Valuation models in excel

What is valuation?

Valuation is the process of calculating the current worth of an asset or liability. Examples of assets are stocks, options, companies, or intangible assets. Concerning liabilities, they can be bonds issued by a company.

Common terms used when discussing the value of an asset or liability are market value, fair value, and intrinsic value.

Put simply, the value to be derived is the present value of all the future benefits (or cashflow) of the given asset or liability. This can calculated in various ways, with the use of financial and valuation tools, to determine the magnitude and risk of such future benefits. Take the example of an analyst determining the value of a company. He will consider the company’s management, the composition of its capital structure, the prospect of future earnings and market value of assets to come to terms with its value.

Valuation Models

There are a range of way to value assets and liabilities, some of which include:

Comparable Company (Comps) Analysis: Also-known-as ‘trading multiples’, ‘peer group analysis’, ‘equity comps’, or ‘public market multiples’, a Comparable Comps Analysis uses information from similar companies, in terms of size and industry, to reach a valuation on the value of a company. This method bases itself on the assumption that comparable organizations will have similar valuation values.

Precedent Transaction Analysis: This method of valuation analysis looks at the price that has been paid for companies similar in size and industry in the past to help value another company. Similar to the comparable comps analysis, due to the fact it is a relative model, the precedent transaction analysis may deliver an outdated valuation depending on when the merger or acquisition has taken place.

Discounted Cash Flow Analysis: A DCF analysis values the company based on the value of current cash flows in the future. This can be a complex method, requiring high levels of detail and intricacy. A DCF analysis is perhaps most accurate, and therefore useful, for companies with steady levels of income.

Other examples of valuation models include the Leverage Buyout Analysis and the Cost Approach (useful for real estate valuations).

It is common for a variety of valuation models used — the outcomes of each, such as the comparable comps, precedent, and DCF valuation models, to be mapped onto a ‘football field chart.’ This shows the variations regarding the different valuation outcomes, and then displays the average price.

All in all, Valuation in finance is key for many reasons. It is needed in investment analysis, capital budgeting and acquisitions transactions, financial reporting, or taxable events.

If you’d like some Valuation Excel Model Templates to facilitate your valuation, you will find the above valuation techniques and many more on the Eloquens catalogue. Also, if you have any questions or would like to discuss matters about a given tool, you can contact our authors whom will happily get back to you.

For more in depth information about Valuation, feel free to have a look through these links:

A more in-depth look at Valuation in general

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Valuation models in excel

Why valuation modeling?

Modeling is a useful tool for finance professionals who are part of various transactions, including mergers and acquisitions (M&As), initial public offerings (IPOs), and venture capital. It is also useful for non-finance professionals like marketing analysts or product development teams to perform market research.

The model can be used independently or in tandem with other models such as sensitivity analysis and scenario analysis. The goal of the model is to estimate the future value of stocks and predict the share price at a certain point in time.

For example, an analyst could use it to figure out how much money they would need to invest in an IPO today to reach their target price when they sell their shares after the IPO.

Modeling in Excel is sometimes the only way to perform valuation analysis if another spreadsheet-based financial application is not accessible or is too expensive. It can also be a more convenient way to perform valuation analysis when spreadsheets are the only tool available for data collection.

It enables one to estimate future financial metrics and use them to calculate ratios, such as price/book value (PBV), price/sales ratio (PSR), price-earnings-growth (PEG), and dividend yield. In addition, it is possible to evaluate changes in the current market value of an asset or company versus its intrinsic value. It can also examine multiples of peers or other companies within the same company.

This article will now cover how to value companies using the three approaches – discounted cash flow (DCF) analysis, precedent comparables, and comparable trading multiples. These models can be built from scratch in Excel or using an existing model or template.

Read on for more!

How to perform valuation modeling in Excel?

Valuation modeling in Excel may be performed by using existing templates or by creating a model from scratch.

DCF analysis is a staple of financial modeling and can be performed with a basic template. It involves estimating future cash flows until the end of the forecast period and is an intrinsic value approach. It is a fundamental approach that provides many options to incorporate various assumptions. Conversely, analyzing trading multiples and precedent comparables are relative value approaches.

In this context, intrinsic value refers to the company’s fair value computed as the sum of its future cash flows and terminal value, discounted at the cost of capital. Other variables being constant, higher future cash flows will translate into a higher intrinsic value in today’s terms.

For example, a person valuing a house using the intrinsic value approach might say, «This house is worth $5 million because if one were to rent this house for many years, they would be paying x amount in annual rent, and the total cash outflow over the years can be discounted to a present value of $5 million.»

Contrary to intrinsic value, relative value derives an asset’s worth by comparing it with the value of similar assets. For example, if a person were valuing a house using the relative value approach, they would say, «A similar house in the neighborhood sold for $4.5 million, but its area was slightly smaller. This house under consideration is fairly similar, so adjusting for its slightly larger area, it must be worth $5 million.»

The video below, taken from our Valuation Modeling Course, walks you through differences in intrinsic and relative valuation methods.

On the other hand, market value is a result of demand and supply. The demand for a stock is reflected in its price. The higher the demand, the higher the price. Therefore, a stock trading at a higher price than its intrinsic value is considered overvalued, and vice versa. However, up and down movements in stock prices are daily occurrences causing stocks to be overvalued and undervalued daily.

Allow us to take you through the steps involved in each of the three approaches to valuing a company.

Discounted cash flow (DCF) modeling in Excel

DCF analysis determines the intrinsic value by finding the value of all expected future free cash flows in present terms. It is an intrinsic form of valuation. Due to that, some experts consider it to be the best way to value a company, especially in periods where the market seems to be over or undervaluing assets.

This method accounts for the time value of money. Experts find free cash flows (operating cash flow minus CapEx) to be one of the best proxies for financial performance. Investors use this to evaluate whether the value of the expected cash flows today is greater than their investment or whether the returns are greater than the opportunity cost.

