Business Terms / Statistics
Compound Annual Growth Rate
Compound Annual Growth Rate = Final Value / the initial value. Raise the result to the power of 1 divided by the number of years
Distribution Channels
A distribution channel represents a chain of businesses or intermediaries through which the final buyer purchases a good or service. Distribution channels include wholesalers, retailers, distributors, and the Internet. In a direct distribution channel, the manufacturer sells directly to the consumer.
Net Profit
Margin - Rent
Three Categories of a Cash Flow Statement
Operating Cash Flows Investment Cash Flows Financing Cash Flows
Avg net profit margin
"across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin."
Proprietary
"relating to an owner or ownership.<br>""the company has a proprietary right to the property"""
American population per age year
4 million people per age group: same # of 2-year-olds as 72-year-olds
Businesses in the US
40 million
Sales Force
"A company's sales force is all the people that work for that company selling its products"
Bottom Line
"Bottom line refers to a company's net income found at the bottom of its income statement"
Consumer Financing
"Consumer financing allows customers to make low monthly payments for a set period of time, for goods or services that they otherwise couldn't afford to pay for upfront with cash or a credit card. If you are a customer looking to make a significant purchase, a number of stores and businesses offer client financing."
People per generation
80 million<br>(0-20, 21-40, 41-60, 61-80)
American life expectancy
80 years
Gross Margin
Revenues - COGS
Leverage
= liabilities / equity
Break even point in price
Break Even Point in Price = (Total fixed cost / Production unit volume) + Variable cost per unit
Break Even Point in Units
Break Even Points in Units= Fixed Costs / (Price - Variable Costs)
CAGR: Applications and Additional Uses
Calculate the average growth of a single investment Compare investments Track performance of various business measures or companies Detect competitive weaknesses and strengths
Net Present Value
the sum of present values of money in different future points in time. The present value (PV) determines how much future money is worth today. Based on the net present valuation, we can compare a set of projects/ investments with different cash flows over time. This enables us to quantitatively assess a business' attractiveness using a benchmarking of NPVs Solve the Gravestone case, an interviewer led case which includes a company valuation
COGS
costs of goods sold
Gross profit
is operating revenue minus the operating costs, resulting from the core business of a firm.
Cross-train
train (an employee) in more than one role or skill.
Equity
Equity is owned by shareholders. All Assets not owned by creditors via obligations belong to shareholders. Therefore Equity = Total Assets - Total Liabilities
Gross Profit Margin
provides the profitability of the pure core business, taking into account only operating revenue, COGS, and SGA =Gross profit / operating revenue
Depreciation
refers to the loss of value of assets, for example, used machines that become outdated over time.
Operating Revenue
relates to all revenue generated as part of the regular business of a firm.
The Price to Book Ratio
shows if a company is under or overvalued. The market value of a firm is the amount of outstanding shares times the price per share. Therefore, it mirrors the market's opinion about the equity value. If the Price to Book Ratio is larger than one, the market values the company more than it is worth according to the balance sheet. The company might be overvalued unless other factors compensate for that (e.g., vast growth, customer loyalty, brand strength, etc).
Churn Rate
the annual percentage rate at which customers stop subscribing to a service or employees leave a job.
Compound Annual Growth Rate (CAGR)
the average rate at which a value (e.g. business or investment) increases over a certain period of time.
Predatory Pricing
the practice of using below-cost pricing to undercut competitors and establish an unfair market advantage. Predatory pricing is a method in which a seller sets a price so low that other suppliers cannot compete and are forced to exit the market.
