Important Stuff to know:
- Balance Sheet
- Bookkeeping → Accounting
- Profit Statement
Key Questions
- how to measure financial business performance?
- how to measure the value of a company?
- how to ensure liquidity/solvency?
- how to decide on investments?
Example Taxi OPC
- Lena wants to become a entrepreneur
- has no idea what to do
- wants to work her own hours and earn as much money as possible
- Lena has some money (investments)
- Lena wants to provide value to customers
- Lena finds out about the revenue of a taxi driver from a friend
- After many conversations she can expect 3.000 monthly revenue
- she can expect 500 monthly ongoing expenditures
- operating cash flow is 2.500
- But what about the car?
- 40.000 upfront is a great capital expenditure (CAPEX)
- paid once … then just used for several years
- an investment into an asset
- after 5 years the care will be worth 15.000 (willhaben)
- in 5 years a comparable car will cost 45.000 (market trend) → + 5.000 inflation over 5 years
- 40.000 - 15.000 + 5.000 = 30.000 depreciation over 5 years
Depreciation … Loss of Value, Loss of Wealth due to time/usage straight line depreciation … each year the same amount of depreciation
Cash Flow Statement
net cash flow after year 1: - 10.000 net cash flow after year 2: 30.000 year 3 & 4 are like year 2: 30.000 (60.000 combined) year 5: net cash flow: 0
Free Cash Flow: 80.000 over 5 years
Income Statement
also known as Profit and Loss Statement
Don’t think about how much money left the bank account, but how many resources you have used. Spreading the cost of the taxi (25.000) on all 5 years instead of just the first year
Expenditure … Paying for something (Paying for gas at gas station) Expense … Using up resources (Driving car)
Depreciation is an Expense.
Profit/Loss Statements produce values over a specific time range (Quarter, Year, Month)
Cost of sales method: Profit is the monetary value of the goods sold minus the monetary value of the resources that have been consumed
Cost of production method: Profit is the monetary value of the goods produced minus the monetary resources of the resources that have been consumed
Profit of each year: Revenue - ongoing Expenditures - Expenses (Depreciation) = 25.000
Balance Sheet
Which assets and debt do I have? How rich (wealth) am I?
Assets right, Claims left Assets - Claims = 0
Net Worth … Assets - Liabilities
Assets
Assets are split into
- Non-Current Assets (stays in the company for long duration)
- Current Assets (short-term assets)
Claims
- Equity (net-worth in the beginning of the year)
- Profit
- Liabilities
Financial Ratios
Corporate Finance
- turning an investment into a Cash Flow Stream
- cash out flow → the investment (buying a new machine)
- cash in flow → increased production/sales → increased cash flow
When a company has liabilities and equity it is impossible to tell which investment is funded by which.
All Claims are equal, whether equity or liabilities
Decisions
- Financing Decisions → Where is the money coming from?
- Investment Decisions → What am I gonna use the money for?
- shareholders need to be pleased
Analysis of Stocks
- Market Analysis
- How is the whole industry developing?
- How will the specific company develop relative to the industry?
- Will the company have any interesting developments in the future?
Value of a Company
The value of a company is rarely put together with simple step-by-step calculations. It is mostly a combination of many factors. It is mostly about how much the company will yield to investors in the future, not necessarily about how much the company is “worth” right now
Sheet Logic Value
Assets - Liabilities = Equity
this is incomplete to what the company will be worth and a buying decision should not be made just by the Balance Sheet
Economic Value
The Value is determined by the future prospects of earnings or cash flow from this company
Factors are
- Management → C-Level leaving/dying
- Research → e.g. Pharma and Bio Tech huge impact
- Intangible Assets → dependent on company
- Intellectual Property → dependent on company
Shares Value
Forecast Value
Investors only interested in future profits Generating forecasts on how the company is going to perform
Attaching a monetary value to a Cash Flow Stream
Money of the future in comparison to today
Discounting
Amortization
- How long is the investment going to take to pay for itself?
- Either by cutting costs or increasing sales
Putting it all together
- predict future Cash Flows
- define Profitability, what counts towards profit
- discount them with current interest rates
- is expected to be close to the Market Capitalization
- there is no “correct” way of calculating the value
- other factors:
- Income Tax
- information of investors, providers of debt or other stakeholders
- measuring and managing the financial performance of the company
- everything is just approximation
- “consulting the local glas sphere”