Financial Analyis and Company Valuation

Analysis on Corporate, Profit Center or Cost Center Level

Activity and Liquidity

  • Activity indicators (asset turnover, inventory turnover in days, collection period in days, and payment period in days) Special attention is paid to collection period from particular customers given profitability of existing business relation, seasonality of receivables, degree of their collectability and aging structure. Inventory is analyzed on product category level focusing on relationship between category profitability and inventory turnover, while at suppliers level the relationship between purchase levels from particular suppliers, purchasing terms (including payment period in days) is analyzed.
  • Liquidity indicators (current ratio, quick ratio, and cash ratio).


  • Profitability indicators down to gross profit level (gross profit margin). Special attention is paid to identification of relevant product and service categories and pertinent sales structure based on those categories. In addition, cost of goods sold (COGS) is calculated for all categories in order to get full understanding of gross profit margin levels and trends on product/service category level. Same analysis is applied to customer level (or group of customers), sales channels, and geographical territories. Finally, an analysis of each category’s, customer’s, sales channel’s and geography’s contribution to overall gross profit will be performed.
  • Profitability down to EBITDA level (EBITDA margin). A detailed analysis of fixed operating expenses (OPEX) will be done including grouping of expenses into adequate categories allowing for better understanding of types of costs being incurred, their level and share of total costs, and finally their impact on EBITDA.
  • Normalization of EBITDA and profit margins. Analysis of OPEX may result in a need for reclassification of part of those costs into COGS in order to get better assessment of real gross profit and gross profit margins. Furthermore, all one-time and non-recurring revenues and costs will be reassessed including their impact on calculated EBITDA, and finally the influence of other operating revenue (other than sales) on EBITDA, such as revenue from asset disposals, rent, reversed warranty provisions, etc. will be studied in order to determine normalized EBITDA related to and stemming only from core operating activities.
  • Profitability below EBITDA level (EBIT and net income). Depreciation policy, structure of financing costs and effective income tax rate will be analyzed.


  • Du Pont analysis. Return on assets (ROA), return on invested capital (ROIC) and return on equity (ROE) will be decomposed into relevant elements providing for better understanding of element’s contribution to an indicator (e.g. ROE will be looked at as a product of asset turnover x net profit margin x equity multiplier, and as sum of ROIC + ((ROIC – cost of debt) x D/E). Such approach allows for identification of areas offering possibility for improvement in ROA, and especially and more important in ROIC and ROE.

Operating and Financial Leverage

  • Indebtedness indicators will be systematically rated (capital structure as measured by debt to equity (D/E) ratio, level of net debt, ratio of net debt to EBITDA, ratio of net debt to cash flow, and coverage indicators).
  • Operating and financial leverage. Calculation of degree of operating leverage (DOL) and degree of financial leverage (DFL) will be performed. DOL tests the influence of fixed operating costs on operating profit by measuring percentage change in operating profit for 1% change in revenue, whereas DFL tests the influence of fixed financing costs on net income by measuring percentage change in net income for 1% change in operating profit.

Net Working Capital (NWC)

  • Net working capital. Special attention will be paid to operating and cash cycles in days, the extent to which changes in the amount of NWC influenced operating cash flow, and the level of investment in NWC needed to generate 1 unit of EBITDA. In addition, it will be tested to which magnitude would changes in collection period, inventory turnover in days and payment period of suppliers impact NWC and subsequently operating cash flow.

Long Term Assets and CAPEX

  • Structure of long term assets and capital expenses (CAPEX). Structure and utilization rate of long term assets will be analyzed together with historical CAPEX and assessment of a need for future CAPEX.
  • Identification of non-operating assets. Intention is to determine which parts of assets are operating i.e. contributing to operating cash flow, and whether non-operating assets can be put to a better use or sold.

Cash Flow

  • Structure of cash flow (operating, investing, financing and free cash flow). The emphasis will be on identifying and understanding the structure of operating cash flow in order to determine which part of it comes from basic operating profitability (EBITDA – corporate income tax) in comparison with changes in NWC. Furthermore, as for the free cash flow, focus is on comprehending its sufficiency to service principal and interest payments to creditors, and/or to provide for potential dividends or share repurchases from shareholders.

