Value Chain Analysis Break-down

The primary purpose of any business is to produce goods or provide services in a way that they have a higher value for the customers than the original cost for the firm. Companies engage in numerous activities while converting inputs to outputs. Porter’s Value Chain helps us create a clear overview of the internal organization, which in turn helps us to assess where the business creates actual value and where we can make improvements in the processes. Value Chain Analysts Read more…

Opportunity Cost in Financial Modeling and Analysis

Introduction Opportunity cost represents the benefits the business misses out on when picking between alternatives. When we have two desirable options, the benefit from the one not chosen is our opportunity cost. These costs are usually the result of bottlenecks in business processes. Therefore, finance professionals use Opportunity Cost analysis to improve the decision-making process and make informed choices. As an example, we can look at salary. If we take unpaid leave to go on vacation, our remuneration will be Read more…

Using the Net Present Value (NPV) in Financial Analysis

The Net Present Value (NPV) is a profitability measure we use to figure out the present value of all expected future cash flows a project or investment will generate, including the initial capital we invest. It shows us the difference between the current value of cash inflows and outflows over a period. Net Present Value (NPV) NPV, also known as Net Present Worth (NPW), is most prevalent in capital budgeting, where analysts use it to identify the projects with the Read more…

Quick Ratio in Financial Analysis and Modeling

Introduction We perform a liquidity ratio analysis to evaluate the ability of the company to settle its obligations on time. The most common use case is when lenders and creditors want to gain a better understanding of the financial health of a borrower or customer. Analysts use the gained insights to set credit terms and manage risk appropriately. The Quick Ratio is a liquidity measure for the ability of the business to cover its current obligations when they become due, Read more…

Compound Annual Growth Rate (CAGR) in Financial Modeling

Introduction Investors are continually evaluating different investments, trying to identify the ones that will maximize their returns and wealth. Analysts consider the Compound Annual Growth Rate (CAGR) as one of the most accurate ways to calculate the return for any investment with a value that changes over time. CAGR represents the rate of return an investment would require, to grow from its beginning value to its future end value, with the underlying assumptions that we reinvest all profits over the Read more…

Working Capital Analysis

Introduction Most significant new projects for a business require investments in Working Capital, and this harms a company’s cash flow. Proper cash management is essential if we want the company to continue to operate in the future. A business can be profitable, but if it can’t keep cash on hand, it won’t survive. Therefore it is crucial to use all financial metrics at our disposal to manage cash availability regularly. Working Capital is used to determine the sufficiency of Current Read more…

CAPEX, Depreciation and Amortization in Financial Modeling

If you are already familiar with the outlined concepts, maybe you would be more interested in taking a look at the Excel model, which you can download below the article. Introduction Long-term (non-current) assets of the company have a long useful life (more than one year). When acquiring capital assets, we aim to use them within the business and not hold them for re-sale. These primarily consist of land, buildings, fixtures and fittings, equipment and machinery, needed to operate the Read more…

Dividend Discount Model in Financial Analysis

Introduction to the Dividend Discount Model The Dividend Discount Model (DDM) is used to estimate the price of a company’s stocks. The model is based on the theory that the present value of the stock is equal to the present value of all future dividend payments when discounted back to the present. If the present value calculated under the DDM is higher than the current trading price, the stock is undervalued and qualifies for a ‘buy’ decision. The Dividend Discount Read more…

Perpetuity Concept in Financial Analysis

Introduction The Perpetuity concept refers to the present value (PV) of equal periodic cash flows that investors will receive over an indefinite future period. We need to calculate the present value of perpetual cash flows for a variety of reasons, some being: Companies have cash flow projections for a reasonable number of periods and no other way to value the indefinite future performance of the business; Some financial instruments like bonds and preferred dividends pay coupons forever, and investors need Read more…

Time Value of Money Explained

Introduction To understand the Time Value of Money, imagine you were offered 100 euros now or 100 euros in three years, what would you prefer? If you are like me, you’d probably prefer the money now. But why is that, when a 100 euros has the same value now and in the future? Having it now makes it more valuable, as we can use it to generate returns in the following three years. If we invest a 100 euro today, Read more…