Operating assets net financial assets c i capital

Operating
Assets
Net
Financial
Assets
C
I
Capital Markets
Debtholders
Or
Debt issuers
Shareholders
F
d
FCF = C – I = F + d OI = NOPAT= OR – OE
Key:
F = net cash flow to debtholders and issuers
d = net cash flow to shareholders
C = cash flow from operations
I = cash investment
OR = operating revenue
OE = operating expense
OI = operating income
FCF = NOPAT - ΔNOA

The Process of Fundamental Analysis
q Where does the firm operate?
q Where is the firm currently?
q Where is the firm going?
q What is the firm worth?
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Step 2: Analyzing financial
statements to know
profitability and risk
Step 1: Knowing the business
Industry and strategy analysis
Step 3: Developing forecasts of
earnings (profits, payoffs)
Step 4 : Convert forecasts to a
valuation

Primary Objectives of Profitability Analysis
• Evaluate the firm relative to past performance
or relative to other firms’ performance
• Identify the cause of increases (decreases) in
profitability
• Determine if the change in profitability is likely
to be permanent or transitory
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Overview
• How can you measure the profitability?
• RNOA
• ROE
• What are the drivers of the profitability?
• Profit margin and asset turnover
• Financial leverage
• Evaluate business activities to generate a
return on shareholders’ equity:
• Operating
• Investing
• Financing
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Preparation for Profitability
Analysis
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Measuring Net Operating Assets, Net
Financial Obligations, and Equity
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NOA
NFO
SE
NOA
NFA
SE
OA
FO
SE
FA
OL
Or
OA: operating assets
OL: operating liabilities
FA: financial assets
FO: financial obligations
NOA: net operating assets
NFO: net financial obligations
NFA: net financial assets
SE: shareholders’ equity

Reformulating Balance Sheet
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Operating Assets OA Operating Liabilities OL
Financial Asssets FA Financial Obligations FO
Shareholders' Equity SE
Total Assets OA+FA Debt + Equity OL+FL+SE
Operating Assets OA Financial Obligations FO
Less Operating Liabilities (OL) Less Financial Assets (FA)
Net Financial Obligations NFO
Shareholders' Equity SE
Net Operating Assets NOA
Net Fiancial Obligations
+ Shareholders' Equity
NFO + SE
Balance Sheet
Reformulated Balance Sheet

Measuring Profit
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NOA
NFO
Equity
Or
Net operating profit after tax = Net financial expense after tax + Net income
Net operating profit after tax + Net financial income after tax = Net income
NOPAT
NFE
(after tax)
NI
NOA
NFA
Equity
NOPAT
NFI
(after tax)
NI

NOPBT = net operating profit before tax
NOPAT = net operating profit after tax
NFA = net financial assets
NFO = net financial obligations
NFE = net financial expense
NFI = net financial income
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Reformulating Income Statement
NOPBT
+ NFI before tax
- Tax reported
= NI
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Net operating profit before tax or
operating income before tax)
NOPBT
- Tax on NOPBT
= NOPAT
NFI before tax
- Tax on NFI
= NFI after tax
NOPAT + NFI after tax = NI

Calculating Net Operating Profit After Tax
(NOPAT)
Tax reported = Tax on NOPBT + NFI x Tax Rate
Tax on NOPBT = Tax reported - NFI x Tax Rate
NOPAT = NOPBT – Tax on NOPBT
= NOPBT – (Tax reported - NFI x Tax Rate)
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NOA
NFA
Equity
NOPBT = $1,000
NFIBT = $500
Tax reported = $250
Tax rate = 30%
NFI x Tax Rate = $500 x .30
= $150
Tax on NOPBT = $250 - $150 = $100

Reformulating Income Statement
NOPBT
- NFE before tax
- Tax reported
= NI
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