Opportunity Cost
the value of the best alternative that was not chosen. ex. in a case interview, as a part of a business solution for a food supermarket, you recommend to use a share of the space for pre-prepared food items instead of a small restaurant (best alternative). Here, opportunity costs would be the revenues that would have been made by utilizing the space for the small restaurant instead of pre-prepared food items. Make sure to mention this in the interview and calculate the lost revenues in opportunity costs if necessary. ex. Business case: investmentAssume you have $100,000 and you are offered an investment which has a return of 10% after one year. This means you will earn $10,000 in year 1. You need to decide against this investment. What are the opportunity costs of this decision?Now, you need to evaluate the next best option. If you leave the money at home, you don't earn anything and after a year, you still have $100,000 instead of $110,000. Thus, the opportunity costs of your decision are $10,000. But if you deposit the money in a bank and earn 2% interest, you actually would have $102,000 in your account after a year and opportunity costs in this case would be $8,000 ($ 10000 - $ 2000). ex. Business case: productionAssume your client produces fabrics. A square meter of fabric costs $8 in production and it can be sold for $10 at a profit of $2. The client decides to build another factory which produces clothes. Instead of selling the fabric on the market, the client passes it on to the new factory. Total costs of production for clothes (which need 1 square meter) are $13 ($8 + $5) and they sell them for $16 with a profit of $3. What are the opportunity costs of this idea?Since the client has foregone his profit from selling the fabric, his opportunity costs are $2. In this case however, the new idea seems to be the better one as the client generates higher profits. Opportunity costs are still important, for example if you want to define the value and profitability of the idea: Opening a new factory will generate $1 ($3 - $2) after taking opportunity costs into consideration Most options will be mutually exclusive. Thus, deciding on one option usually means forgoing an alternative. Note that the the basic principle is always to go for the option with the highest opportunity costs since this option would be the most expensive if it is ignored. In the previous example of a small restaurant vs. pre-prepared food, we assumed the opportunity costs of pre-prepared food to be higher than of a small restaurant. Since the option with the highest opportunity costs is chosen, the net effect on business is still beneficial (expected revenues from pre-prepared food items MINUS expected revenues from small restaurant). Opportunity costs are closely related to discounting, which is a standard procedure utilized in finance. The discounting rate depicts the opportunity costs of investing the money for a certain interest rate somewhere else. Think about why we choose a discount rate of 5%. This is because we could opt for another investment (same risk-return ratio) that yields 5% as an alternative. In a case interview, you will need to use the concept of opportunity costs in cases that involve Valuation or M&A situations since in these cases you often need to determine client's willingness to pay for certain companies. The willingness to pay is mainly determined by the options you have and the associated opportunity costs practice case: Bain Case: Old Winery
Move Upmarket
to start to sell products for people with more money The brand is going/moving upmarket.
Cost of Revenue
Cost of revenue is the total of all costs incurred directly in producing, marketing, and distributing the products and services of a company to customers. Cost of revenue can be found in the company income statement.
Hedge currency rates
Currency Hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates. ... Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.
Interests
are costs of debts. The debts are listed on the balance sheet.
Growth Cycle Phase One
"Launch: Each company begins its operations as a business and usually by launching new products or services. During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase.<br><br>-In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle.<br><br>-Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business' profit but that are certainly reflected in its cash flow"
Return on investment (ROI)
"ROI = Profit from Investment / Investment Cost<br>*obviously, should be greater than 1 if you're planning on doing this"
Quick Ratio
= (Current assets - inventories) / current liabilities
Working Capital Ratio
= Current assets / current liabilities
How to Use a Balance Sheet
If you are given details from a balance sheet during your case, you can interpret the different components. Especially if you look at the development of certain figures or ratios by comparing data from previous years, you can generate useful insights.Look at: Current Assets Non-current assets Liabilities Equity
Cash Ratio
cash ratio = (cash + marketable securities) / current laibilities
Growth Cycle Phase Four
"Maturity: When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement.<br><br>-However, it's important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace."
Liquidate
-To liquidate means to sell an asset for cash.
