1. Miaomiao Li BSc. MSc. CPm Small, Dip. CIMA
Statement of financial position and Business value
Miaomiao Li BSc. MSc. CPm Small, Dip. CIMA

2. Learning Subjects
Understanding and production of Statement of Financial position (SOFP)
Calculation and explanation of Financial Indicators
Common Business Evaluations techniques
Balance sheet evaluation
Multiple based evaluation
Free cash flow evaluation

3. What is Statement of Financial Position (SOFP)
A ‘snapshot’ of the financial position of the business at a particular point in time. Also call it Balance Sheet
It is comprised of three main components: Assets, liabilities and equity
These three segments give investors an idea as to what the company owns, as well as the amount invested by shareholders.

4. The SOFP format What has the business got? Where did it come from?
Non-current assets
Current assets
Where did it come from?
Current liabilities
Long-term liabilities
Capital & retained profit
(owner’s equity)
Cut off between current and non-current (long-term) is one year

5. What is Asset
Assets (practical definition): item of value owned or controlled by the business that can be converted into cash
Assets are reported on a company’s SOFP, and they are bought or created to increase the value of a firm
Current, Non-current, and Intangible Assets

6. Current Assets Current assets are:
a) short-term economic resources that are expected to be
converted into cash within one year.
b) cash or cash equivalent
c) is held primarily for the purpose of being traded
d) is expected to be realised in, or is intended for sales or
consumption in, they entity’s normal operating cycle
CIMA terminology
I.e. cash/cash equivalents, accounts receivable, inventory, bank balance, and various prepaid expenses.

7. Non Current Assets
Non-current assets (previously known as Fixed assets) are long-term resources that company owns.
Acquired for retention by an entity for purpose of providing a service to entity and not held for resale in normal course of trading
CIMA Terminology
I.e. land, plants, equipment/machinery and buildings.

8. Intangible Assets
Intangible assets are non-physical, meaning they cannot be touched. They have value because they represent an advantage to a business or organization.
I.e. People, Band name, License, Goodwill, copyright, etc

9. What type of assets are they?
Current Asset
Non-Current Asset
Intangible Asset
Inventory
Accounts Receivavles
Brand
Cash/Bank balance
Intellectural Property
People
Property, Plant & Equipment

10. What is Liability
Liabilities (practical definition) : obligations or financial debt owed by the business at a point in time
Current liabilities – reasonably expected to be liquidated within a year.
I.e. wages, taxes, and accounts payable, portions of
long-term loan to be paid this year.
Long-term liabilities – reasonably expected not to be settled within a year.
I.e. long-term loan, notes payables, long-term
leases,, and long-term product warranties

11. Are they Liabilities? On balance sheet? Liabilities? Short-term Debt
Accounts Payable
Tax/Interest Payable
Short term Bank Loan
Purchases
Long term bond
Salaries/Wages

12. Capital and Equity
(Share) Capital: total amount initially input by shareholders to the business. In return for their investment, shareholders gain a share of the ownership of the company
Retained profit: percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt
Owner’s equity: a source of the company's assets. Owner's equity is sometimes referred to as the book value of the company

13. The Accounting Equation
Reveal the accounting equation and explain that this is a fundamental concept of finance. Although the numbers may change over time this relationship will always hold.
Flipchart example to clarify the above
Set the scene for delegates. Imagine they are planning to buy a house for £60,000. They can obtain a mortgage for £50,000 so in order to buy the house need to input £10,000 of their own money (they are the sole shareholder of their little ‘property’ company. The house can now be bought because of the accounting equation:
60,000 = 50, ,000
The £10,000 represents ‘capital’ – an amount of money put in by the ‘owner’
Now imagine a year later the house has risen in value to £70,000. The mortgage was ‘interest only’ so whilst interest has been paid (and recorded in the P&L) the mortgage outstanding is still £50,000. The equation must now balance as follows with C&R being the balancing number
70,000 = 50, ,000
The £20,000 is made up of the original £10,000 and an additional £10,000 ‘profit’ that the business has generated for its ‘owner’ in the first year of trading. Ask delegates a number of questions:
What does the profit represent? (rise in value of the house)
Who does it belong to? (the owner)
Is it a cash profit? (no, the owner has ‘allowed’ the business to keep it, tied up in the asset
How can the owner get it back? (by selling the house – analogous to a shareholder selling shares
Refer back to the definition of capital and reserves on which should make more sense
Assets = Liabilities + Capital & Retained profit (owner’s Equity) 13

14. Standard SOFP format

15. Siemens 2016 SOFP

16. Example – Statement of Financial Position

17. Business valuation Financial indicators Non-Financial indicators
Profitability
Liquidity
Asset turnover
Non-Financial indicators
Balanced Scorecard
NFPIs
Benchmarking

18. Financial Indicators – Profitability
Return on capital employed (ROCE)
Gross profit margin
Operating profit margin
Net profit margin
ROCE measures how well the business is doing in relation to the investment made by its shareholders.
Profit margin measures how much a company earns (Gross/Net) relative to its sales.

19. The drivers of profit margin
Pricing
Costs
Volumes
Competition
Quality

20. Financial Indicators – Liquidity
Current Ratio
Acid-Text (Quick) Ratio
Receivable days
Payable days

21. The drivers of liquidity
Fixed Asset
Inventory
Current Assets
Payment terms
Loan

22. Financial Indicators – Efficiency
Asset turnover
Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.
If the ratio is 1, it means company is generating £1 revenue per pound of assets invested.
Higher ratio = better performing

23. Example – Ratio Analysis

24. Enterprise Value
Enterprise Value = Market Capitalization + Market Value of Debt – Cash and Equivalents

25. Price/earnings ratio - definition
Price/earnings (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. 
Where EPS = earnings ÷ total shares outstanding
Allows companies to be classified as over- or under-valued relative to the sector, market or historic levels

26. EV/EBITDA Method
EV/EBITDA is a financial ratio that compares a company’s Enterprise Value to its annual EBITDA.
EBITDA Multiple = Enterprise Value / EBITDA
EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization.

27. EBITDA Formula Revenue X Less : cash operating costs (X) EBITDA
Less : depreciation and amortisation
Profit/loss from operations
Less : Interest and tax
(x)
Net profit for the period x

28. Free Cash Flow method
Free cash flow valuation method is to find out the present value of the cash flow
In order to determine the value of a firm, an investor must determine the present value of operating free cash flows.
Free cash flow present value = Cash flow x Cost of capital (%)
(use discount factor table to find the rate)

29. Example – Firm value evaluation

30. Thank you!