ANALYSIS OF FS
Debt holders Secondary
Debt Holders
Secondary
Shareholders
Shareholders
Cash from
sale of Debt
Interest and
Loan repayments
The Capital Market: Trading
Value
The Investors:
The claimants on value
Cash from
share issue
Dividends and cash from
Share repurchase
The Firm: The Value generator
Operating
Activities
Investing
Activities
Financing
Activities
Cash from Loans
Cash from
sale of Shares
The Firm, Its Claimants, and the Capital market
BUSINESS ACTIVITIES : All Stocks and Flows for a firm
Shareholders
Debt holders or
Debt issuers
Net financial
Assets (NFA)
F
d
Financing activities
Capital Markets
Firm
F= Net cash flows to debt holders and issuers ; d= Net cash flows to shareholders
NFA (net financial assets) = financial assets – financial liabilities
C= Cash flows from operations; I = cash investment
NOA = Net operating assets = operating assets – operating liabilities
OR = Operating revenue; OE = Operating expense; OI = operating income; NFI = Net financial income
C
I
Net
Operating
Assets
(NOA)
Operating activities
Products &
Inputs markets
OR
OE
Customers
Suppliers
OR – OE = OI
OI – ∆NOA = C – I
C – I – ∆NFA + NFI = d
#1 #2 #3
Raise Capital Invest in Business Generate Profit
Debt PPE NOPAT
Equity Working Capital
Modeling a Business: A Simple Framework
#4
Reinvest/Return
Reinvest in Business
Service/Paydown Debt
Dividends/Buy-backs
Financing
Interest income (expense)
Dividend income
Gain/Loss on financial investments
Foreign currency gains (losses)
Preferred dividends
Pension interest cost
Pension expected return on plan
assets
Implied interest expense on
capitalized operating leases
= Net Financial Income (Expense)
Pretax
Tax on financing is assumed to be at
the statutory rate
= Net Financial Income (Expense)
Operating
Operating revenue
Operating expense (excluding
goodwill, one time items,
interest and expected
return on plan assets for
pensions)
Income (loss) on operating
associates
= Pre-Tax Operating Profit
(EBIT)
Tax on operations is assumed
to be at the statutory rate
= NOPAT
Other
Income (loss) on non-
operating associates
Other non-operating income
(expense)
Minority interest
Tax adjustment
= Other Income (Expense)
NOPAT + Net Financial Income (Expense) + Other Income (Expense) = Net Income
Operating Assets
Financial Assets
Operating Liabilities
Shareholders’ Equity
Financial Obligations
Net Operating Assets
Net Debt
Shareholders’ Equity
Total Capital (Book)Net Operating Assets
Total Assets Total Liabilities and Equity
BALANCE SHEET
Operating Assets – Operating Liabilities = Net Operating Assets
Financial Liabilities – Financial Assets = Net Debt
Other Assets – Other Liabilities = Net Other Assets
BALANCE SHEET
GAAP BALANCE SHEET ( Conceptual stock of shareholder value)
Liabilities and Equity Rs. Assets Rs.
Operating liabilities
Financial Obligations
Common shareholders equity
Total claims
OL
FO
CSE
———–
OL + FO +
CSE
Operating Assets
Financial Assets
Total assets
OA
FA
—–
OA + FA
Reformulated Balance Sheet
Fin. Obligations and Owner’s Equity Rs. Operating Assets Rs.