# American households
100 million
People per household
3.2 people per household
Income distribution
30% high income<br>50% middle-income<br>20% low-income
US population
320 million
% US with car
91% of households have access to a vehicle according to DoT, and studies show that the average person spends 101 minutes a day in the car
Net Profit Margin
= net income / operating revenue considers all costs, also interest, and taxes. If net profit margins are different but operating margins are the same, you can infer that the variance is not directly caused by the core business, but rather due to differences in tax and interest payments. If you compare profit and loss statements from consecutive years, you will identify suspicious trends, which can be useful for solving a case. The cost breakdown of an income statement is MECE and can be used as an issue tree while solving a profitability case.
Debt Ratio
= total liabilities / total assets
Balance Sheet
A balance sheet, also known as the financial position statement, depicts a company's financial balance in terms of assets and liabilities/equity. As opposed to an income statement, the balance sheet can be seen as a snapshot of a business's situation since it shows the company's financial situation at a specific point in time. As a result, it does not allow conclusions about a company's performance over a time period but rather its status at a specific time point.
Capital Market
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold, in contrast to a money market
Current Assets
Cash: Usually, an increasing amount of cash is an indication of good performance and growth. Cash reserves secure a company against recessions and can be used as funds for investments. Too much cash, on the other hand, is suspicious: It might be a result of extraordinary sales or it is a sign of a firm's difficulties to find appropriate investments. Inventory: Large amount of inventories cause storage costs. Money is tied up in products, which could be used otherwise for investments (see opportunity costs). Growing inventory is often a sign of either decreasing sales or overcapacity in production. Receivables: The faster the firm collects money tied up in receivables the better, as cash as opposed to receivables can be invested or at least generate interest. Furthermore, early collecting of receivables decreases the default risk of single customers. Increasing receivables can be a sign of more sales, but also delayed payments from customers.
Why Is the CAGR Important in Consulting?
Consultants often like to compare the current year's growth rate with the following year's growth rate (see Benchmarking). Looking at year-over-year growth rates is often subjected to several one-off influencing factors. Additionally, consultants often have to work with Growth Plans that include a company's goals for the future (usually for the next 5 years). These growth plans, in turn, consist of a set of measures each having different impacts in different years. A question asked very often is: how much does the company grow on average? To answer this question, you need to use the CAGR. The CAGR shows the yearly growth of an indicator if it had grown at a steady rate Y-o-Y.
Contribution Margin
Contribution Margin=Sales Revenue − Variable CostsContribution Margin Ratio = (Sales Revenue − Variable Costs) / Sales Revenue
Cotribution Profit
Contribution Profit = Sales Revenue − Variable Costs
Liabilities
Current Liabilities are obligations, such as payments to suppliers. They must be paid within a short time frame. In the regular case, large current liabilities are not a problem as it is an advantage for a company if they are allowed to pay their bills late. However, in case of financial distress, increasing liabilities can become a problem. Non-current liabilities are usually credits and loans given by banks or bondholders. They can be both advantageous and problematic. Usually, debts are cheaper capital since interest paid for them is less than what a company pays to equity holders. Interests reduce the earnings a company generates and thus the taxes it has to pay. However, if debts and interest are too high, a company might run bankrupt if they cannot pay interest. In addition, large debt amounts increase the dependency on the general development of key interest rates.
Growth Cycle Phase Five
Decline: In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market.
The Two Sides of a Balance Sheet
Equity + Liabilities = Assets) A balance sheet consists of two sides: assets and equity/liabilities. As you can guess by the name, both sides should be balanced. On the one side, the balance sheet lists the value of all assets a company owns. These can be tangible (such as cash, receivables, and goods) or intangible (such as brand value or patents). They are sorted in terms of their liquidity, which is the ease of selling them in order to generate cash. Current assets are very liquid while long-term assets, or fixed assets, are less liquid.On the other side, the balance sheet shows how assets of a company are financed, meaning how assets were acquired. They are either financed through equity, which is the company owner's money, or they are financed by debt, which are liabilities the company owes to others. Balance Sheet example: Together with the Cash Flow Statement and Income Statement, the financial position is analyzed to derive an overview of a firm's (financial) situation. Key ratios structure the data to compare the firm with similar competitors and provide a quick overview for analysts (see benchmarking).