The video below is taken from our DCF Modeling Course. It illustrates the purposes of using the DCF approach and when it is used most.

WSO’s finance experts have crafted a free template specifically for DCF analysis with which you can experiment as you go on reading the steps involved in DCF analysis.

1. The UFCF estimate in the first forecasting period can come from the company’s financial statements or somesell-side analyst reports .
2. Next, the growth rates can be predicted by creating individual estimates for each year or by applying bulk estimates that apply the same growth rate for different phases. For example, the same growth rate may be applied from years 2 to 6, another growth rate from years 7 to 11, and another to calculate terminal value .
3. Then, the discount rate , cash and the liability balances, and the number of shares outstanding need to be input in the separate cells.
4. Once this is done, analysts need to decide which rate to use while discounting the UFCF.
5. The NPV function is used to calculate the net present value (NPV) of the estimated cash flows and the terminal value by discounting them at the cost of capital .
6. The current value of debt and cash can be subtracted from the NPV to determine the intrinsic value of equity.
7. The total intrinsic value can be divided by the shares outstanding to find the intrinsic value per share.

Everything You Need To Master DCF Modeling

To Help you Thrive in the Most Prestigious Jobs on Wall Street.

Comparable trading multiples in Excel

Comparable analysis (also called trading multiples analysis, comps analysis, or comps) is a relative value approach to valuation in which analysts observe trading multiples of comparable companies and use those ratios to calculate the value of a company. Unlike DCF analysis, comps do not account for the time value of money. Calculating relative valuation through comps is routine for analysts working in investment banking, corporate development, equity research, and private equity.

This method is similar to the precedent transaction method in many ways. The key differences are listed in the next section, which is about the precedent transaction method.

Below is an introductory video on trading comps from our Valuation Course.

Below, we will walk you through the list of steps to build valuation models for trading comps.

1. Find similar companies
2. Collect information
3. Build comps model
4. Compute relevant multiples
5. Value the company
6. Interpret results

Feel free to download this free modeling template on Multiples Analysis which is made with the sole intention of helping you understand this concept better. The above steps to comps analysis are explained below.

This task may not be as easy as it sounds because defining comparable companies can be subjective. Although data mines such as Bloomberg Terminal and CapIQ can be expensive, they are great portals to find all your needed information. They can give you detailed information about publicly traded companies. Analysts can filter companies based on industry, geography, size, growth, etc.

Once we have determined the closest matches to the company we are trying to value, we must gather their historical financial data. Again, data mines like Bloomberg Terminal can help cut down a major chunk of the laborious work. Without access to these databases, the data can still be obtained and entered into the model as it is publicly available, but it can get tedious. Depending on the stage of the company in the business lifecycle, we look at different metrics. Profit-related metrics like EBITDA or net income are considered heavily for a mature company. On the other hand, turnover-based metrics like revenue or gross margin carry more weight in the case of early-stage companies.

We can begin working on the comps valuation model with all the requisite data now at hand. We can start by listing the relevant data about the comparable companies. The most used metrics include share price, market cap, revenue, EBITDA, enterprise value (EV), earnings per share (EPS), and some estimates or assumptions for the future.

The next step is to compute the relevant ratios using the data gathered so far and the future outlook. The most common ratios used in comps analysis are EV/EBITDA, EV/Gross Profit, EV/Revenue, price-to-earnings (P/E), and price-to-book (P/B).

The valuation process is summarized below.

• Compute ratios for each of the comparable companies.
• Take the average of each ratio — for example, the average of the P/E ratios of all the comparables.
• Adjust each of these averages based on future outlook.
• Use the adjusted averages to determine different valuations of the company in question.
• Use the average of the different valuations of the company to arrive at the final valuation.

1. Present results:

The best way to communicate quantitative results is by using charts and graphs. The results should be graphed in an easily understandable manner to compare them with the results determined using other methods. A football field chart is one of the commonly used charts in comps analysis and precedent transaction analysis as it allows users to present ranges of valuations.

Comps analysis can ultimately tell us which companies are undervalued or overvalued based on different ratios. However, since the analysis ignores qualitative factors, results need to be interpreted with caution. Understanding why the company is overvalued or undervalued compared to other companies can usually mitigate the ambiguity. Companies may be overvalued or undervalued, or appear to be so, due to differences in growth prospects, Capex, capital structure, etc.

Precedent transaction modeling in Excel

In the precedent transaction approach to valuation, also known as transaction comps analysis, the company in question is compared to comparable companies in the industry which were recently sold or acquired. Since companies are often acquired at a premium, the valuation figures derived using the precedent transaction method also include a premium component. Due to that, it generally gives the highest valuation of a company, followed by comps analysis and then DCF analysis. This method is also a relative value approach to valuation like comps analysis. It also uses metrics and ratios of other companies to derive the value of the company being analyzed. Both the methods rely on comparable companies, which are not easy to pick. That said, the two methods have some key differences, as listed below.

• Data: Comps analysis uses data of publicly traded companies. The precedent transaction method uses transaction data of other recently acquired companies. The data for the latter is harder to gather in comparison with the former.
• Validity of results: Since M&A activity is infrequent, the valuations derived using transaction comps become stale over time. On the other hand, comps analysis can be done daily as the public market data is easily available.
• Acquisition premium: Companies are often acquired at a premium. The precedent transaction method uses companies that are recently acquired. Due to this, a premium component will inflate the valuations of the company being analyzed. Comps analysis does not suffer from this phenomenon.

Transaction comps are particularly useful for valuing companies for mergers and acquisitions (M&A) transactions. However, it is not as prominently used in the valuation business as the other two methods. The steps to value a company using transaction comps are listed below.

1. Select relevant transactions
2. Shortlist transactions
3. Spreading comps
4. Value the company
5. Present results

These steps involved in precedent transaction analysis are explained below.

