 SMCG business model in Excel – basic assumptions
  • 70. 70 Vaccum cleaner producer – modeled as product seller Smartphone firm– modeled as a provider of a service Let's start with the modelling vacuum cleaner producer
  • 71. 71 Vaccum cleaner producer – modeled as product seller Smartphone firm– modeled as a provider of a service Let's start with the modelling vacuum cleaner producer
  • 72. 72 Let’s go through basic assumptions of the model. We want to get to the operational profit SMCG product MarketingSales Channels  Vacuum cleaners  1 production site  Own e-commerce  Retail chain  TV ads  Market research  Social Media  Mailing  Loyalty program  Outdoor campaigns
  • 73. 73 Modeling the SMCG as service – Introduction
  • 74. 74 Vaccum cleaner producer – modeled as product seller Smartphone firm– modeled as a provider of a service We said we will do modelling for 2 different products and also in different way
  • 75. 75 Vaccum cleaner producer – modeled as product seller Smartphone firm– modeled as a provider of a service We said we will do modelling for 2 different products and also in different way
  • 76. 76 He currently sells around 600 K smartphones and has a bas of around 1 M customers He has to acquire new customers to cover for the lost ones and grow He considers switching to offering annual subsription model To make the change more obvious we will first do a case of a firm that moves from product to service and wants to do calculate whether it makes sense
  • 77. 77 To make the change more obvious we will first do a case of a firm that moves from product to service and wants to do calculate whether it makes sense Why moving from product to service makes sense? Case study of a smartphone producer Solution in Excel to the case study Modeling Head Office costs Modeling Head Office profit & loss statement
  • 78. 78 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
  • 80. 80 Business Units Analyses – Introduction
  • 81. 81 In many cases the business you want to analyze are very complicated. You have to look deeper. You have to analyze specific business units to understand the result and the future
  • 82. 82 This obviously means that you have to divide into business units that you want to analyze separately and draw conclusions on their performance
  • 83. 83 In this section we will discuss the following things Why analysis of Business Units makes sense Analysis of Business Units – Disney Analysis of Business Units – Grocery Discounter
  • 84. 84 Why analysis of Business Units makes sense
  • 85. 85 Let’s have a look why it makes sense to look at business units in details On aggregated level you have averaging effect Business units may have different business models Business units may have different growth perspectives Business units may have different margins Business units may require different Capex Business units may have different competitors Business units usually have different drivers & KPIs You can sell some business units
  • 87. 87 SaaS E-commerce Media site 2-sided market User Generated Content Mobile Applications Retail B2C Service B2B Service FMCG SMCG Commodity There are 6 offline business models and 6 online models. Every business model has its set of KPI
  • 88. 88 SaaS E-commerce Media site2-sided market UGC B2B Service B2C ServiceRetail Bear in mind that big companies can operate many business models
  • 89. 89 Analysis of Business Units – Groceries Discounter – Case Introduction
  • 90. 90 Imagine that you have to analyze the performance of difference concepts and regions of a Grocery Discounter. You have data on the store level.
  • 91. 91 Let’s have a look at the data that we have on the Grocery Discounter He currently has 700 stores He operates 4 concepts: Mini, Express, Regular, Big He operates in 10 regions Have a look at results on the level of concepts & regions Look at revenue and EBITDA per store
  • 94. 94 In this section we will discuss the following things Introduction to Valuation Introduction to DCF methods Difference between FCFF and FCFE Introduction to using multipliers for valuation Case study
  • 95. 95 We are going back to our example of ceramic tiles producer and we will see what kind of methods we can use to estimate its valuation.
