In accordance with the dynamics imposed on the world economy and that the financial indices traditionally managed, have limitations that do not give the possibility of making appropriate analyzes, it is necessary to implement other types of indicators that provide greater revelations about managerial performance and that allow observing more clearly the development of business activities and determine, as the various factors involved, contribute to the improvement of the company and the generation of value, which ultimately is what really matters as it allows its permanence and growth and is It constitutes a fundamental concept in modern financial management.
Despite the fact that currently, liquidity, profitability and indebtedness indicators continue to occupy a privileged place in the analysis of the financial situation of a company, they have serious limitations that are worth clarifying.
Traditional indicators determine what happened in the past, since the information derived from them arises from historical financial statements, which does not allow us to glimpse the future potential of the company and from the point of view of generating cash flows that It is an aspect of great relevance, since it gives an important idea about the possibilities of growth and value generation; Additionally, many of the analyzes performed are based on profits that can be easily manipulated using different methods of depreciation, inventory valuation, expense incursion or income confrontation in different periods of time, distorting the reality of cash moving in the company.
Another aspect that is essential to analyze, when referring to profits, is the investment necessary to obtain it; in multiple circumstances higher profits are achieved but given the high investment profitability deteriorates and instead of generating value is destroyed; whenever reference is made to profits, it is necessary to determine the investment made to achieve it.
The indicators are extracted from financial statements for a certain period, they only analyze the short term and do not allow us to appreciate the effect of the decisions in the long term. Another reason that accentuates their low reliability is the low chance relationship they have with the aspects they analyze, for example, in the debt indicators and especially in the interest coverage, there is no alignment with what they intend to calculate, the same happens with the rotation of current assets and even with the profitability of the asset. Traditional indicators do not perceive future requirements for working capital and fixed assets, necessary to carry out activities that generate value for owners and all those who have to do with the company, such as customers, workers, suppliers, government and others.
The ideas presented confirm the need to use other types of measures that allow a more adequate appreciation of the development of the company, they are the generators of value, among which the following stand out:
EBITDA, EBITDA Margin, working capital productivity, growth lever, productivity of fixed assets, profitability of net assets and free cash flow.
EBITDA
EBITDA is earnings before interest, taxes, depreciations and amortizations, that is, the cash profits that the company has in a period and that allow to cover the payment of taxes, investments in working capital, replacement of fixed assets, payment debt service, strategic investments and profit sharing. It is known as EBITDA because it corresponds to the acronym of Earnings before interest, taxes, depreciation and amortization.
Gives an idea of the business's potential to free up cash, the higher the EBITDA the higher the cash flow; is an operational indicator and relates sales to living costs and expenses, to the extent that the cash generated by sales is greater than the cash that is committed to out-of-pocket costs and expenses, the company will have better opportunities from the point of view of value generation since availability is what ultimately allows us to fulfill the commitments acquired and specifically the payment of taxes, payment of debt service, the distribution of profits and the carrying out of strategic investments
Additionally, large profits can be revealed but have been affected by non-operating concepts or conversely lower profits are shown by the effect of depreciations and amortizations, which can confuse the analyst, which is why when you want to observe the independent company of the fixed charges that were agreed and that do not depend on the work of the administrator but on decisions of senior management and the tax strategy, EBITDA constitutes an important tool, from which the true potential of the company is perceived to fulfill all the aforementioned commitments.
The EBITDA margin shows, in percentage terms, the ability of the company to generate cash for each peso of sales, the ideal is to achieve a high margin since this shows how income exceeds cash disbursements. Therefore, one of the fundamental efforts of the administration is to achieve the growth of said margin, which will undoubtedly be reflected in an operational improvement of the business and will increase the possibilities of permanence, growth and value generation.
In many circumstances, given the competitive characteristics of the market, it is very difficult to free up cash since it is necessary to grant greater credits, longer terms or maintain high levels of inventories in order to meet demand and not enter competition, development These policies require a cash commitment, deteriorating EBITDA and therefore free cash flow with the consequent loss in value.
The calculation of EBITDA and EBITDA margin is carried out as follows:
These indicators are value inductors, since to the extent that the company releases more cash for each peso of sales, there will be greater liquidity and better possibilities from a financial point of view, since the commitments are fulfilled with cash and not with profits.