Growth Cycle Phase Two
Growth: In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow.
How to Solve NPV
How to Calculate The Net Present Value (NPV) PV is the present value FV is the future value i is the decimal value of the interest rate for a specific period n is the number of periods between present and future The following is the calculation of the above PV example with $102 future value at an interest rate of 2%, Below you can find a slightly different version of the above example, in which you receive $102 in two years instead of next year. The two-year investment earns you a theoretical interest two times, which is why you discount twice. The Net Present Value of those two $102 payments in one and two years is simply its sum.
Pareto Principal
Pareto`s 80-20 principle is a general rule of thumb that describes an unequal distribution between causes and effects. The principle states that 80% of overall results are driven by 20% of inputs. For example: 80% of work requires 20% effort, 80% of a project requires 20% of the time, and 80% of revenue comes from 20% of clients. When analyzing case problems, the Pareto rule can be utilized to diagnose big issues that might be caused by a much smaller problem. On the other hand, problems that seemingly look huge might result in only a small issue.
Limitations of The Net Present Value
In practice, the concept of net present value is common and is used oftentimes. Nevertheless, there are disadvantages and limitations of this key figure. For example, the calculated value is based on various assumptions. If one or more assumptions do not materialize in practice, the net present value and the actual benefit of an investment may differ. At the same time, the concept is susceptible to influence by the valuer. Individual assumptions can theoretically be changed until the result matches the expectations of the valuer. Consequently, the net present value has the highest informative value when an investor calculates it himself. Example: A company examines the benefits of investing in a new production line. The company assumes that the machine will be used for ten years and consequently plans with ten periods to determine the net present value. However, after seven years, customers no longer demand the product that has been produced. The production line has to be discarded in favor of a new machine. The originally calculated net present value is significantly lower than originally assumed due to the change in the utilization period. Although the net present value is a comprehensive concept, the secondary effects of an investment are not taken into account. The cash flow series used relates directly to the investment examined. The net present value cannot measure synergy effects in other parts of the company or, for example, an improved corporate image.
Non-current assets
Includes all assets which are not current, such as real estate and intangible assets. Companies cannot sell their fixed assets quickly. They are long-term investments necessary to run a business. The extent of non-current assets, therefore, depends highly on the industry. It can be useful to check if the investments in fixed assets are really business-relevant or serve other purposes.
Effect of Fed Funds Rate
Interest rates have a direct effect on consumer behavior, impacting several facets of everyday life. When rates go down, borrowing becomes cheaper, making large purchases on credit more affordable, such as home mortgages, auto loans, and credit card expenses. When rates go up, borrowing is more expensive, putting a damper on consumption. Higher rates, however, do benefit savers who get more favorable interest on deposit accounts.
