IBD Interview Preparation

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WHAT ARE THE THREE MAIN FINANCIAL STATEMENTS?

There are 3 key financial statements:

Income Statement: it is a way to walk through the revenues and costs of a company. It starts
with Sales/Revenues and goes down to Net Income (except for Financial Institutions).
Through the Income Statement, the Analyst can have a view on the Companys cost
structure (variable vs. fixed costs) and of the Companys efficiency (margins). The main goal
of the IS or P&L is to calculate tax

Cash Flow Statement: it is the most important statement in Finance: cash is king. A cash
flow statement is divided in 3 main categories: 1) cash flows from operations, 2) cash flows
from investing activities and 3) cash flows from financing activities

Balance Sheet: it is a snapshot of the company at a particular point in time. It shows the
level of stocks, debts, equity etc of the company. It has 3 main aggregates: 1) assets, 2)
liabilities and 3) equity where assets = liabilities + equity

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WALK ME THROUGH THE MAJOR LINE ITEMS OF AN INCOME STATEMENT

Revenue: what the company sells (products or services)

COGS: cost associated with the sales (if the company sells chairs, it may be the wood and
steel used in the production)

Operating expense: personnel, marketing, R&D, rent

Depreciation: represent the expense (non-cash) linked to the use of tangible assets

Amortization: represent the expense (non-cash) linked to the use of tangible assets

Interest expense: expense linked to debt liabilities

Interest income: income linked to cash and cash equivalent (the company invests its cash in
short term cash securities)

Taxes: taxes declared to tax authorities (rate depends on the country of operation)

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WHICH OF THE VALUATION METHODOLOGIES WILL RESULT IN THE
HIGHEST VALUATION?

Most of the time, Discounted Cash Flow valuation will give the higher valuation. DCF is an
intrinsic value methodology. It will grasp the full value of the company.

It is also a control-based methodology (including control premium), which gives higher

valuation.

In conclusion, it is very likely that:

DCF > LBO (WACC for a DCF is usually lower than the WACC in a LBO
transaction)

DCF > Trading Comparable

Here is an overview of a Football Field, a summary valuation page which is often

shown in books to potential clients and clients:

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WHAT IS WORKING CAPITAL? HOW DO YOU COMPUTE IT?

Working capital is a measure of a companys operational efficiency and short-term financial

health. It is calculated as Current Assets Current Liabilities:

While analyzing working capital, it is important to look at the variations. Current assets are
a measure of the cash tied up in Inventories, Accounts Receivable etc while Current
Liabilities, is the cash provided by Suppliers (Accounts Payable).

Analysis of working capital is a way to analyze how the company is dealing with its clients
and suppliers: does it get pay first before paying its suppliers? Is its situation changing
because of pressure from the supplier side? How powerful is the company in negotiating
good deals with its clients? How good is the company in managing inventories?

The analysis of working capital is particularly important as it has a direct effect on cash
generation. Investors will look at how efficient the company is in managing its working
capital:

Get an idea of how much cash it generates/ consumes

How much cash will the company need to finance its working capital?

If things go wrong (economic crisis, suppliers decide to shorten payment period),

how would it affect the company?

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