The way of calculating EBITDA, previously exposed, is little used since the concept is barely being disclosed, and when EBITDA is calculated, it starts from the operating profit to which the relevant depreciations and amortizations are added; it also starts from net profit and appropriate adjustments are made, adding and subtracting different items.
EBITDA is an operating generator, when carefully analyzing its configuration, it is perceived that it only takes into account the development of the business purpose in terms of sales revenue and disbursements made for costs and expenses, which were previously defined as costs alive, without calculating the investment required in working capital and replacement of fixed assets; For this reason, when an analysis is undertaken, to determine the generation or destruction of value, various indicators must be combined that allow us to appreciate the combined effect of both operational and financial inducers and reach better conclusions.
Some indicators that support this process are the productivity of working capital, growth lever and productivity of fixed assets; which allow a combined analysis and thus determine the behavior of value in the company from different points of view.
Before taking a look at the aforementioned indicators, let us examine with an example, a type of analysis that is carried out based on EBITDA and EBITDA margin and that allows us to improve the conclusions about the generation of value in the company.
Applying EBITDA and EBITDA margin, analyze the situation of the company ILUSIONES SA and determine if it generates or destroys value.
| CONCEPTS | 2006 | 2007 |
| Sales (millions) | 459 | 544 |
| Operating profit | 136 | 170 |
| Depreciation | 76.5 | 76.5 |
The increase in sales of $ 85 equivalent to 18.5%, is reflected in an increase of 25% in operating profit, which suggests a good managerial performance as there is favorable operating leverage since an increase in sales occurs a more than proportional increase in operating profit. This would induce the management of the company, among other things, to think about a greater distribution of profits given the proper management.
If analyzed in light of EBITDA, different conclusions can be reached, let's see:
EBITDA 2006 136 + 76.5 = 212.5
EBITDA 2007 170 + 76.5 = 246.5
Given the 18.5% increase in sales, there is a 16% increase in EBITDA, which shows that from the operational point of view, the management that is being carried out is not so good, since the company you have less and less cash; The previous conclusion is reached, untying the effect that depreciation has on profits, which is not due to a managerial decision but possibly to a tax strategy or the way assets are depreciated in the company according to previously established policies.
It is for this reason that when you want to carry out an analysis of the operation of the company, it must be done in light of EBITDA and not of operating profits.
This is corroborated if we perceive what happens with the EBITDA margin.
The EBITDA margin decreased from period to period, accentuating all the conclusions drawn with the previous analysis, in which the fundamental idea is that the company is obtaining less cash for each peso of sales, therefore the situation that was reflected in operating profit could lead to erroneous decisions and negatively affect the liquidity of the company.
Productivity of working capital
The productivity of working capital refers to the use of the investment made in net working capital in relation to the sales achieved. The higher the sales, given an investment in working net working capital, the better the productivity provided by this item.
It can be said that one of the high points in the Colombian company is the investment in working capital. In many circumstances, too many resources are committed to inventories or accounts receivable, either due to the competitive characteristics of the sector in which it operates or due to administrative inefficiencies, deteriorating the company's profitability and jeopardizing its liquidity position.
To fully understand the productivity of working capital, it is necessary to correctly understand the concept of operating net working capital.
From the accounting point of view, working capital is the difference between current assets and current liabilities, a valid concept in the structuring of the balance sheet and the statement of changes in the financial position, but it does not meet expectations from the financial point of view, where what really matters is to analyze the available capital to carry out short-term operations; therefore working capital is the current asset, since the investments that are held in inventories, accounts receivable and cash are fully used in the development of the activity; You cannot say that you only work with the difference between current assets and current liabilities, because nobody is going to stop using any amount of their assets.
For example, you have a current asset of $ 300 and a current liability of $ 200, the company will not use only $ 100, makes use of all its short-term resources and attends to the debts as they reach maturity.
Operating working capital (KTO) is equal to the sum of inventories and accounts receivable, which are short-term operating items, temporary investments are discounted for not obeying the development of the company's operational activity and cash because it is a casual figure and it is intended to be as low as possible because you cannot leave idle resources that do not generate profitability, in summary
After analyzing the concept of KTO, let's bring up another aspect related to this item and it is related to accounts payable to suppliers.