Selecting the relevant historical transactions from the universe of all M&A transactions is the first step. Analysts screen for M&A where the target company is comparable to the company being valued. Companies may be considered comparable based on the following criteria–

• Industry
• Company size
• Financial metrics (revenue, EBITDA, etc.)
• Offerings (products and services)
• Geography
• Customer base

Information providers and data aggregators such as CapIQ can make the entire valuation process more efficient, as most of the necessary data, if not all, can be found in a single depository.

No two companies are exactly the same, so it is next to impossible to find perfectly comparable companies. Regardless, we try to find the closest matches in this step of the process. The relevant transactions identified in the previous step can be narrowed down by carefully understanding what the target companies do and discarding those that are not close matches.

«Spreading the comps» is investment banker lingo for creating spreadsheet models to analyze comparable multiples like P/E, P/B, EV/EBITDA, EV/Sales, etc. As part of this step, averages and medians for each ratio are calculated for further use.

The averages and the medians of the multiples calculated in the previous step are applied to the corresponding value drivers of the company being valued. Different ratios should produce different values for the company, thus creating a range for its valuation.

The best way to communicate quantitative results is by using charts and graphs. The results should be graphed in an easily understandable manner to compare them with the results determined using other methods. A football field chart is one of the commonly used charts in comps analysis and precedent transaction analysis as it allows users to present ranges of valuations.

Since precedent transactions analysis ignores qualitative factors, results need to be interpreted with caution. Understanding why a company is overvalued or undervalued compared to other companies can usually mitigate the ambiguity. Reasons for overvaluation or undervaluation could be due to takeover premium or differences in growth prospects, CapEx, capital structure, etc. The video below, taken from WSO’s Valuation Course, gives an overview of breaking down the output from transaction comps analysis.

Skills for performing valuation modeling in Excel

Valuation modeling in Excel is a skill and a practice. Modeling involves a much more comprehensive process than most imagine. It requires the modeler to know more than just Excel. It’s not about formulas or numbers; it’s about understanding the valuation process and how to use the innumerable tools. These skills can sometimes take years of experience to master.

Some skills for performing modeling in Excel include:

• Understanding the benefits of DCF analysis, trading multiples, and precedent transactions
• Being able to build financial models from scratch (or by using existing templates/models)
• Being able to build a three-statement model
• Understanding the significance of ratios
• Being able to prepare data using pivot tables
• Attention to detail
• Forecasting skills
• Presentation skills
• Ability to make reasonable and realistic assumptions
• Ability to simplify complex information

To perform financial modeling in Excel, a finance professional will typically be skilled in Microsoft Excel, Microsoft Access, or both. They should also have the fundamental knowledge of accounting, finance, and strategy. They should also know about financial analysis software like Bloomberg and Reuters. Additionally, a finance professional must be familiar with finance principles and the various types of analysis that can be performed with these tools.

Apart from these skills, financial modelers should also be aware of the current best practices in the industry to build models that are easy to comprehend by all users, meet their objectives effectively, and are robust.

Jobs that require valuation modeling in Excel

Valuation modelers typically work in a variety of fields, including commercial banking, private equity, investment banking, and venture capital. They may also be employed by third-party consulting firms that require them to develop or otherwise use valuation models.

Venture capitalists will often require the valuation models used in their investments to be tailored for their specific businesses. They will then present these valuations in pitch meetings with new business opportunities for potential investments or as part of their due diligence process to evaluate investment opportunities.

Companies selling financial products such as stocks, bonds, and mutual funds may also rely on valuation models created by valuation modelers to determine the value of their assets. These assets are typically valued based on their earnings before interest and taxes (EBIT), market capitalization, and other factors.

Financial modeling in Excel can be used in a variety of different scenarios. Some of the most common jobs that may require this skill are:

Why use Excel for valuation modeling?

Excel is a versatile tool for data analysis, the best perhaps, and valuation modeling is just one of the many ways it can be used. Because it’s so easy to create a spreadsheet in Excel and the software has wide-ranging capabilities, it’s often the best option for this type of work.

An innumerable amount of data is processed on Excel spreadsheets every day. All this data helps decision-makers make informed decisions. Investors are a subset of all decision-makers that use it to analyze data to optimize investment portfolios and evaluate investment opportunities.

Excel allows users to easily manipulate large amounts of data, create models through formulas, and perform advanced statistical calculations. It also enables users to navigate through humongous amounts of data easily. In addition, users can use formatting to differentiate between different data and make numbers look more presentable. Finally, it allows users to present the data visually through charts and graphs.

It offers users an extremely wide range of built-in formulae and functions, which play a huge part in financial modeling and data analysis. Even though most users will not end up using many of its functions, it is comforting to know that they are available at the click of a few buttons.

Besides the wide range of functionality that Excel offers, it also has a large user base. The user base acts as a community that shares resources on Excel. The large community can be an especially helpful source of learning resources. In addition, with such a large user base, any bugs in the software are found and fixed faster, or workarounds are shared rapidly.

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Financial modeling in Excel refers to tools used for preparing the expected financial statements predicting the company’s financial performance in a future period using the assumptions and historical performance information. One may use such financial models in DCF valuations, mergers and acquisitions, private equity, project finance, etc.  

Financial modeling in Excel is all around the web. There has been a lot written about learning financial modeling. However, most of the financial modeling pieces of training are the same. It goes beyond the usual gibberish and explores practical financial modeling used by Investment BankersInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more and Research Analysts.

In this free financial modeling Excel guide, we will take the example of Colgate Palmolive (2016 – 2020) and prepare a fully integrated financial model from scratch.

This guide is over 5,000 words and took me three weeks to complete. Therefore, save this page for future reference, and do not forget to share it.

Financial Modeling in Excel Training – Read me First

Step 1 – Download the Colgate Financial Model Template.

You can download this Colgate Financial Modeling Templates (Solved/Unsolved) here – Colgate Financial Modeling Templates (Solved/Unsolved)

Step 2 – Please note you will get two templates – 1) Unsolved Colgate Palmolive Financial Model and 2) Solved Colgate Palmolive Financial Model.

