AFM211 Lecture Notes - Lecture 4: Refinancing, Cash Flow, Financial System
Assessig a Copay’s Future Fiaial Health
Step 1, 2: analyze fundamentals
• Financial system → goals, strategies, market conditions, operating characteristics
• sales growth in each business unit determines the amount of investment in assets to support
operation
• effetie strategies ifluee the fir’s opetitie ad profit performances, need for external
finance, and access to debt and equity markets
step 3: analyze investments to support the business unit strategies
• investments in A/R, inventories, PPE
• estimate the amount that will be tied up in asset types by virtue of sales growth and the
improvement/deterioration in asset management
• study past results of e.g. olletio period, ad apply a reasoale alue for eah ategory to the
sales forecast
• assues future uderlyig arket, opetitie, ad regulatory oditios ill ot e
changed from those that influenced the historical performance
step 4: assess future profitability and competitive performance
• sustainability is determinated by:
• assess to debt/equity finance on acceptable terms
• ability to self-finance growth through the retention of earnings
• capacity to bet on risky tech/market/products
• the valuation of the company
• assess a fir’s future profitaility y aalyzig past patterns of profitability
• average trend, volatility of profitability
• is the level of profitability sustainable taking in account of competitive and regulatory
pressures?
• Is the current level of profitability at the expense of future growth/profitability?
• Has management initiated unique major profit improvement programs?
• Ay hidde proles suh as uild up of A/R or ietory ad uusual trasatios?
Step 5: assess future external financing needs
• Future external financing need depends on
• Future sales growth
• Length of its cash cycle
• Future level of profitability and profit retention
• Rapid sales growth by a company with long cash cycle (long collection period + high inventories +
high PPE relative to sales) and low profitability/retention is a sigh for a high appetite for external
finance
• High sales growth does not always result in a need for additional external finance
Step 6: ensure access to target sources of external finance
find more resources at oneclass.com
find more resources at oneclass.com