Although it is true that the company must invest resources in inventories and accounts receivable, these are reduced in the amount in which the suppliers grant credits, reducing the resources committed in the working capital, therefore it is more convenient to speak of working capital operating net (KTNO), which reveals in a more realistic way what is being invested in the short term to operate efficiently, its calculation is as follows:
Once the KTNO is known, the concept raised above about the productivity of working capital (PKT) can be analyzed, where it was hinted that it is the use made of the investment in working net working capital and is calculated as follows:
It is very important for a company that aims to achieve high performance to have the highest possible productivity in its working capital. In many circumstances more is invested than is required.
The policies that are handled in relation to this aspect must be very well designed and correspond to the dynamics of the sector in which it operates. In this sense, the rotations of accounts receivable and inventories are an important support that allow us to improve the management of these transcendental concepts to achieve growth and value generation in the company.
Remember that it is not convenient to make more investments than required because they have negative effects on the liquidity and profitability of the business.
Growth lever (PDC)
The growth lever refers to the combined analysis of EBITDA margin (ME) and working capital productivity (PKT), a financial ratio that allows us to determine how attractive growth is for a company from the point of view of added value. The growth lever combines the EBITDA margin with the productivity of working capital, from its result the appropriateness or not of growth is established.
The relationship between the two mentioned elements is as follows:
The PDC is favorable for the company and growth generates value, if the result obtained is greater than one, which implies that as the company grows, it releases more cash, improving liquidity and the possibility of fulfilling the commitments of the company. If the PDC is less than one, instead of releasing cash, it consumes that of previous periods, setting up an imbalance in the cash flow, preventing it from adequately complying with commitments to pay taxes, debt service, replacement of assets fixed and profit sharing.
If the company has an EBITDA margin (ME) greater than the productivity of working capital (PKT), the development of its activities will generate value; It is not possible to look very rigidly at what has been outlined above, since it could decrease the ME and have a positive effect on the PKT by reducing investment in current items, that is, always keep in mind a PDC greater than one, which implies monitoring constantly these two variables that must evolve according to market conditions and the effects that the environment may have on the company under study.
To clarify everything related to ME, PKT and PDC, let's understand the following example.
EBITDA margin (ME): 20%
Working capital productivity (PKT): 50%
Sales year 1: $ 830 million
Sales increase: 25% (207.5 million)
Sales year 2: $ 1,037.5 million
Depreciation: $ 50 million
Interest: $ 20 million
Profit sharing: 50%
Taxes: 38.5%
Solve the following questions:
- Cash needed to achieve growth Cash availability after growth Perform an analysis with income statements and comment on the results obtained What should be the change in the KTNO, to maintain the cash for the second year, if the EBITDA margin drops to 15% If PKT rises to 55% What should be the change in EBITDA to keep the cash from year two How to keep the cash generated in year 1? 1. Cash needed to achieve growth
Sales increase $ 207'500
x EBITDA margin 0.20
= Cash generated 41'500
Sales increase $ 207'500
x PKT 0.50
= KTNO required 103'750
Net cash to achieve growth:
103'750 - 41'500 = $ 62'250 Million
Carrying out the proposed growth program implies committing $ 103'750 in KTNO, and only producing $ 41'500 of cash, so, to sustain it, it is required to use cash from the previous period, reducing the liquidity of the company and the possibility of adequately meet financial commitments, since growth does not in itself finance cash requirements and therefore, from this perspective, it is not appropriate to grow since instead of releasing cash, the previous period is being consumed, destroying the value of the company.
- Cash available after growth
EBITDA year 1 (830'000 x 0.20) $ 166'000
- Box needed for growth 62'250
= Cash surplus $ 103'750
Or also:
Year 2 EBITDA (1,037'500 x 0.20) $ 207'500
- KTNO required 103'750
= Cash surplus $ 103'750
As mentioned, growth does not generate value for the company, on the contrary it destroys it, since part of the cash from previous periods has to be used to finance it, reducing the available cash, in the event that such cash is not available, the company it would have to resort to institutional credit, increasing interest and therefore further deteriorating its liquidity position and decreasing profitability.
It is worth thinking about whether under these circumstances it is convenient to grow and when doing so, what is the motivation to carry it out since the effect on value does not justify it, on the contrary it indicates that this opportunity for growth must be rejected in order to preserve the value at the moment. Let's not forget that growth must be profitable and generating its own liquidity.
