Demystifying numbers – taking the leap

21 August 2014 Written by 
Published in Financial

Financial modelling sharpens the focus on business model validation.

It links financial drivers to the qualitative elements that include external environment, opportunities and risks, governance, resource allocation and future outlook. These elements also serve as lead indicators, providing invaluable insights as to whether the strategy and tactics are aligned and or require modification(s).

The table below, a component of a financial model based on a Storytelling series, sets out the NOPLAT[1] calculation and from which we can reconcile to the accounting numbers as well as computing the economic profit (loss) generated and enterprise/ firm value. Comparing the NOPLAT to the accompanying Invested Capital clues us in as to whether the business model is creating shareholder value. A ROIC[2] that exceeds the WACC [3]signals value creation. The Year 1 and 2 economic profits are 11.5% and 15.3% respectively. This is a good sign for the business model concerned.

Company Name: WeCanTrust

NOPLAT CALCULATION AND RECONCILIATION

 
         

NOPLAT CALCULATION AND   RECONCILIATION

 

Year 1

Year 2

Year 3

         

EBIT[4]

 

$               716,000

$             3,156,000

$         4,979,000

Add: Goodwill

 

$                       -  

$                       -  

$                   -  

Adjusted EBIT

 

$               716,000

$             3,156,000

$         4,979,000

Taxes on EBIT

 

$             (887,500)

$             (1,048,500)

$         (2,639,500)

Changes in Deferred Taxes

 

$               800,000

$               (200,000)

$           (200,000)

NOPLAT

 

$               628,500

$             1,907,500

$         2,139,500

         
         

Taxes[5]   On EBIT

       

Provision on Taxes

 

$               800,000

$             858,500

$         2,474,500

Tax Shield on interest expense

 

$               102,500

$             215,000

$             190,000

Taxes on Interest Income

 

$               (15,000)

$               (25,000)

$             (25,000)

Taxes on Non-Operating Income

 

$                       -  

$                       -  

$                   -  

Taxes on EBIT

 

$               887,500

$             1,048,500

$         2,639,500

         

Reconciliation to Net Income

       

Net Income

 

$             (259,000)

$             1,917,500

$         2,474,500

Add: Increase in deferred taxes

 

$               800,000

$               (200,000)

$           (200,000)

Add: Goodwill amortisation

 

$                       -  

$                       -  

$                   -  

Adjusted Net Income

 

$               541,000

$             1,717,500

$         2,274,500

Add: Interest expense after-tax

 

$               102,500

$             215,000

$             190,000

Total Income to Investors

 

$               643,500

$             1,932,500

$         2,464,500

Less: Interest income after-tax

 

$               (15,000)

$               (25,000)

$             (25,000)

Non-operating expense (income)

 

$                       -  

$                       -  

$           (300,000)

NOPLAT

 

$               628,500

$             1,907,500

$         2,139,500

check digit

 

$                       -  

$                       -  

$                   -  

Invested Capital

       

Operating Current Assets

 

$             1,816,667

$             3,650,000

$         5,075,000

Non-Interest Bearing Current   Liabilities

 

$             (1,683,167)

$             (3,399,000)

$         (4,738,500)

Net Working Capital

 

$               133,500

$             251,000

$             336,500

         

Net Fixed Assets

 

$             8,000,000

$             7,600,000

$         5,600,000

Other Operating Assets

 

$                       -  

$                       -  

$                   -  

Value of operating leases

       

Operating invested capital

 

$             8,133,500

$             7,851,000

$         5,936,500

         

Excess marketable securities

 

$             2,407,500

$             4,407,500

$         7,737,750

Goodwill

 

$                       -  

$                       -  

$                   -  

Non-operating investments

 

$                       -  

$                       -  

$                   -  

   

$           10,541,000

$           12,258,500

$         13,674,250

Reconciliation - Invested Capital

       

Equity

 

$             5,741,000

$             7,658,500

$         9,274,250

Deferred Taxes

 

$               800,000

$             600,000

$             400,000

Adjusted equity

 

$             6,541,000

$             8,258,500

$         9,674,250

         

All interest bearing debts

 

$             4,000,000

$             4,000,000

$         4,000,000

Value of operating leases

 

$                       -  

$                       -  

$                   -  

   

$           10,541,000

$           12,258,500

$         13,674,250

         

check digit

 

$                       -  

$                       -  

$                   -  

         

ROIC Calculation

       

NOPLAT

 

$               628,500

$             1,907,500

$         2,139,500

Operating invested capital ( ob[6])

 

$                       -  

$             8,133,500

$         7,851,000

         

ROIC

 

NA

23%

27%

ROIC ( including goodwill )

 

NA

23%

27%

         
         

Economic Profit Calculation

       

Return on Invested capital

 

NA

23.5%

27.3%

WACC

 

12.0%

12.0%

12.0%

Economic Profit

 

NA

11.5%

15.3%

In the Storytelling blog category, we have kicked-start the journey of reviewing the model build i.e. drilling down to the underlying assumptions and associated quantification; thereby connecting the dots between the financial and non-financial metrics.

The end goal is to validate the purpose in being for the business model, setting of objectives, measures and targets, initiatives to be commissioned and the resources to be allocated in order for the vision and strategy to be realised. The idea being what gets measured gets managed.

Any successful, sustainable outcome is predicated on a sound  purpose in being and the underlying core values. It goes without saying, getting the right people on-board, pre-disposed to the philosophy and core values upon which the business model sits; is an absolute must in order to achieve sustainable value creation.

 


[1] Net operating profit less adjusted taxes

[2] Return on Invested Capital ( NOPLAT divided by Invested Capital )

[3] Weighted Average Cost of Capital

[4] Earnings before interest and taxes

[5] Corporate income tax rate of 50% and assuming no capital gain tax

[6] Opening balance

 

Read 13466 times Last modified on Friday, 22 August 2014 15:31
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