Finance and accounting shortcuts

1. Finance & Accounting
Shortcuts

2. Accounting Equation
2
Assets = Liabilities + Equity
= = =
Current Assets
Current
Liabilities
Capital
+ + +
Fixed Assets Long Term Debt Reserves
+ +
Intangibles
Returned
Earnings
+
Revenue
−
Expenses
−
DividendsBasel Omar Abu-Ali

3. Accounting Balance
3
Assets Liabilities Equity
Assets
+ − + +
− + − −
Liabilities
+ − −
− + +
Equity
+ −
− +
Basel Omar Abu-Ali

4. Financial Analysis
Common-size (to Sales)
Common-size (to Assets)
Trend – History
Last year same period
Budget Variance
Benchmarking
Forecast
DCF
4Basel Omar Abu-Ali

5. Financial Ratios (1)
5
(Cash +
Marketable
Securities)
Current
Assets
(Current
Assets −
Inventory)
Total Assets
Total
Liabilities
Cash Flow
from
Operations
/
Total Assets Debt Ratio CFO / Assets
Current
Liabilities
Cash Ratio
(/) Liquidity
Ratio (−)
Working
Capital
Quick Ratio
Equity
Financial
Leverage
Debt to
Equity Ratio
CFO /
Liabilities
Interest CFO / Interest
Basel Omar Abu-Ali

6. Financial Ratios (2)
6
Sales Purchases COGS Gross Profit EBIT Net Profit
/
Receivables
Receivables
Turnover
Inventory
Inventory
Turnover
Fixed Assets
Fixed Assets
Turnover
Total Assets Assets Turnover Return on Assets
Payables
Payables
Turnover
Equity Return on Equity
Sales
Gross Profit
Margin
Operating Profit
Margin
Net Profit Margin
Interest
Interest Coverage
Ratio
Basel Omar Abu-Ali

7. Cash Conversion Cycle
7
365
/
Receivables Turnover Days of sales outstanding
+
Inventory Turnover Days of inventory in hand
=
Operating Cycle
−
Payables Turnover Days of payables
=
Cash Conversion Cycle
Basel Omar Abu-Ali

8. Capital Budgeting–Feasibility Study–Business Plan
8
Business Plan
=
Feasibility Study + Documentation
=
Capital
Budgeting
+ Market Study
= +
Financial Study Technical Study
Basel Omar Abu-Ali

9. Free Cash Flow to Firm (FCFF) & Free Cash Flow to Equity (FCFE)
9
Net Profit Net Profit
+ +
Noncash items (Depreciation) Noncash items (Depreciation)
+
Interest (1−Tax)
− −
Changes in Working Capital Changes in Working Capital
− −
CAPEX CAPEX
+
New (or repayment of) debt
+ +
TV TV
= =
FCFF FCFE
Basel Omar Abu-Ali

10. Investment Appraisal Indicators
10
Payback
Period (PBP)
Discounted
PBP
Accounting
Rate of
Return
(ARR)
Net
Present
Value
(NPV)
Internal
Rate of
Return
(IRR)
Profitability
Index (PI)
Simple calculation Y Y
Income approach Y
Cash flows approach Y Y Y Y Y
Ignores cash flow after payback
period
Y Y
Considers TVM Y Y Y Y
Discount rate Y Y Y Y
Terminal value Y Y Y
Results
# Years Y Y
Value Y
% Y Y
>1< Y
Basel Omar Abu-Ali

11. Key (Net Present Value or NPV) Value Drivers (1)
Value
RFR
Beta
Market Rate
Interest Rate
WACC
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12. Key (Net Present Value or NPV) Value Drivers (2)
Value
Tax Rate
Growth Rate
Terminal Value
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13. Merger & Acquisition (M&A)
13
Firm Firm Firm(s) Operating
Merger A + B = A or B
Acquisition A + B = A and B
Consolidation A + B = C
Joint Venture A + B = A and B and C
Basel Omar Abu-Ali

14. Multiples
14
Enterprise Value (EV) Market Share Price Dividends
/
Sales EV to Sales Price to Sales
Book Value Market to Book
Earnings per Share (EPS) Price to Earnings Payout Ratio
Market Share Price Yield Ratio
EBITDA EV Multiple
EV = Market Capitalization + Market Value of Debt − Cash
Market Cap. = Shares Outstanding × Market Share Price
EBITDA = Earnings before interest, taxes, depreciation, and amortization
Basel Omar Abu-Ali

15. Options
15
CALL
LONG Owner Buyer Right to buy
SHORT Writer Seller Obligation to sell
PUT
LONG Owner Buyer Right to sell
SHORT Writer Seller Obligation to buy
CALL
Market Price > Strike Price In the money
Market Price = Strike Price At the money
Market Price < Strike Price Out of the money
PUT
Market Price < Strike Price In the money
Market Price = Strike Price At the money
Market Price > Strike Price Out of the money
Option
Value
= Intrinsic Value (IV) + Time Value
= =
CALL
Market Price − Strike
Price
Premium − IV
PUT
Strike Price − Market
Price
Basel Omar Abu-Ali

16. Price-Earnings Ratio (P/E Ratio)
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P/E =
D/E
= P =
D
= K =
D
+ G
(K − G) (K − G) P
E = EPS =
Net Income D: Dividends
Common
Shares
P: Price
G: Growth rate
Ke: Cost of equity
G =
(1 − D/E) ×
ROE
Kd: Cost of debt
We: Weight of equity
Wd: Weight of debt
ROE =
Assets
×
Net Income
×
Sales RFR: Risk-free rate
Equity Sales Assets B: Beta
MR: Market return
K = Hurdle Rate = Discount Rate = WACC
WACC = ( Ke × We ) + ( Kd × Wd )
= = = =
CAPM Equity
Interest
(1−Tax)
Debt
=
(Equity +
Debt)
(Equity +
Debt)
RFR + B (MR
− RFR)

17. Goodwill
Acquired Maintained
Built
17Basel Omar Abu-Ali

18. Business Model Aspects
What
Why
How
When
Who
Where
18Basel Omar Abu-Ali

19. ‘S’-Holders
Stickholders
Stakeholders
Shareholders
•BOD
•Community
•Competitors
•Creditors
•Government
•Investment bankers
•Media
•Rating Agencies
•Researchers
•Small investors
• Customers
• Consultants
• Employees
• Management
• Potential investors
• Strategic Partners
• Suppliers
• Employees (stock options)
• Owners
19Basel Omar Abu-Ali