- Analysis with income statements
YEAR 1 YEAR 2
EBITDA 166'000 207'500
- Depreciation 50'000 50'000
= Operating profit 116'000 157'500
- Interest 20'000 20'000
= Income before taxes 96'000 137'500
- Taxes 36'960 52'938
= Net Income 59'040 84'562
The 43.2% increase in net profit hints, to the unsuspecting analyst, a great situation leading management to make profit-sharing decisions that can impair the company's financial possibilities and all for not considering the additional need for KTNO that allows sustain growth.
Let us look at this situation from a different perspective.
Net Income 84'562
+ Depreciation 50'000
- KTNO 103'750
= Available RU 30'812
- Distribution of profits 42'281
= Deficit (11'469)
As is clear from the previous result, if the company distributes profits of 50%, it will be subject to great liquidity risks as it will have a cash deficit, which will not allow it to meet capital payments, nor to replace fixed assets when the situation demand it.
When the analysis is performed with the value generators, the amount of resources required in KTNO is perceived and therefore the entrepreneur will have the precaution of creating reserves that allow the proper operation of the company without having to incur debt and showing What are the true possibilities of profit sharing that you have and avoid future problems due to the desire to enjoy profits, which must be committed to the capital of the company to achieve the objectives of permanence and growth that a high-level company has in mind. performance.
- What would happen with the KTNO, if the ME drops to 15% and you want to keep the box for year two?
EBITDA year 2 (1,037'500 x 0.15%) 155'625
KTNO 51'875
Cash surplus 103'750
Given a drop of 5% in the EBITDA Margin, the PKT should go to 25%, which implies a great investment effort in inventories or accounts receivable, therefore, in view of a prospect of a decrease in the EBITDA margin, the company has than looking at what your future possibilities are, to conserve cash and if it is really possible to modify the PKT.
- If the PKT rises to 55%, what would be the EBITDA situation?
EBITDA year 2 217'875
KTNO (207'500 X 0.55) 114'125
Cash surplus 103'750
By requiring more investment, in operating net working capital, for each sale weight as suggested in the previous numeral, the EBITDA margin must be improved to offset this greater investment; although the situation would be worse if the previous case is presented, since under the current perspective, the increase in the EBITDA margin would be only 1%, which can be more easily achieved. To improve EBITDA, it is necessary to reduce living costs and expenses, that is, those that involve cash disbursements.
- How to maintain the cash generated in year 1?
Manage the KTNO:
EBITDA year 2: 207'500
KTNO required 41'500
Cash surplus year 1 166'000
If you intend to keep the cash from the previous year, instead of a PKT of 50% you should have one of 20%, and avoid the destruction of value.
Manage EBITDA:
EBITDA year 2: 269'750
KTNO required: 103'750
Cash surplus 166'000
If what we are trying to analyze is the effect on the EM, keeping the situation of year one, it is observed that we must achieve a growth of 6% in said margin.
Productivity of fixed assets (PAF)
Productivity of fixed assets refers to the adequate use of capital invested in property, plants and equipment; efficiency is seen from the point of view of achieving higher sales with a certain level of investment in fixed assets; it is of great importance for the company not to maintain idle capacity that produces additional costs and deteriorates profitability.
One of the important aspects in relation to fixed assets is the implementation of strategies that minimize this investment without affecting profits.
There are different possibilities that merit analysis such as leasing, maquila, outsourcing, or other models that allow the release of resources.
It is also important that through adequate maintenance and conservation programs for fixed assets, their useful life is increased and investment expectations are lowered.
Its calculation is as follows:
Net asset return
In the study of the financial situation of a company, an element that sets the standard is profitability, although it is true, with traditional indicators this analysis has been carried out, it has certain shortcomings that do not allow to properly calculate such an important aspect in business dynamics.
In this section and based on the knowledge that we have about profitability, we will make a series of clarifications that will allow us to reach better conclusions.
In the first instance, let's consider the traditional calculation.
In relation to the previous calculation, the following observations can be made: in terms of operating profit, a fundamental problem that it presents is not considering taxes that are only reflected in net profits, overvaluing profitability, since by not referring to one from the significant disbursements that the company faces and that largely derive from the development of its operational activity, higher profits are shown.
The foregoing explanations lead to the conclusion that, in calculating profitability, the correct thing is to use the operating profit after taxes, which is calculated by applying the tax rate to operating profit, it is also known as the NOPAT (Net Operating profits After Taxes) and its calculation is carried out as follows:
UODI: Operating income after taxes
UAII: Operating profit or profit before interest and taxes
Tx: Tax rate.