Step 3- You will work on the Unsolved Colgate Palmolive Financial Model Template. Follow the step-by-step instructions to prepare a fully integrated financial model.

Step 4 – Happy Learning!

If you are new to financial modeling, look at this guide on What is Financial Modeling?Financial modeling refers to the use of excel-based models to reflect a company’s projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.read more

How to Build a Financial Model in Excel?

Let us look at how one can build a financial model from scratch. This detailed financial modeling guide will provide a step-by-step guide to creating a financial model. The primary approach taken in this financial modeling guide is Modular. The modular system essentially means building core statements like income statements, balance sheets, and cash flows using different modules/sheets. The key focus is to prepare each statement step by step and connect all the supporting programs to the core statements on completion. We understand that this may not be clear now. However, you will realize this is very easy as we move forward.

•  Step 1 – Colgate’s Financial Model – Historical
•  Step 2 – Ratio Analysis of Colgate Palmolive
•  Step 3 – Projecting the Income Statement
•  Step 4- Working Capital Forecast
•  Step 5 – Depreciation Forecast
•  Step 6 – Amortization Forecast
•  Step 7 – Other Long Term Forecast
•  Step 8 – Completing the Income Statement
•  Step 9 – Shareholder’s Equity Forecast
•  Step 10 – Shares Outstanding Forecast
•  Step 11 – Completing the Cash Flow Statements
•  Step 12- Debt and Interest Forecast

Please note the following –

• The core statements are the Income StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more, Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, and Cash Flows.
• The different sheets are the depreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  read more forecast, working capital forecast, intangibles forecast, shareholder’s equityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more forecast, other long term items forecast, debt forecast scheduleA debt schedule is the list of debts that the business owes, including term loans, debentures, cash credit, etc. Business organizations prepare this schedule to know the exact amount of the company’s liability to others and manage its cash flows to prevent the financial crisis and enable better debt management.read more, etc.
• The different schedules are linked to the core statements upon their completion.
• This financial modeling guide will build a step-by-step integrated economic model of Colgate Palmolive from scratch.

Step 1 – Financial Modeling in Excel – Project the Historicals

The first step in the financial modeling guide is to prepare the historicals.

Download Colgate’s 10K Reports

One prepares financial models in Excel. The first steps start with knowing how the industry has been doing recently. Understanding the past can provide valuable insights into the company’s future. Therefore the first step is to download all the company’s financials and populate the same in an Excel sheet. For Colgate Palmolive, you can download the annual reports of Colgate Palmolive from their Investor Relation Section.

Create the Historical Financial Statements Worksheet

• If you download 10K of 2020, you will note that only two years of financial statement data is available. However, for financial modeling in Excel, the recommended dataset is to have the last 5 years of financial statements. Therefore, please download the last 3 years of the annual reportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more and populate the historical.
• Often, these tasks seem too tedious as it may take a lot of time and energy to format and put the excel in the desired format.
• However, one should not forget that this is the work you are required to do only once for each company. Populating the historicals also helps an analyst understand the trends and financial statementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
• So, please do not skip this. Instead, download and populate the data (even if you feel this is the donkey’s work).

Colgate Income Statement with Historical Populated

Colgate Balance Sheet Historical Data

Step 2 – Ratio Analysis 

The second step in financial modeling in Excel is to perform ratio analysis. We covered this in detail in part 1 of the series – Ratio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more

Vertical Analysis of Colgate

On the income statement, the vertical analysis is a universal tool for measuring the firm’s relative performance from year to year in terms of cost and profitability. Therefore, it should always be included as part of any financial analysis. Here, percentages are computed concerning net sales, which is considered 100%. This vertical analysis effort in the income statement is often referred to as margin analysis since it yields different margins concerning sales.

Horizontal Analysis of Colgate

Horizontal analysis is a technique used to evaluate trends over time by calculating percentage increases excelPercentage increase = (New Value — Old Value)/ Old Value. Instead of showing the delta as a Value, percentage increase shows how much the value has changed in terms of percentage increase.read more or decreases relative to a base year. It provides an analytical link between accounts calculated at different dates using the currency with varying purchasing powers. In effect, this analysis indexes the reports and compares these evolved. As with the vertical analysisVertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in percentage of the base figure. The formula is: (Statement line item / Total base figure) X 100read more methodology, issues that need to be investigated and complemented with other financial analysis techniques will surface. The focus is to look for symptoms of problems that one can diagnose using additional methods.

Let us look at the horizontal analysis of Colgate.

Liquidity Ratios of Colgate

• Liquidity ratios measure the relationship of the more liquid assetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company’s balance sheet.read more of an enterprise (the ones most easily convertible to cash) to current liabilities. The most common liquidity ratios are the current ratioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it’ short-term loans within a year. Current ratio = current assets/current liabilities
  read more, Acid test (or quick asset) ratio Cash RatiosCash Ratio is calculated by dividing the total cash and the cash equivalents of the company by total current liabilities. It indicates how quickly a business can pay off its short term liabilities using the non-current assets.read more.
• Turnover Ratios like Accounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
  read more turnover, inventory turnover, and payables turnover.

Also, have a look at this detailed article on Cash Conversion CycleThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more.

Operating Profitability Ratios of Colgate

Profitability ratiosProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more are a company’s ability to generate earnings relative to sales, assets, and equity.

Risk Analysis of Colgate

Through Risk AnalysisRisk analysis refers to the process of identifying, measuring, and mitigating the uncertainties involved in a project, investment, or business. There are two types of risk analysis — quantitative and qualitative risk analysis.read more, we try to gauge whether the companies will be able to pay their short and long-term obligations (debt). We calculate leverage ratiosDebt-to-equity, debt-to-capital, debt-to-assets, and debt-to-EBITDA are examples of leverage ratios that are used to determine how much debt a company has taken out against its assets or equity.read more that focus on the sufficiency of assets or generation from assets. Rates that looks at are:

• Debt to Equity Ratio
• Debt ratio
• Interest Coverage RatioThe interest coverage ratio indicates how many times a company’s current earnings before interest and taxes can be used to pay interest on its outstanding debt. It can be used to determine a company’s liquidity position by evaluating how easily it can pay interest on its outstanding debt.read more

Step 3 – Financial Modeling in Excel – Project the Income Statement

The third step in financial modeling is to forecast the income statement, wherein we will start with modeling the sales or revenue items.

