Operating Assets Net Financial Assets C I Capital Markets Debtholders Or Debt

Operating assets net financial assets c i capital

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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
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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? 15 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
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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 16
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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 17
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Preparation for Profitability Analysis 18
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Measuring Net Operating Assets, Net Financial Obligations, and Equity 19 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
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Reformulating Balance Sheet 20 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
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Measuring Profit 21 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
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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 22
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Reformulating Income Statement NOPBT + NFI before tax - Tax reported = NI 23 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
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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) 24 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
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Reformulating Income Statement NOPBT - NFE before tax - Tax reported = NI 25
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  • Balance Sheet, Generally Accepted Accounting Principles, net operating assets

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