Another alternative to calculate the UODI is as follows:
In this last form of presentation, the tax benefit is subtracted from the interest; by relating the interests in the income statement, profit is decreased and therefore taxes, obtaining a tax benefit that reduces the cost of debt; The calculation of the UODI is made independent of the form of financing that the company chooses, that is, only the business is considered from the operational point of view; the effect of a certain form of financing will be addressed in a later analysis.
On the other hand, in the denominator of the fraction, the operational assets are taken in their entirety, which is an error that increases this item and undervalues profitability.
Operational assets are those used in the development of the corporate purpose, that is, current and fixed; So far everything seems normal, but let's see what are the nerve points that the asset thus considered presents.
Regarding current assets, the investments that are actually made and that correspond to KTNO are considered; the liabilities derived from financing with suppliers are excluded, since they decrease current investment.
Fixed assets must be considered at their commercial value, the book value does not represent the reality of the investment committed in this area, therefore the estimate made of the profitability will be an inappropriate parameter but it will be considered a value close to reality.
The operational asset will be: KTNO + Fixed assets at their commercial value.
In light of the above explanations, the return on the asset is calculated as follows:
RAN: Return on operational or net assets
UODI: Operating income after taxes
AO: Operational asset.
In this way, a calculation closer to the reality of a concept of utmost importance in business finance, such as the profitability of the asset, is achieved.
Let us now look back at the profitability of equity, it was said that it includes the combined effect of the profitability of the operational asset, that is, the profitability of the assets committed to the business, regardless of the way in which these assets are financed and the financial contribution, which comes from the use of debt in the development of the corporate purpose. When debt is used, it is expected that the return is greater than its cost and to reach additional points that make up the financial contribution, the purpose of which is to improve the profitability of the assets, that is, the profitability of the company's partners.
As stated in previous paragraphs, the return on equity is made up of the return on the operating asset and the financial contribution.
The financial contribution is calculated as follows:
Let us illustrate what has been said with a simple example.
UAII $ 350'000
Operational Assets $ 750'000
Interest Rate 23% Before taxes
Liabilities $ 300'000
Tax rate 38.5%
UODI = UAII (1 - Tx)
UODI = 350'000 (0.615) = $ 212'250
UAII $ 350'000
Interest 69'000
UAI 281'000
Tax 108'185
NET INCOME 172'815
Equity = Assets - liabilities 750'000 - 300'000 = $ 450'000
Now let's calculate the return on equity from the point of view of the return on the operational asset and the financial contribution.
Debt cost after tax = Cost before tax (1 - Tx)
CDI = 0.23 (0.615) = 14.15%
Calculation of financial contribution (CF) = (RAN - CDI) D / P
CF = (0.287 - 0.145) 300/450 = 9.7%
It can also be calculated as follows:
Yield above debt. 28.7% - 14.15% = 14.55%
Contribution in pesos of the debt 14.55% x 300'000 = $ 43'650
Return on equity (RP) = Return on net assets + Financial contribution
RP = 28.7% + 9.7% = 38.40%
Tax shield
The tax shield refers to the tax benefit obtained by assuming liabilities, the cost of which is the interest that is deductible from the tax point of view, lowering the cost of the debt and therefore the cost of weighted capital of the company. When the study of the cost of capital is undertaken, it will be amplified and adequately explained regarding this aspect that is so important for the generation of value in the company.
Free cash flow
An important tool, which allows us to conclude about the value that a company generates or destroys, is the elaboration of cash flows in its different conceptions, that is, gross cash flow and free cash flow. Through them, conclusions can be drawn about the possibility of the company to meet its commitments including investment in KTNO, in fixed assets (replacement or replacement), payment of debt service, profit sharing and the realization of strategic investments. Let's analyze what is related to cash flow, its importance and construction.
The cash flow confronts the income and expenses of cash in a period of time, its importance lies in the fact of showing the availability of cash available to meet the different financial commitments; This is the time to show why the analyzes should be conceived from cash flows and not from accounting profits.
Profits, reflected in the income statement, can lead to misleading decisions, these originate in accrual accounting, recording income and expenses independent of the movement of cash; Additionally, profits can be manipulated with the application of accounting practices such as different methods of inventory valuation and depreciation, valuation of good will, capitalization of expenses, not reflecting the reality of cash availability.