  • 96. 96 They have 4 groups of products We have DCF models Use DCF and multiplier method to estimate their value Just as a reminder a few information about the firm
  • 98. 98 You can try to estimate the value of 2 different categories Enterprise Value Equity Value Net Debt Value
  • 99. 99 For valuations you can use 2 groups of valuations methods DCF methods  DCF of Free Cash Flows to Firm (FCFF)  DCF of Free Cash Flows to Equity (FCFE) Multiplier methods  EV/EBIT  EV/EBITDA  P/E ratio
  • 101. 101 In DCF model you use forecast of cash flows to estimate the value of the company Step 1 – Calculate the cash flows 2018 2019 2020 2021 2022 𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022 t+1 𝐶𝐹𝑡+1 𝐶𝐹2018 (1 + 𝑟) 𝐶𝐹2019 (1 + 𝑟)2 𝐶𝐹2020 (1 + 𝑟)3 𝐶𝐹2021 (1 + 𝑟)4 𝐶𝐹2022 (1 + 𝑟)5 𝐶𝐹𝑡+1 (1 + 𝑟) 𝑡+1 𝒊=𝟏 𝒕 𝑪𝑭𝒊 (𝟏 + 𝒓)𝒊 Step 2 – Calculate the present value of CF Step 3 – Calculate the Valuation 𝑻𝒆𝒓𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆 (𝟏 + 𝒓) 𝒕+𝟏 Step 3 – Calculate the Valuation + 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐶𝐹𝑡+1 (𝑟 − 𝑔) Step 3 – Calculate the Valuation Step 3 – Calculate Terminal (Continuing) Value 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
  • 102. 102 In the next lecture we will use 2 different methods for DCF valuation Free Cash Flows to Firm (FCFF) Free Cash Flows to Equity (FCFE) Cash flow before financial activities
  • 104. 104 In the next lecture we will use 2 different methods for DCF valuation Free Cash Flows to Equity (FCFE)  DCF Cash Flow before financial activities  As a discounting rate we use Weighted Average Cost of Capital (WACC)  The Terminal Value is calculated using 3% growth rate assumed after the period of forecast  DCF Free Cash Flows to Equity  As a discounting rate we use cost of equity  The Terminal Value is calculated using 3% growth rate assumed after the period of forecast Free Cash Flows to Firm (FCFF)
  • 105. 105 FCFF and FCFE evaluate different things Enterprise Value Net Equity Value Net Debt Value  Cash flow before financial activities / Free Cash Flows to Equity (FCFF) estimates the Enterprise Value  Afterwards using the Net Debt Value you can estimate Equity  Free Cash Flows to Equity (FCFF) estimates Equity Value
  • 107. 107 For simplicity often valuation is calculated using multipliers. Multipliers also help you check the valuation from DCF which is subject to many assumptions EV/EBIT EV/EBITDA P/E ratio
  • 108. 108 Using the Multiplier method of valuation is relatively easy Find comparable companies Estimate the multipliers for the comparable. Eliminate outliers Estimate the EBIT, EBITDA and net profit for the company and adjust them Apply the multiplier Estimate Equity Value
  • 109. 109 The methods we discussed estimate different values Enterprise Value Equity Value Net Debt Value  Using EV/EBITDA multiplier and EV/EBIT you can estimate the Enterprise Value  Using P/E ratio you can estimate Equity Value
  • 110. 110 Below how we can use the EV/EBIT multiplier to estimate the Equity Value in 2 steps EV/EBIT multiplier x = EBIT of the company Enterprise Value of the company Enterprise Value of the company - = Debt of the company Equity Value of the company
  • 111. 111 Using P/E ratio is even easier P/E ratio x = Net profit of the company Equity Value of the company
  • 112. 112 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
  • 114. 114 Financial analyses related to M&A – Introduction
  • 115. 115 Many companies grow by acquiring other firms. In this cases consultants do a lot of financial analyses related to M&A. We will discuss examples of such analyses in this section.
  • 116. 116 In this section we will discuss the following things What kind of financial analysis consultants do when it comes to M&A Estimating the impact of expanding via M&A – plywood producer case study Vertical Consolidation via M&As – fitness sector case study Sell non-core assets – general framework Sell non-core assets – case study
  • 117. 117 Financial analyses that consultants do when it comes to M&A
  • 118. 118 Let’s have a look at different types of analyses management consultants do Estimation of Potential Synergies Valuation of potential targets Value Creation Plan in Excel Comparison of M&A vs organic growth options Forecasting of the firm after the M&A Valuation of the firm after the M&A Divestment analyses
  • 119. 119 Expand via M&A – Plywood – Introduction
  • 120. 120 Let’s have a look at plywood producer that has 2 factories and is considering taken over another one 2 plants Considers taking over a plant in Lithuania Try to estimate the possible benefits
  • 121. 121 Expand via M&A – Plywood – Solution
  • 122. 122 Let’s have a look at plywood producer that has 2 factories and is considering taken over another one 2 plants Considers taking over a plant in Lithuania Try to estimate the possible benefits
  • 123. 123 There are plenty of potential benefits that you can expect from this particular M&A Reducing Head Quarters costs Savings on Capex Less competition on price Cross-selling among customer baes Lower Purchasing price on wood Exchange of best practices
  • 124. 124 From the analysis of benefits we can see that we can gain up to $17 M from acquiring the Lithuanian factory 2 100 3 500 3 720 2 739 576 4 280 16 915 Reducing Head Quarters costs Savings on Capex Less competition on price Lower Purchasing price on wood Exchange of best practices Cross-selling among customer baes Total benefit from M&A Annual additional benefits from M&A In million of USD
  • 125. 125 Vertical Consolidation via M&As – Case Introduction
  • 126. 126 Let’s imagine that you have to help a fitness card operator decide what will be the impact of M&A on his strategy to vertically integrate Fitness card operator wants to have 40% of his revenue delivered by his own fitness clubs He is considering 2 options: only organic growth or M&A with organic growth Check what will be the impact of both options on Revenues, EBITDA and Market Cap
  • 127. 127 Let’s have a look at value chain in the fitness segment Operator of the fitness card Fitness Clubs HR Managers Developers Landlords Equipment Producers Others Producers of raw materials and components Financing Fitness Clubs Elements of value chain where he is currently present
  • 130. 130 Firms do a lot of investment. During consulting project quite often you have to check whether they make sense. We will discuss investment analysis in detail using different case studies.