Revenues Projections 

For most companies, revenues are a fundamental driver of economic performance. Therefore, a well-designed and logical revenue model reflecting the type and amounts of income flows accurately is extremely important. There are as many ways to create a revenue schedule as there are businesses. Some common types include:

• Sales Growth: Sales growth assumption in each period defines the change from the previous period. It is a simple and commonly used method but offers no insights into the components or dynamics of growth.
• Inflationary and Volume/ Mix effects: Instead of a simple growth assumption, a price inflation factor and a volume factor are used. This useful approach allows the modeling of fixed and variable costs in multi-product companies and considers price vs. volume movements.
• Unit Volume, Change in Volume, Average Price, and Change in Price: This method is appropriate for businesses with a simple product mix. It permits analysis of the impact of several key variables.
• Dollar Market Size and Growth: Market share and change in share – useful for cases where information is available on market dynamicsMarket Dynamics is defined as the forces of market constituents responsible for the shift in the demand and supply curve and are therefore accountable for creating and reducing the demand and supply of a particular product.read more and where these assumptions are likely to be fundamental to a decision. For example, the telecom industry.
• Unit Market Size and Growth: This is more detailed than the preceding case and is useful when pricing in the market is a crucial variable. (For a company with a price-discounting strategy. For example, a best-of-breed premium-priced niche player) e.g., the luxury car market
• Volume Capacity, Capacity Utilization Rate, and Average Price: These assumptions can be important for businesses where production capacity is essential to the decision. (In purchasing additional capacity, for example, or determining whether the expansion would require new investments).
• Product Availability and Pricing
• Revenue was driven by investment in capital, marketing, or R&D
• Revenue-based on installed base (continuing sales of parts, disposables, services, add-ons, etc.). Examples include classic razor-blade businesses and businesses like computers where sales of service, software, and upgrades are essential. Again, modeling the installed base is key (new additions to the floor, attrition in the ground, continuing revenues per customer, etc.).
• Employee based: For example, revenues of professional services firms or sales-based firms such as brokers. Modeling should focus on net staffing and revenue per employeeRevenue Per Employee is the ratio of total revenue over total number of employees in a particular accounting period. It gives an idea about how the business performed.read more (often based on billable hours). More detailed models will include seniority and other factors affecting pricing.
• Store, facility, or Square footage based: Retail companies are often modeled based on stores (old stores plus new stores each year) and revenue per store.
• Occupancy-factor-based: This approach applies to airlines, hotels, movie theatres, and other businesses with low marginal costs.

Projecting Colgate Revenues

Let us now look at the Colgate 10K 2020 report. First, Colgate has not provided segmental information in the income statement. However, as additional information, Colgate has provided details of each segment.

Source – Colgate 2020 – 10K, Page 119

Since we do not have any further information about the features, we will project the future sales of Colgate based on this available data. We will use the sales growth approach across segments to derive the forecasts. Please see the picture below. We have calculated the year-over-year growth rate for each element.

Now, we can assume a sales growth percentage based on the historical trends and project the revenues under each part. Therefore, total net sales are the total of the Oral, Personal & Home Care, and Pet Nutrition Segment.

Costs Projections

• Percentage of Revenues: Simple but offers no insight into any leverage (economy of scale or fixed cost burden.
• Costs other than depreciation as a percent of revenues and depreciation from a different schedule: This approach is the minimum acceptable in most cases and permits only partial analysis of operating leverageOperating Leverage is an accounting metric that helps the analyst in analyzing how a company’s operations are related to the company’s revenues. The ratio gives details about how much of a revenue increase will the company have with a specific percentage of sales increase – which puts the predictability of sales into the forefront.read more.
• Variable costs based on revenue or volume, fixed costs based on historical trends, and depreciation from a different schedule. This approach is the minimum necessary for sensitivity analysisSensitivity analysis is a type of analysis that is based on what-if analysis, which examines how independent factors influence the dependent aspect and predicts the outcome when an analysis is performed under certain conditions.read more of profitability based on multiple revenue scenarios.

Cost Projections for Colgate

For projecting the cost, the vertical analysis done earlier will be helpful. So, let us have a relook at the vertical analysis:

• Since we have already forecasted sales, all the other costs are some margins of these sales.
• The approach is to take the guidelines from the historical cost and expense margins and then forecast the future margin.
• For example, the cost of sales has been in the range of 39.2%-40.6% for the past five years. So we can look at forecasting the margins on this basis.
• Likewise, selling, general, and Administrative ExpensesSelling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.read more have been historically in the range of 33.8%-36.5%. We can assume the future SG&A expense margin on this basis. Likewise, we can go on for another set of expenses.

Using the above margins, we can find the actual values by back calculations.

We use the effective tax rate assumption to calculate the provision for taxes.

• Also, note that we do not complete the “Interest Expense (Income)” row as we will look at the income statement later.
• Interest Expense and Interest Income.Interest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more
• We have also not calculated depreciation and amortization, which we have already included in the cost of sales.
• This completes the income statement (at least for the time being!).

Step 4- Financial Modeling – Working Capital Schedule

Now that we have completed the income statement, the fourth step in financial modeling is to look at the working capital schedule.

Below are the steps that one must follow for a working capital schedule.

Link the Net Sales and Cost of Sales 

• Reference the past data from the balance sheet.
• Calculate net working capitalThe change in net working capital of a firm from one accounting period to the next is referred to as the change in net working capital. It is calculated to ensure that the firm maintains sufficient working capital in each accounting period so that there is no shortage of funds or that funds do not sit idle in the future.read more
• Arrive at an increase/ decrease in working capital
• Note that we have not included short-term debt and cash and cash equivalents in the working capital. We will deal with debt and cash and cash equivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more separately.