Not surprisingly, some authors say "profit is an opinion and cash a reality"
With what has been said so far, let's determine how cash flows are made; It will depend on the purpose it has, it is not the same to build a historical free cash flow as a projected cash flow and in the projected there are differences between cash flows for valuation, evaluation of alternatives, financial structure or analysis of future cash possibilities.
The historical free cash flow shows how the cash movement was in a given period, highlights the items that affected the result, it is calculated as follows:
To calculate the gross cash flow, the net profit is added to the interest, depreciation and amortization and in obtaining the free cash flow, the investment in KTNO and the replacement of fixed assets are subtracted from the gross cash flow; Let's clarify these aspects.
Depreciations and amortizations are subtracted to establish the profit before taxes, since they are expenses that are related in the income statement, reducing the taxable profit and the payment of taxes; they are added to obtain the gross cash flow since they do not imply cash disbursements, therefore they involve available cash that is used in the operational activity. The same treatment is given to provisions for protection of assets such as inventories or accounts receivable.
In relation to interest or financial expenses, they are subtracted to reach taxable profit and this for the same reason as in the previous item, that is, to achieve a tax benefit or tax shield, by subtracting them from operating profit, the taxable base is lower and hence the payment of taxes. Now, in determining the gross cash flow, they are added together, because when the free cash flow is calculated, we want to show the availability for the payment of the debt service and the distribution of profits.
In determining the free cash flow, the KTNO requirements are subtracted, which are a necessary investment to operate properly; The replacement of fixed assets is also subtracted, that is, the investment necessary to continue operations without increasing installed capacity; As a result, the free cash flow is obtained that allows servicing the debt, that is, interest and payment of capital, establishing an adequate policy for the distribution of profits and making strategic investments.
When the idea is to develop projected free cash flows, it is first defined whether it is to evaluate investment alternatives, value, calculate EVA, determine financial structure, cash position, establish a profit-sharing policy or debt restructuring; since depending on the purpose, the structure to be used is established.
When the purpose in mind is to evaluate investment alternatives, calculate economic value added (EVA) or value companies, the projected free cash flow, which is used, acquires the following structure
In determining the free cash flow, to evaluate alternatives, calculate EVA and value, the effect that financial expenses have on taxes is not considered; apparently the tax benefit derived from the use of the debt is waived, this is not the case, when it is evaluated or valued, the cash flows are brought to present value and this is done with the weighted cost of capital of the company in which the cost of the debt after taxes is contemplated and therefore the tax benefit is being collected within the cost of capital, if it is considered in the construction of the cash flow, it would be doubly considering overvaluing a project or the value of the company.
Additionally, the value of the company or a project is determined, regardless of how it is financed, the value of the assets is taken without determining what proportion is financed with own resources and what proportion with liabilities, that is, the operational aspect of the business and the discount rate is the weighted cost of capital of the company (CCPP or WACC).
The profitability of a project is also analyzed, considering the contribution made by the partners, that is, the investor's profitability is evaluated, a concept that allows us to perceive the use from the operational and financial point of view; therefore, the possibility of complying with third parties is analyzed and the benefit obtained by owners for using financial leverage is defined.
Under this perspective, cash flows are discounted or brought to present value with the investor's opportunity cost and it takes the following form:
If the purpose of free cash flow is to analyze the future cash position, define a profit-sharing policy or determine the financial structure, the scheme to use is as follows:
The differences that are observed in the previous structure, in relation to the historical cash flow, is that these are projected figures and in the fixed assets it takes the total investment, since it shows the necessary disbursement in this item to function in the future.
Free cash flow is a fundamental tool that allows us to determine how valuable a company is, when we address the issue of value, the great importance of cash flow will be understood, as it is currently one of the most accepted techniques to value companies, discounting future cash flows with the company's weighted cost of capital.
It is important to note that in free cash flow, explicit concepts such as EBITDA, internal fund generation (GIF) and cash generated from operations (EGO) can be made, which give more points of analysis, are important and worthwhile. take them into consideration to analyze the statement of changes in the financial position or the possibilities that the company has operationally and that are reflected in the statement of cash flow, recognized in Colombia from decree 2649 of 1993 as a basic financial statement of purpose general.
Let's see how the mentioned concepts can be incorporated.