Detailed Financial Projections

Forecast of Revenue and EBITDA

  • Projection of gross profit for all product categories (quantities, selling prices, gross profit margin) including reasonably detailed articulation of all pertinent assumptions. Projection will be done and presented in a manner fully comparable with historical results.
  • Projection of operating costs (employee costs, rent, marketing, travel, energy, vehicles, memberships, banking services, insurance, intellectual services, maintenance, telephone, Internet, IT, representation, other operating expenses) for each profit and cost center.

Forecast of Net Working Capital

  • Projection of accounts receivable based on assumption regarding average collection period in days.
  • Projection of inventory by product category based on assumption regarding average inventory turnover in days.
  • Projection of accounts payable based on assumption regarding average payment period in days.
  • Projection of other current assets (loans given, advanced payments for goods, short term loans given to third parties, receivables from employees, etc.).
  • Projection of other current liabilities (VAT and other tax obligations, liabilities towards employees, advances received, etc.).
  • Calculation of total anticipated investment in (or reduction of) net working capital during forecasted period.

Forecast of Long Term Assets

  • Projection of CAPEX and asset disposals for each major category of long term assets (land, buildings, equipment, machinery, software and other intangibles, vehicles, etc.).
  • Projection of asset disposals (sale of parts of the business, sale of non-operating assets, etc.).
  • Projection of depreciation
  • Projection of other long term assets (loans given to third parties, shares in other companies, deposits and various guarantee payments, deferred tax assets, etc.).

Forecast of Short and Long Term Debt and Interest Payments

  • Projection of short and long term debt based on existing repayment schedules and assumptions regarding issuances of new debt and/or restructuring of existing debt (refinancing, converting short term debt into long term debt, rescheduling of principal repayments, lengthening maturity, converting debt to equity, etc.)
  • Projection of interest costs based on existing repayment schedules adjusted for anticipated modifications of debt facilities as a result of debt restructuring or issuance of additional debt.

Forecast of Other Long Term Liabilities and Equity

  • Projections of other long term liabilities (warranties, deferred revenue, deferred tax liabilities, pension liabilities, etc.).
  • Projections of equity based on anticipated future earnings, dividend payouts, value adjustments of assets directly impacting equity, and potential recapitalizations.

Forecast of Cash Flows and Need For External Financing

  • Projection of operating, investing and financing cash flow.
  • Projection of free cash flow and funds available to investors for repayment of principal, interest and dividend.
  • Projection of potential cash gap and need for external funding (timing and magnitude).

Sensitivity and Scenario Analysis

  • Sensitivity analysis. Identification of key drivers of income statement and balance sheet with quantified effects of changing inputs on forecasted financial statements with special emphasis on forecasted free cash flow.
  • Scenario analysis. Identification of realistic and pessimistic scenario with quantified effects on forecasted financial statements and company’s cash flow.

Enterprise and Equity Value Including Evaluation of Strategic Options

Financial Model

  • Creation of detailed financial model using previously addressed elements with forecast of income statement, balance sheet, operating, investing, financing and free cash flow. Same format is used for presentation of expected and historical figures in order to retain comparability.

Business Valuation

  • Determination of adequate discount rate (weighted average cost of capital).
  • Determination of anticipated long term capital structure (share of debt vs share of equity in total invested capital).
  • Calculation of terminal value using 3 different methods: (i) EBITDA multiple, (ii) perpetuity model (iii) constant growth (Gordon) model.
  • Sensitivity analysis of estimated valuation on changes in discount rate and assumptions related to terminal value.
  • Final valuation expressed in relative terms as a multiple of selected financial parameter (sales, EBITDA, net income, etc.) achieved in last fiscal year or its forecast for the current year.

Evaluation of Strategic Options and Improvement Measures

  • Merger of companies from the group
  • Carve-outs and spin offs of assets
  • Transfer of shares in portfolio companies to a new firm
  • Sale of companies or assets from the group
  • Acquisition of companies or assets outside of the group
  • Search for strategic partner(s)
  • Change and/or strengthening of management
  • Acquisition of shares from existing shareholders by other shareholders or by management through MBO/LBO
  • Squeeze out of minority shareholders
  • Measures directed to improvement of gross profit and EBITDA
  • Debt restructuring
  • Implementation of adequate financial controlling and reporting system