Calculate the Turnover Ratios

• Calculate historical ratios and percentages
• Use the ending or average balance.
• Both are acceptable as long as consistency is maintained.

Populate the assumptions for future working capital items

• Certain items without a prominent driver are assumed usually at constant amounts.
• Ensure assumptions are reasonable and in line with the business.

Project the future working capital balances

Calculate the changes in Working Capital

• Arrive at cash flows based on individual line items.
• Ensure signs are accurate!

Link up the Working Capital Forecasts to the Balance Sheet

Link Working Capital Items to the Cash Flow Statement 

Step 5 – Financial Modeling in Excel  – Depreciation Schedule

With the completion of the working capital schedule, the next step in this financial modeling is to project the CapexCapex or Capital Expenditure is the expense of the company’s total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more of Colgate and the depreciation and assets figures.

source – Colgate 10K 2020 Page – 72

• It has not provided depreciation and amortization as separate line items. However, it is included in the cost of sales.
• In such cases, please look at the cash flow statements, where you will find the depreciation and amortization expense. Also, note that the below figures are 1) Depreciation and 2) amortization. So, what is the depreciation number?
• Ending Balance for PPE = Beginning balance + Capex – Depreciation – Adjustment for Asset Sales (BASE equation).

Link the Net Sales figures in the Depreciation Schedule

• Set up the line items
• Reference net sales
• Input past capital expenditures
• Arrive at Capex as a % of net sales

Forecast the Capital Expenditure Items

• There are various approaches to forecasting capital expenditure. One common practice is to look at the press releases, management projections, and MD&A to understand the company’s view on future capital expenditure.
• If the company has guided future capital expenditure, we can take those numbers directly.
• However, if the Capex numbers are not directly available, we can calculate it crudely using Capex as % of Sales (as done below).
• Use your judgment based on industry knowledge and other reasonable drivers.

Reference Past Information and Calculate Net PP&E

• We will use Ending Balance for PPE = Beginning balance + Capex – Depreciation – Adjustment for Asset Sales (BASE equation)
• It is complicated to reconcile past PP&E due to restatementsA restatement is the revision of already issued financial statements of one or more companies to correct errors with material inaccuracy due to non adhering and complying with the GAAP, accounting mistakes, fraud, or clerical errors affecting part of the entire financial statement requiring a completely new audit.read more, asset sales, etc.
• It is therefore recommended not to reconcile the past PPE as it may lead to some confusion.

Depreciation Policy of Colgate

• Colgate has not explicitly provided a detailed breakup of the Assets. Instead, they clubbed all assets into the land, building, machinery, and other equipment.
• Also, useful lives for machinery and equipment are provided in range. In this case, we will have to do some guesswork to determine the average useful life left for the assets.
• Also, guidance for useful life is not provided for “Other equipment.” Therefore, we will have to estimate the useful life of other equipment.

Colgate 2020 – 10K, Page 79

Below is the breakup of 2012 and 2013 Property, Plant, and Equipment Details

Colgate 2020 – 10K, Page 125

Estimate the breakup of Property Plant and Equipment (PPE)

• First, find the Asset weights of the Current PPE (2020)
• We will assume that these asset weights of 2020 PPE will continue going forward.
• We use these asset weights to calculate the breakup of estimated capital expenditure.

Estimate the Depreciation of Assets

• Please note that we do not calculate depreciation of LandThe land is a company asset with an infinite useful life. As a result, it is not subject to depreciation, unlike other long-term assets such as buildings and furniture, which have a limited useful life and thus require their costs to be allocated to the accounting period.read more as land is not a depreciable asset.
• For estimating depreciation from Building improvements, we first make use of the below structure.
• Depreciation here is divided into two parts: 1)Depreciation from the building improvements asset already listed on the balance sheet, 2) depreciation from the future Building improvements.
• We use the simple Straight Line Method of depreciationStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more to calculate the depreciation from building improvements listed on the asset.
• For calculating future depreciation, we first transpose the Capex using the TRANSPOSE Function in ExcelThe TRANSPOSE function in excel helps rotate (switch) the values from rows to columns and vice versa. Being a part of the Excel lookup and reference functions, its purpose is to organize the data in the desired format. To execute the formula, the exact size of the range to be transposed is selected and the CSE key (“Control+Shift+Enter”) is pressed.
  read more.
• We calculate the depreciation from asset contributions from each year.
• Also, the first-year depreciation is divided by two as we assume the mid-year convention for asset deployment.

Total Depreciation of BuildingDepreciation of building refers to reducing the recorded cost of a building until the value of the structure either becomes zero or reaches its salvage value. In addition, it helps to map the revenue in the form of lease rental generated during the corresponding expenses.read more improvement = depreciation from the asset already listed on the balance sheet + depreciation from the future building improvements.

In the above process for estimating depreciation, one may calculate the depreciation of 1) manufacturing equipment & machinery and 2) other equipment, as shown below.

Total Depreciation of Colgate = Depreciation (Building Improvements) + Depreciation (Machinery & Equipment) + Depreciation (additional equipment)

Once we have found the real depreciation figures, we can put that in the BASE equation as shown below.

• With this, we get the ending net PP&E figures for each year.

Link the Net PP&E to the Balance Sheet

Step 6 – Amortization Schedule

The sixth step in this financial modeling in Excel is to forecast the amortization. Again, we have two broad categories to consider here – 1) GoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more and 2) Other Intangibles.

Forecasting Goodwill

Colgate 2020 – 10K, Page 88

• Goodwill comes on the balance sheet when a company acquires another company. It usually is complicated to project goodwill for future years.
• However, Goodwill is subject to impairment tests annually, which the company performs. Therefore, analysts are in no position to conduct such tests and prepare estimates of impairments.
• Most analysts do not project goodwill. They just keep this constant, which we will do in our case.