Questionnaire
- Explain the main limitations of traditional financial indicators. Explain what the value generators consist of and what are the fundamental aspects that are perceived with them. Explain EBITDA, EBITDA Margin and its usefulness in financial decision-making. Show and analyze Different ways to calculate EBITDA. Why, when analyzing the financial management of a company, based on profits, can one come to the wrong conclusions? What other types of analysis do you suggest? Explain. Incorporate EBITDA into free cash flow and explain the result obtained. Clearly explain the differences between working capital, operating working capital and net operating working capital. How is the PKT calculated? comes with your analysis.When calculating the PKT, the KTNO is used When is it more convenient to use the KTO? If the investment in KTNO is correctly calculated, there should be no additions or reductions in its level during the life of a project. Do you agree or not? Explain: How is the PDC calculated and what is its meaning? What would be the effect on the company if the PDC were less than one? How would you relate the PDC to growth and from a value point of view? How does it relate The PDC with the operating profit and what conclusions does it draw from this relationship? One of the modern tools of financial management is the PDC, as it would be applied to determine if from the point of view of value generation it is convenient to grow. net is one of the great inducers of value,Explain how the results that can be obtained through your application are calculated and interpreted. What does it mean to the after-tax operating profit (UODI) and why is it not included in your calculation? Explain the importance of cash flow Free and for what the amount obtained is used. How is historical free cash flow calculated and what is it used for? Why are they added to net profit, depreciations and interest to obtain gross cash flow? How is cash flow calculated for valuation purposes? Explain what is the operational risk and financial risk of a business and through which indicators can it be calculated.How can you measure the premium for operational risk and the premium for financial risk in a business and what is the meaning of these calculations? How is the financial contribution calculated? Explain each of the variables that compose it, the set in general and its meaning. Why could a negative financial contribution be obtained in a business and what is its effect on the profitability of equity? "Although the company shows a financial contribution positive, more and more value is being destroyed "Do you agree or not? To evaluate the good performance of the company, it is sufficient that the return on net assets is greater than the cost of capital. Analyze the statement. Explain what the productivity of fixed assets consists of and present your calculation method.As an operational inducer that the tax shield means for a company and how can it be used?
Application exercises
- Based on the following information from the company PURA VIDA SA, calculate the return on net assets (RAN), the return on equity (RP), considering the financial contribution.
UAII $ 225 million
Assets $ 800 million
Debt cost 25%
Liabilities $ 250 million
Tax 38.5%
- Taking into account the EBITDA and the EBITDA margin, analyze the situation of the company VIDA PURA SA and determine if it is adding or destroying value.
| CONCEPTS | 2006 | 2007 |
| Sales (millions) | 270 | 320 |
| Operating profit | 80 | 100 |
| Depreciation | Four. Five | Four. Five |
- Below is a detail of how, under a long-term perspective, the transportation companies Nascar and Formula One distribute their cash flow, expressed in millions of pesos. Which company do you consider most valuable? Explain your conclusion.
| CASH FLOW | REPLACEMENT OF KT AND AF | DEBT SERVICE | AVAILABLE FOR UTILITIES | |
| Nascar | 700 | 170 | 450 | 170 |
| Formula One |
700 |
300 |
300 |
100 |
- The company Pura vida sold $ 325 million in the last year, for the next year, it expects an increase of 15%. It currently maintains 40 days of accounts receivable and for next year they will go to 60; inventories are expected to go from 20 to 40 days. Assuming cash purchases and a 40% gross profit margin, how much is required to finance the KTNO increase in the next year? Based on the cost and expense structure of the company Imaginaciones SA, calculate the PDC and issue your judgment with relation to the result obtained.
- Days of accounts receivable 75 Days of inventory 30 Days of payment to suppliers 50 Gross Margin 43% EBITDA Margin 25%
- Consider the following information from the company ilusiones SA
EBITDA margin 20%
PKT 42%
Sales for the year 1 $ 830 million
Year 2 growth 25%
- How much cash is required to finance the growth of the company in year 2? How much is the cash available to meet the payment of taxes, replacement of fixed assets, debt service and dividends, after growth and what are its conclusions in relation to the results obtained? What would have happened if the analysis had been carried out only taking into account the income statement and assuming depreciation of $ 50 million, interest of $ 5 million and that 50% of net profits are distributed as dividends If the EBITDA margin drops to 15%, what should be the evolution of the PKT,to keep cash after growth? If the PKT goes to 49%, how much should the EBITDA margin be to keep cash after growth? If you do not want to deteriorate the initial cash position in relation to cash after growth How should the EBITDA margin or the PKT evolve?