NPV Shortcuts for Casing
It's unlikely that you will need to calculate a complex NPV during a case interview because the calculations tend to get overly complicated. But in some cases you can apply some shortcuts as discussed below: 1) Perpetuity: the NPV for infinite cash flows (meaning business will generate profits for an infinite period of time)For infinite cash flows, there is a simplified formula: Imagine you have to value a company in a case interview. A common approach is to define the value of a company as the sum of all its discounted future profits. If you assume that a company will have the same profits every year for an indefinite time horizon, you just divide the future value of all profits by the respective discount rate. For instance, if you expect the company to yield $100 every year, the company is worth $2500 (at a discount rate of 4%). To make this more pragmatic, you could assume that the company's profits will grow every year at a certain rate g. Especially for short-term horizons, defining expected growth is difficult. An approximated growth rate for profits that are far into the future is often around 2%. After a while, every business or product life cycle ends up in a competitive market environment and simply grows at the same rate as the overall economy. The above example recalculated with a continuous growth rate of 2% results in a net present value of $5000 for the company. Notice that the value is twice the value compared to the calculations without a growth. NPV calculations are very sensitive towards changes in inputs. Therefore, a sensitivity analysis is conducted in most cases. To do so you need to create a range of possible NPVs by using a range of possible growth and discount rates. 2. Find the right interest rate iFinding the correct discounting factor for NPV calculations is the business of entire banking departments. In general, there is one basic rule: the bigger the risk the higher the discount rate.The rationale behind this rule is simple: The less you can be sure about receiving future earnings, the less you value them. By increasing the discount rate, the NPV of future earnings will shrink. Discount rates for quite secure cash-streams vary between 1% and 3%, but for most companies, you use a discount rate between 4% - 10%, and for speculative start-up investment, the applied interest rate could reach up to 40%. In case interviews, you could ask for the discount rate directly or estimate it at 10% for most scenarios if the interviewer requests you to approximate it.
CAGR in Case Interviews
More than likely, you will not be asked to calculate a CAGR in a Case Interview but knowing what it means and also knowing the formula will get you through the majority of the cases during interviews. How to Calculate the CAGR: Formula Formula: As an easy way to check your results during case prep, you can use the CAGR calculator. Example and Calculation Your interviewer gives the following graph on a client's sales in the last 7 years and wants you to find their CAGR. Sales in 2006 were 0.8 million Euros (beginning value). In 2013, after 7 years, sales increased to 1.8 million Euros. This means, if the company grew each year from 2006 onwards with a rate of ~12% (12.28%), sales in 2013 would be 1.8 million Euros.
Net Income
Net Income=Revenues - Expenses
Advantages of NPV
Net Present Value (NPV) offers many advantages, all of which relate to the accuracy of the calculation in determining the actual value of a future amount of money under present conditions. The measurement is based on the time value of money theory, which indicates that a given amount of money is worth more now than the same amount of money in the future. Inflation rates and the rates at which invested money can grow in the future combine to form a discount rate that devalues future money. Because the discount rate is considered in the calculation, one of the main advantages of NPV is that it allows important financial decisions to be made. Business decisions are difficult to make at any scale, from deciding on a key purchase to deciding on a costly new project. It can be foolish to make these decisions without first considering the impact of time on money. For this reason, a calculation that takes into account the relationship between time and money, which is one of the main advantages of NPV, is critical. The perhaps most important advantage of the present value is its usefulness in a business decision. Once the NPV is calculated, the company making the decision needs to only compare current costs with the NPV. For example, a company that has the opportunity to purchase a new factory for $100,000 (USD) should only proceed with the purchase if the present value of future cash flows is greater than $100,000. Otherwise, it would be better for the company to invest the money elsewhere.
Common terms on Income Statements
Operating Revenues Operating Cots Gross PRofit Non-Operating Revenue and Cost Depreciation Interests Taxes
Positioning
Positioning refers to the place that a brand occupies in the minds of the customers and how it is distinguished from the products of the competitors and different from the concept of brand awareness.
Profit Margin
Profit Margin = Net Income / Revenue*Profit simply means the revenue that remains after expenses; it exists on several levels, depending on what types of costs are deducted from revenue. Net income, also known as net profit, is a single number, representing a specific type of profit. Net income is the renowned bottom line on a financial statement.**Logically, this will never be greater than one
The State of the Economy
Recession: The recession is technically over Any crises? Employment rate: natural rate is ~4%, 5.4 percent as of July Interest rates: Fed's benchmark interest rate currently bw 0-0.25% Strength of the dollar relative to popular currencies (Euro, pound, yuan, yen):
Growth Cycle Phase Three
Shake-Out: During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market. Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.
Why Use NPV?
