【正文】 llowing for expected inflation differentials ? Real historic rates vary between countries Document number 39 … But hurdle rates have fundamental weaknesses ? Arbitrary ? liable to cause over/underinvestment (faster/slower growth) ? Can lead to ―politicallycharged‖ material decisions。 Change of working investment = Operating cash flow + Desinvestments – Investments = Free cash flow (to Firm) 1) Calculated figure (not the actual taxes) for a fully equity financed pany Document number 30 Working cash balances + Accounts Receivable + Inventory + Other Current Assets Accounts Payable Accrued Liabilities Other Current Liabilities = Net working investment Changing working investment Net working investment (NWI) ? NWI is the balance of the accounts in the current portion of a pany‘s balance sheet that move with normal business activity (., move with sales) and operating decisions, but not with financing decisions. ? NWI represents the investment in current assets and liabilities required to support sales. ? NWI differs from ―Working Capital‖ which includes other accounts that do not necessarily move with sales, such as cash and shortterm debt. Source: Roland Berger Analysis Document number 31 NWI is useful because it helps us to understand the business of target pany ? Focus on the operating aspects of the business independent of discretionary financial decisions (., changes in cash and shortterm debt) ? Better understand how an industry works by analyzing its NWI ? Identify changes in the management of the business as well as changes in the business environment ? Understand how a particular pany works by paring its NWI to your expectations and its petitor‘s NWI ? Understand how a pany‘s performance is affected by business and industry cycles and seasonality ? Understand how management decisions (such as trade policies, accounting practices, buying and selling a business, etc.) can affect a pany‘s NWI ? Forecast a pany‘s investment requirements to support future sales, which affect a pany‘s debt capacity and valuation Source: Roland Berger Analysis Document number 32 However, there are some industries where NWI dose not apply Utilities Banks and insurance panies Securities firms ? The industry uses some unusual accounting practices due to government regulation and industry specific financial reporting standards. ? Banks and insurance panies do not invest in receivables and inventory as we think of them for nonfinancial services panies. ? It is difficult to distinguish current from long term assets and liabilities, given that assets are markedtomarket daily and are quite liquid. Source: Roland Berger Analysis Document number 33 Some business are sensitive to various cycles and by understanding these will have accurate forecast of NWI Cycles impact NWI Seasonality ? Seasonal panies sell a relatively high proportion of their annual sales in one season. – Department stores, for example, do most of their year‘s business during the December holiday season. ? Simply looking at the annual financial statements will not disclose this. Seasonality can be better determined by looking at quarterly reports. Business cycle ? Some panies‘ sales are sensitive to general economic conditions (. GNP) and their sales rise and decline during economic expansions and contractions. – It takes time for manufacturers to react to economic downturns, resulting in higher inventories. – Customers also tend to pay their bills more slowly, increasing receivables. These factors increase NWI/Sales. ? Remember to analysis how the pany performed during past business cycles. Industry cycle ? Some industries have cycles that are peculiar to it and are unrelated to the economy as a whole. – An example of this is the 36month poultry cycle. The cycle occurs as follows: As poultry farmers raise chickens, supply begins to outweigh demand, causing farmers to cut back their chicken production. This leads to undersupply so farmers increase chicken production, again resulting in supply exceeding demand, and the cycle continues. Source: Roland Berger Analysis Document number 34 Changes in NWI need to be evaluated Source: Roland Berger Analysis Looking at the behavior of the individual ponents of NWI and their relationship to sales and Using financial ratios: Receivables Days = (Average Accounts Receivable/Sales) 365 This shows how long it takes to convert accounts receivable into cash. A receivables days ratio that is significantly longer than the industry standard or the normal credit terms of the pany or one that is growing may indicate credit management problems. A ratio lower than the industry standard may indicate restrictive credit management. Inventory Days = (Average Inventory/COGS) 365 This shows how fast the inventory is converted from raw material into sales. If this ratio is rising, too much cash may be tied up in inventory relative to the level of sales. Payables Days = (Average Accounts Payable/COGS) 365 This shows how fast payables are paid by the pany. When this ratio is rising, it may indicate more favorable credit terms or late payment of bills. When falling, it may indicate tightened credit terms from suppliers. NWI evaluation methods Document number 35 B. Discount cash flow (DCF) B1. Cash flow B2. Discount rate and WACC B3. Terminal value B4. Common DCF Qamp。A Document number 29 Determination of cash flows Earnings before interest and taxes (EBIT) – Taxes1) + Depreciation 177。 Change of provisions 177。A transactions Selected aspects of the DCF method assumptions judgment Po