  • 131. 131 In this section we will discuss the following things Time value of money NPV & IRR Investment – General thoughts Replacement Investment – case study Required by customer investment – case study Investment in bottleneck removal – case study Cost reduction Investment – Retail – case study Cost reduction Investment – Ceramic Tiles – case study
  • 133. 133 Let’s first start by calculating what is the future value of 100 USD 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Future Real Value of 100 that we have today 100 105 110 Nominal Value x (𝟏 + 𝒓) 𝟏 Nominal Value x (𝟏 + 𝒓) 𝟐
  • 134. 134 Now imagine that the you are getting 100 USD every year. You want to calculate the Present value of the money 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓) 𝟏 Nominal Value (𝟏 + 𝒓) 𝟐
  • 136. 136 Let’s start with a short definition  NPV stands for Net Present Value  NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time usually related to some investment  It’s used to determine whether something (action, investment etc.) makes sense or not NPV =
  • 137. 137 Just as a reminder Present Value of money is different than the Nominal Value 100 100 Today After 1 year 100 After 2 years Nominal Value Interest rate you can earn every year 5% 5% Present Value 100 95 91 Nominal Value (𝟏 + 𝒓) 𝟏 Nominal Value (𝟏 + 𝒓) 𝟐
  • 138. 138 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
  • 139. 139 NPV enables you to make decisions about specific investment NPV 0>  The investment can generate more cash than it requires. Can be considered to be done NPV 0<  The investment will be eating away cash. Rather consider not doing it NPV 0=  Neither creates nor destroys value. Look for other criteria i.e. strategic, tactical factors
  • 140. 140 Let’s have a look at the NPV for a small investment - 1 000 300 Year 1 Year 3 300 Year 5 Cash flows generated by the investment in nominal value 300 Year 2 300 Year 4 - 1 000 272 247 Present value of cash flows generated by the investment for interest rate r=5% 286 259 64 NPV 5 year for the end of Year 1; rate r=5% 300 (𝟏 + 𝟓%) 𝟏 Formula for the present value calculations using interest rate r=5% 300 (𝟏 + 𝟓%) 𝟐 300 (𝟏 + 𝟓%) 𝟑 300 (𝟏 + 𝟓%) 𝟒
  • 142. 142 Let’s start with a short definition  IRR stands for Internal Rate of Return  IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero  IRR tells us how much you would have to earn on saving account every year to get to the same results as from the investment you are analyzing IRR =
  • 143. 143 If you want to decide on whether to do certain investment or not compare IRR with the right interest rate IRR Interest rate >  The investment can generate higher returns than the alternatives. Can be considered to be done IRR Interest rate <  The investment will generate lower returns than the alternatives. Rather consider not doing it IRR Interest rate =  The investment is as good as other alternatives. Look for other criteria i.e. strategic, tactical factors
  • 144. 144 NPV and IRR gives you the same directional information NPV 1 NPV 2>  Investment 1 is better than Investment 2 IRR 1 IRR 2>  Investment 1 is better than Investment 2
  • 145. 145 NPV – How to calculate it in Excel
  • 147. 147 Apart from capacity increase there are 4 main reasons why you do investment Investments Replacement Required by the customer Reducing costs Removing bottlenecks Total cost of Ownership / Usage – comparison Margin that may be lost if you don’t do the investment Margin that can be gained if you do the investment Change in labor costs Change in materials and related costs Change in energy & other utilities costs Margin gained thanks to the removal of the bottlenecks Reduction of costs related to production Reduction of other costs (not related to production) Change in maintenance costs
  • 148. 148 To decide whether something makes sense or not we compare Capex and Benefits Capex Benefits? Cash outflow / Negative cash flow Cash inflow / Positive cash flow ?