Forecasting Other Intangible Assets

• Colgate’s 10K Report notes that most of the finite life intangible is related to the Sanex acquisition.
• “Additions to Intangibles” are also complicated to project.
• Colgate’s 10K report provides us with the details of the next five years of amortization expenses.
• We will use these estimates in our financial model.

Colgate 2020 – 10K, Page 88

Calculate Ending Net Intangibles

Ending net intangibles are linked to the “Other Intangible Assets.”

Link Depreciation and Amortization to Cash Flow Statements

Link Capex & Addition to Intangibles to Cash flow statements

Step 7 – Other Long Term Schedule

The next step in this financial modeling is to prepare the other long-term schedule. It is when we prepare for the “leftovers” that do not have specific drivers for forecasting. In the case of Colgate, the other long-term items (leftovers) were Deferred Income TaxesDeferred income tax is a balance sheet item that can be either a liability or an asset since it is a difference in income recognition between the firm’s accounting records and the tax law, resulting in the company’s income tax due being different than the total tax expense reported.read more (liability and assets), other investments, and other liabilities.

Reference the historical data from the Balance Sheet

Also, calculate the changes in these items.

Forecast the Long Term Assets and Liabilities

• Keep the long-term items constant for projected years in case of no visible drivers.
• Link the forecasted long term items to the Balance SheetAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more as shown below.

Reference Other Long Term Items to the Balance Sheet

Link the long term items to the Cash Flow Statement

Please note that if we keep the long-term assets and liabilities constant, the change that flows to the cash flow statement would be zero.

Step 8 – Financial Modeling in Excel  – Completing the Income Statement

• Before we move any further in this Excel-based financial modeling, we will review the income statement.
• Populate the historical basic weighted average shares and dilute the weighted average number of shares
• These figures are available in Colgate’s 10K report.

Reference the basic and diluted shares

At this stage, assume that the future number of primary and diluted shares will remain the same as in 2020.

We are ready to move to our next shareholder’s equity schedule.

Step 9 – Financial Modelling – Shareholder’s Equity Schedule

The next step in this financial modeling in Excel training is to look at the shareholder’s equity schedule. The primary objective of this schedule is to project equity-related items like shareholder’s equity, dividends, Share buybackShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more, option proceeds, etc.

Colgate’s 10K report provides us with the details of common and treasury stock activities in the past years, as shown below.

Colgate 10K 2020 – Page 97

• Historically, Colgate has repurchased shares, as shown in the schedule above.
• Populate Colgate’s shares repurchase (millions) in the Excel sheet.
• Link the historical diluted EPS from the income statement.
• The historical amount repurchased should be referenced from the cash flow statementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more.

Also, have a look at Accelerated Share RepurchaseAccelerated share repurchase (buyback) is a strategy adopted by a publicly-traded company to acquire its outstanding shares in the market from the clients in large blocks via an investment bank.read more.

• Calculate the implied average price at which Colgate has done share repurchases historically. One may calculate the Amount repurchased / Number of shares.
• Calculate the PE multipleThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more = Implied Share Price / EPS

Colgate has not officially announced how many shares they intend to buy back. The only information that their 10K report shares are that they have authorized a buyback of up to 50 million shares.

Colgate 10K 2020 – Page 97

• We need to assume the share repurchase amount to find the number of shares repurchased. Based on the historical repurchase amount, we have taken this number as $1,500 million for all the future years.
• We need the projected implied share price of the potential buyback to find the number of shares repurchased.
• Actual share price = assumed PE multiplex EPS.
• One can assume future buyback PE multiple based on historical trends. We note that Colgate has repurchased shares at an average PE range of 17x – 25x.
• Below is the snapshot from Reuters that helps us validate the PE range for Colgate.

• In our case, we have assumed that all future buybacks of Colgate will be at a PE multiple of 25x.
• Using the PE of 25x, we can find the implied price = EPS x 25.
• Now that we have found the implied price, we can see the number of shares repurchased = $ amount used for repurchase / implied price.

Stock Options: Populate Historical Data

• The common stock and shareholder’s equity summary shows us the number of options exercises each year.

Colgate 2020 – 10K, Page 97

• Besides, we also have the option proceeds from the cash flow statements (approx).
• With this, we should be able to find an effective strike priceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more.

Colgate 2020 – 10K, Page 76

Also, note that the stock optionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more have contractual terms of eight years and vest over three years.

Colgate 2020 – 10K, Page 100

With this data, we fill up the options data as per below. We also note that the weighted average strike price of stock options for 2020 was $72, and the number of options outstanding was 27.541 million.

Colgate 2020 – 10K, Page 100

Stock Options: Find the Option Proceeds.

Our options data below shows that the option proceeds were $504 million in 2021. We have assumed that 7 million options exercise each year.

Stock Options: Forecast Restricted Stock Unit Data

In addition to the stock options, there are Restricted Stock UnitsRestricted Stock Units or RSU can be defined as stock-based compensation that is issued as company’s stock to an employee. The company establishes vesting requirements based on the performance of an individual and the length of the employment.read more are given to the employees and awarded and vested at the end of each three-year performance period.

Colgate 2020 – 10K, Page 99

Populating this data in the restricted stock units dataset.

The restricted stock units project to be (8.65/3.0 years), i.e., 2.88 million going forward.

Also, have a look at the Treasury Stock MethodTreasury Stock Method is an accounting approach assuming that the options & stock warrants are exercised at the beginning of the year (or date of issue, if later) & proceeds from the exercise of these options & warrants are used to repurchase shares in the market. read more.

Dividends: Forecast the Dividends

• Forecast estimated dividends using the Dividend Payout Ratio.
• Fixed dividend outgo per-share payout.
• From the 10K reports, we extract all past information on dividends.
• With the information on dividends paid, we can find the Dividend Payout Ratio = Total Dividends Paid / Net Income.
• We have calculated the dividends payout ratio of Colgate as seen below:

We note that the dividends payout ratio has been broadly in the range of 60%-66%. Therefore, let us assume the dividend payout ratio of 60% in the future years.