The NPV is a strong indicator for companies to determine whether a project is profitable or not. As it considers the interest rate and inflation rate (which are usually equal to one another), the real value of money at every year of the project</strong> can be considered. If the calculated NPV is positive the company can argue that the project or investment will be profitable since the earnings generated exceed the costs, all calculated in the present value of dollars. On the other side, if the calculated NPV is negative, it is an indicator for a company to step back from an investment o project since it will result in a net loss. Thus, the NPV can be a valuable tool for companies to evaluate whether to invest in a project or not.
Cash Flow Statement
The cash flow statement belongs to one of the three financial statements in addition to the balance sheet and income statement. Cash flow statements show the inflow/outflow of cash. The key difference between a cash flow statement and an income statement is that while an item gets listed in the income statement as soon as it is accrued, the same item gets listed in the cash-flow statement only after the actual payment has happened.
Why Do Fed Funds Rates Change
The federal funds rate is a monetary policy tool used to achieve the Fed's goals of price stability (low inflation) and sustainable economic growth. Changing the federal funds rate influences the money supply, beginning with banks and eventually trickling down to consumers. The Fed lowers interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and perhaps inflation. Inflation eats away at purchasing power and could undermine the sustainability of the desired economic expansion. On the other hand, when there is too much growth, the Fed will raise interest rates. Rate increases are used to slow inflation and return growth to more sustainable levels. Rates cannot get too high, because more expensive financing could lead the economy into a period of slow growth or even contraction.
Ratios for Income Statements
The income statement is a great tool to determine the profitability of a firm. Looking at financial ratios, the variety of possible profitability measures allow deeper analysis and comparison of firms (see benchmarking). Includes: Gross Profit Margin Operating Margins Net Profit Margin
Why Cash Flow, Balance Sheet, and Financial Statement are Interdependent
The income statement is used to derive the operating cash flow: In general, you start with EBIT. All included positions that have no actual influence on cash flows are subtracted. For example: to derive the earnings before interest and taxes (EBIT), depreciation is subtracted from the gross profit. Since depreciation is not actual cash flow, it has to be added again to get a true picture of a firm's cash flow. Likewise, positions that are not included in EBIT, but result in changes in cash flow need to be added, e.g. taxes. The balance sheets from two consecutive years are used to derive the investment and financing cash flow:Determine the investment cash flow over the asset side of the balance sheet: If assets increase due to investments over the past year, cash-outflows are necessary to acquire them. Likewise, if assets such as inventory decrease, they result in cash inflows from sales.Use the financing side of the balance sheet to derive the financing cash flow. If equity or liabilities increase a cash inflow must have happened. Of course, you can buy assets immediately through debts meaning that the cash from getting credit is directly used for the asset. Consequently, cash flows possibly cancel each other out.The sum of all three cash flows (operating, investment and financing) is the final change in cash. You can find this change in the balance sheet as the difference in cash positions between the current and preceding year.
Income Statement / Profit and Loss Statement
The income statement or profit and loss statement (P&L) is a summary of the annual revenues, costs, and profits/loss, and is one of the three financial indicators in addition to balance sheet and cash flow statement. As opposed to the cash flow statement, the income statement registers income and expenses at the accrual date. For instance, when a company receives a bill, it shows up in the company's income statement the same day when the bill is incurred. Note that in a cash flow statement, the cost is not accounted for as cash outflow until the bill is actually paid.
Penetration Rate
The penetration rate (also called penetration, brand penetration or market penetration as appropriate) is the percentage of the relevant population that has purchased a given brand or category at least once in the time period under study.
Debt Ratios
These show a company's extent of debts. The debt ratio gives the percentage of assets that are financed by debt. Leverage compares Liabilities and Equity directly but has basically the same meaning.
Barriers to Exit
Typical barriers to exit include highly specialized assets, which may be difficult to sell or relocate, and high exit costs, such as asset write-offs and closure costs. A common barrier to exit can also be the loss of customer goodwillIncludes:-Direct exit costs:-Indirect opportunity costs of exit:-Fear of missing potential upturn.Other factors that may form a barrier to exit include:-Government and social restrictions. Often based on government concerns for job losses and regional economic effects.
