Financial Statement Modeling & Valuation — Study Pack Summary & Study Notes

📊 Balance Sheet Fundamentals

Balance sheet equation: $Total\ Assets = Liabilities + Equity$. The balance sheet records the stock of resources (assets) and claims on those resources (liabilities and equity) at a point in time. Key items include Capex, Accounts Receivable (AR), Accounts Payable (AP) and deferred revenue.

🧾 Income Statement & EBITA

EBITA is a core private equity metric defined as $EBITA = Operating\ Income + Depreciation$. It isolates operating cash generation before interest and tax effects and excluding non-cash depreciation to reflect operating performance.

💸 Cash Flow Types

• Net Cash Flow: total cash movement across operating, investing, and financing activities.
• Operating Cash Flow: cash generated by core operations, before capex and financing.
• Free Cash Flow (FCF): cash available after maintaining and growing operations, typically expressed as $FCF = Operating\ Cash\ Flow - Capex$.

🧾 Capitalisation & Capex

Capitalisation moves an expense from the income statement to the balance sheet as an asset, spreading recognition over time via depreciation. Capex is cash spent to acquire or maintain long-term assets and affects both the cash flow statement and the balance sheet.

🔁 Working Capital

Working capital covers short-term assets and liabilities: AR, inventory, prepaid expenses, AP, and accrued expenses. Changes in working capital affect operating cash flow: increases in AR or inventory typically reduce cash, while increases in AP increase cash.

📈 Revenue Forecasting

Two common approaches: (1) apply growth rates from research or historical trends; (2) build from volume/unit assumptions by modelling units sold and price per unit. The unit method provides more granularity but requires more assumptions.

💳 Debt, Interest & Net Debt

Total debt includes revolver balances and term loans. Interest expense is generally calculated using average debt outstanding times the interest rate: $Interest = Average\ Debt \times Rate$. Net debt is often computed as $Net\ Debt = Total\ Debt - Cash$.

📉 DCF & Valuation Approaches

Two DCF styles: unlevered DCF (values both debt and equity holders using unlevered FCF) and levered DCF (focuses on equity cash flows). Complementary methods include trading comps and transaction comps. A typical enterprise value relation is $EV = Equity\ Value + Net\ Debt$.

📊 Valuation Multiples

Common multiples: EV/EBITDA, EV/EBIT, and P/E. Choose multiples consistent with the profit metric and capital structure adjustments (EV-based multiples for enterprise-level comparables; P/E for equity-level comparisons).

🔁 Circular Logic in Financial Statements

Statements are interdependent: net income flows into retained earnings on the balance sheet, while interest expense on the income statement depends on debt balances from the balance sheet. Models often require iterative solutions or careful linking to resolve circular references.

🧾 Non-GAAP Adjustments

Non-GAAP metrics exclude non-recurring items to highlight core operations. Adjustments commonly remove one-off charges or unusual gains, but recurring items like depreciation are typically retained because they reflect ongoing economics.

🔍 Trading & Transaction Comparables

Trading comps use current market multiples of peers to value a company; peer selection should match operational scale, growth profile, and capital intensity. Transaction comps use historical deal multiples and often include deal-specific premia; ensure consideration of timing, size differences, and control premiums.

🧩 Dilutive Securities & Share Count

In valuation and transaction analysis, include vested/unvested RSUs/options when control changes are likely. Use basic shares outstanding prior to announcements to avoid distortions from post-announcement equity issuances unless fully diluted metrics are explicitly needed.

🏦 LBO Fundamentals

A leveraged buyout (LBO) acquires a business primarily with debt. Key modelling assumptions include entry EV/EBITDA, projected EBITDA growth, leverage structure, and exit multiple. Recent tax rules limit interest deductibility, reducing some historical leverage benefits.

💰 Private Equity Waterfall & Cash Management

Distribution waterfall prioritizes returning investor capital and preferred returns before sponsor carry. Mechanisms like cash sweeps, PIK interest, and equity kickers affect debt repayment and sponsor returns. Clawback provisions protect investors if carried interest was over-distributed.

🧾 Financing Fees & Uses/Sources

Upfront financing fees are often accounted for as contra-debt and amortized over the debt life, affecting net income and retained earnings. In transaction modelling, pay attention to detailed uses and sources: purchase price, fees, refinancing, and the allocation among equity and debt.

✅ Practical Modelling Tips

Keep schemas consistent (flow vs stock items), reconcile cash, and test model sensitivity to key drivers (growth, margins, capex, working capital). Document assumptions clearly and ensure multiples/methods align with the chosen metric and capital structure.