• We can also link the projected net income from the income statement.
• Using the projected net income and the dividends payout ratio, we can find the total dividends paid.

Forecast equity account in its entirety

With the forecast of share repurchase, option proceeds, and dividends, we are ready to complete the shareholder’s equity schedule. Link all these up to find the ending equity balance for each year, as shown below.

Link Ending Shareholder’s Equity to the Balance Sheet 

Step 10 – Shares Outstanding Schedule

The next step in this online financial modeling in Excel training is to look at the shares’ outstanding schedule. Summary of shares outstanding schedule:

• Basic Shares – actual and average
• Capture past effects of options and convertibles as appropriate
• Diluted SharesDiluted shares can be defined as the total number of shares that the company has at a particular point that can be converted into the normal share by the holders (convertible bond, convertible preferred stock, employee stock options). It is done by exercising the right to alter such shares into ordinary shares.read more – average
• Reference Shares repurchased and new shares from exercised options
• Calculate forecasted raw percentages (actual)
• Calculate average basic and diluted shares
• Reference projected shares to Income Statement (recall Income Statement Build up!)
• Input historical shares outstandingOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more information
• Note: Commonly, this schedule integrates with the equity schedule.

Input the historical numbers from the 10K report 

• Shares issuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more  (actual realization of options) and shares repurchased can be referenced from the shareholder’s equity schedule.
• The input weighted an average number of sharesWeighted Average Shares Outstanding is a calculation used to estimate the variations in a Company’s outstanding shares during a given period. It is determined by multiplying the outstanding number of shares (consider issuance & buybacks) in a given reporting period with their individual time-weighted portions. read more and the effect of stock options for the historical years.

Basic Shares (Ending) = Basic Shares (Beginning) + Share Issuances – Shares Repurchased.

Find the basic weighted average shares

• We find an average of two years, as shown below.
• Also, add the effect of options and restricted stock units (referenced from the shareholder’s equity schedule) to find the diluted weighted average shares.

Link Basic & diluted weighted shares to Income Statement

• Now that we have calculated the diluted weighted average shares, it is time to update the same in the income statement.
• Link up forecasted diluted weighted average shares outstandingWeighted Average Shares Outstanding is a calculation used to estimate the variations in a Company’s outstanding shares during a given period. It is determined by multiplying the outstanding number of shares (consider issuance & buybacks) in a given reporting period with their individual time-weighted portions. read more to the income statement as shown below

With this, we complete the shares’ outstanding schedule and time to move to our next set of statements.

Step 11 – Completing the Cash Flow Statements

We must fully complete the cash flow statements before we move to our next and final schedule in this financial modeling, i.e., the debt schedule. Until this stage, there are only a couple of incomplete things.

• Income Statement – interest expense/ income are incomplete at this stage
• Balance Sheet – cash and debt items are incomplete at this stage

Calculate Cash Flow for Financing Activities

Also, check out Cash Flow from FinancingCash flow from financing activities refers to inflow and the outflow of cash from the financing activities like change in capital from securities like equity or preference shares, issuing debt, debentures or repayment of a debt, payment of dividend or interest on securities.read more

Find net increase (decrease) in Cash & Cash Equivalents

Complete the cash flow statements

Find the year-end cash and cash equivalents at the end of the year.

Link the cash & cash equivalents to the Balance Sheet.

Now we are ready to take care of our last and final schedule, i.e., Debt and Interest Schedule

Step 12 – Financial Modeling in Excel  – Debt and Interest Schedule

The next step in this online financial modeling is to complete the debt and interest schedule. Summary of the Debt and Interest – Schedule.

Set up a Debt Schedule

• Reference the cash flow available for financing
• Reference all equity sources and uses of cash

Calculate Cash Flow from Debt Repayment

• Reference the beginning cash balance from the balance sheet.
• Deduct a minimum cash balance. We have assumed that Colgate would like to keep a minimum of $500 million yearly.

Skip long-term debt issuance/ repayments, cash available for revolving credit facility, and revolver section.

Colgate’s 10K report notes the available details on the revolved credit facility.

Colgate 2020 – 10K, Page 49

Also provided in additional information on debt is the committed long-term debt repayments.

Colgate 2020 – 10K, Page 50

Calculate the Ending Long Term Debt.

We use the long-term debt repayment schedule provided above and calculate the ending balance of long-term debt repayments.

Link the long term debt repayments

Calculate the discretionary borrowings/paydowns.

Using the cash sweep formula, as shown below, calculate the discretionary borrowings/paydown.

Calculate Interest Expense from Revolving Credit Facility

• Make a reasonable assumption for an interest rate based on the information provided in the 10K report.
• Find the average balance of the revolving credit facility and multiply it with the assumed interest rate.

Calculate the Interest Expense from the Long Term Debt

Link the historical average balances and interest expenses. Find the implied interest rate for historical years.

Assume the interest rate on Long term debt based on the implied interest rate. Then, multiply the average long-term debt by the assumed interest rate.

Calculate Total Interest Expense = average balance of debt x interest rate

Find the Total Interest Expense = Interest (Revolving Credit Facility) + Interest (Long Term Debt)

Link debt & Revolver drawdowns to Cash Flows 

Reference Current and Long Term to Balance Sheet

• Demarcate the Current Portion of Long Term DebtCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.read more and long-term debt as shown below.

• Link the revolving credit facility, long-term debt, and current portion of long-term debt to the balance sheet.

Link Noncontrolling Interest from Income Statement

Calculate the Interest Income using the average cash balance

Link Interest Expense and Interest Income to Income Statement 

Perform the Balance Sheet check: Total Assets = Liabilities + Shareholder’s Equity

Audit the Balance Sheet

We need to audit the model and check for linkage errors if there is any discrepancy.

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What next?

If you learned something new or enjoyed this Excel-based financial modeling, please leave a comment below. Let me know what you think. Many thanks, and take care. Happy Learning!