Effects of interest rates on the economy
When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy.
What it Means When the Fed Cuts Rates
When the Fed "cuts rates," this refers to a decision by the FOMC to reduce the federal fund's target rate. The target rate is a guideline for the actual rate that banks charge each other on overnight reserve loans. Rates on interbank loans are negotiated by the individual banks and, usually, stay close to the target rate. The target rate may also be referred to as the "federal funds rate" or the "nominal rate." The federal funds rate is important because many other rates, domestic and international, are linked directly to it or move closely with it.
Land Bank
a large body of land held by a public or private organization for future development or disposal
Due Diligence
an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.
Free Cash Flow
another type of cash flow important for investors. It depicts the amount of cash that can flow to a company's security holders in terms of dividends or interests without extracting necessary money for daily operations. Free cash flows are often used to determine the company value by applying discounting principles. Calculations can be done in several different ways. But the key idea remains the same: from a company's income, add everything that has been subtracted during profit and loss calculation that has no real influence on the level of cash. Subtract everything that is needed as an investment to keep the business running at a current level. This is usually working capital, or current receivables, payables, and capital expenditure (e.g., investments in plants, property, and equipment), which have to be renewed.
Rule of 72
approximates how long it will take for the size of something to double. If an economy grows at 2% per year, it will take 72 / 2 = 36 years for the size of that economy to double. If an economy grows at 7.2% per year, it will take 72 / 7.2 = 10 years for the size of that economy to double, and so on.
Financing Cash Flows
are a result of activities such as issuance and repurchase of bonds, equity, and dividends.
Operating Cash Flows
are a result of the core business in which cash flows are directly generated by manufacturing or selling a product. These are necessary to keep the business operating.
Investment Cash Flows
are long-term investments into assets such as property or plants.
Non-operating revenue and cost
are non-business-related incomes and expenses, such as revenue from selling real estate or costs of a lawsuit.
Taxes
are paid on earnings before tax (EBT)
Operating costs
are subdivided into COGS (costs of goods sold) and SGA (selling, general and administrative costs). COGS are directly caused by producing goods, such as material costs or the amount of labor used. SGA refers to costs that cannot be easily attributed to a single product, such as general brand advertisement. This cost differentiation is analogous to fixed and variable costs.
Estimation
ask if estimating is okay Estimations off by 20% are good enough
Economies of Scale
cost advantages of a company due to its large size. Most companies and businesses can realize advantages of scale that are a result of two effects: Fixed costs: spread across a large volume of units, decreasing the cost per unit Variable costs: low due to operational efficiencies and synergies. Larger production processes can be split into smaller, repetitive, and simpler tasks.Larger sizes of raw materials and production technologies, resulting in bulk discounts.Risks are distributed on a larger scale, leading to fewer demand peaks.Cheap automatized production technologies become feasible. ex. A power supplier has high initial costs for setting up the infrastructure. Once the infrastructure is set up, the additional costs of providing their service to an additional household are very little. Fixed costs will be split into more households and sudden demand drops have less impact because other households still require sufficient energy levels. Want to see a full case of how to apply the concept of Economies of Scale? Solve the Paper Print case
Operating Margins
non-operating costs and revenues are taken into account. Also, depreciation can be included as it is closely linked to a firm's business especially in asset-heavy industries. = EBITDA / operating revenue = EBIT / operating revenue
Liquidity Ratios
provide information about a firm's ability to repay debts. The Cash Ratio shows to what extent a company's cash and quickly sellable securities are sufficient to repay the debt. If the ratio is less than 1, there is not enough cash to repay all liabilities due in one year.Include: Cash Ratio Quick Ratio Working Capital Ratio The Quick Ratio and Working Capital work similarly, however, more illiquid assets are included in these ratios