  • 149. 149 We usually use the NPV or IRR to decide whether the investment makes sense NPV IRR
  • 150. 150 In the next lectures we will go through different case studies Replacement Investment – Furniture Production Required by customer investment – Food Industry Investment in bottlenecks removal – Plywood
  • 151. 151 In the next lectures we will go through different case studies Cost reduction Investment – Retail Cost reduction Investment – Ceramic Tiles
  • 153. 153 Imagine that you work for a furniture producer that operates in Europe 10 factories Sells most of his production to France & Germany You have to calculate whether the investment in new forklifts makes sense
  • 155. 155 Just as a reminder you work for a furniture producer that operates in Europe 10 factories Sells most of his production to France & Germany You have to calculate whether the investment in new forklifts makes sense
  • 156. 156 Let’s have a look how to show the results of investment in replacing forklifts in the Power Point 3 691 7 185 10 875 8 182 2 694 NPV of Difference in Maintenance Costs NPV of Difference in Fuel / Electricity Costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments In thousands of USD
  • 157. 157 Required by customer investment – Introduction
  • 158. 158 We will now have a look at a company selling branded juice in Romania. They were asked to start using plastic bottles Currently they sell juice in glass, tetra pak and aluminum cans One of the customers (a discounter) wants to get juice in plastic (PET) bottles This will require significant investment
  • 159. 159 Required by customer investment – Solution
  • 160. 160 Just as a reminder we have to estimate wheter it makes sense to get into PET bottles as we were asked by the customer Currently they sell juice in glass, tetra pak and aluminum cans One of the customers (a discounter) wants to get juice in plastic (PET) bottles This will require significant investment
  • 161. 161 Let’s have a look how to show in Power Point the results of PET investment 34 804 12 489 22 315 13 182 9 133 NPV of Additional margin from PET NPV of fixed costs related to PET NPV of Net Benefit NPV of Capex NPV of the whole Investment NPV of benefits and investments – 10 year perspective In thousands of USD
  • 162. 162 Investment in bottlenecks removal – Introduction
  • 163. 163 Let’s have a look at a plywood producer that considers removing a bottleneck for one of the factories he has 3 plants They have a bottleneck in 1 of the factory They have a demand for products from this factory
  • 164. 164 Below you can see the capacity for the factory in question by stages. As you can see sanding is the bottleneck 200 100 90 80 120 100 50 90 120 Preparation of the wood Peeling Drying Repairing Cold Press Hot Press Sanding Foil Triming & Packing Production Capacity by stages In thousands of cubic meters (m3)
  • 166. 166 Investment in bottleneck removal – Solution
  • 167. 167 Just as a reminder we are working for a plywood producer that considers removing a bottleneck for one of the factories he has 3 plants They have a bottleneck in 1 of the factory They have a demand for products from this factory
  • 168. 168 Let’s have a look how to show in Power Point the results from the improvement of sanding line 6 565 1 004 5 561 209 5 352 NPV of Additional margin from higher sales NPV of Additional fixed costs NPV of Net Benefit NPV of Capex NPV of the whole Investment NPV of benefits and investments – 10 year perspective In thousands of USD
  • 169. 169 Cost reduction investment – Retailer – Introduction
  • 170. 170 Imagine that you are working for a fashion discounter that operates a retail chain in Easter Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
  • 171. 171 Cost reduction investment – Retailer – Solution
  • 172. 172 Just as a reminder you are working for a fashion discounter that operates a retail chain in Eastern Europe The retailer has 2 000 stores in Europe The retailer uses traditional lighting He wants to switch to LED lighting
  • 173. 173 Let’s have a look how to show the results from the change to LED bulbs in the Power Point 15 624 1 250 620 17 494 3 636 13 858 NPV of Difference in electricity costs NPV of Difference in bulb costs NPV of Difference in labor costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
  • 174. 174 Cost reduction investment – ceramic tile producer – Introduction
  • 175. 175 Imagine that you are working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
  • 176. 176 Cost reduction investment – ceramic tile producer – Solution
  • 177. 177 Just as a reminder you are working for a ceramic tiles producer that has 10 factories in Eastern Europe He has 10 factories Every factory on average has 15 production lines Currently loading the tiles is done mannually (2 people per line)
  • 178. 178 Let’s have a look how to show in Power Point the results from the introduction of robots to ceramic tiles factory 156 890 37 566 16 657 102 668 27 273 75 396 NPV of Difference in labor costs NPV of Difference in electricity costs NPV of Difference in maitenance costs NPV of Total Benefit NPV of Capex NPV of the whole investment NPV of benefits and investments – 10 year perspective In thousands of USD
  • 179. 179 For more details and content check my online course where you can find case studies showing analyses along with detailed calculations in Excel Financial Analysis for Management Consultants $190 $19 Click here to check my course
  • 181. 181 Project Management for Management Consultants Practical Guide presentation Check also my other presentations
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