Liquidity and Leverage
How do you calculate the Current Ratio?
Current Assets / Current Liabilities
What does Days Payable Outstanding Measure?
Measures how quickly payables are repaid
What is our minimum threshold for cash runway?
3 months
Why is stable revenue better than variable revenue?
The better we can predict revenue, the better we can predict repayment.
What do we tag Undeposited Funds?
CA
Why is it dangerous for a company to have low cash even if they have a strong current ratio?
A company can struggle to make payments on its obligations if those obligations must be paid before cash can be realized from A/R and/or inventory
What does Days Inventory Outstanding measure?
Measures how many days of inventory is currently held before it's sold off
How do you calculate free cash flow?
Operating Cash Flow - CAPEX
What operating expenses are included in Net Operating Income but not EBITDA?
Depreciation & Amortization
You see an item labeled "Debt" on the balance sheet, but it doesn't provide any context on the lender. The balance has been the same over the last 12 months. What do you tag it?
NCD
What do we consider to be a high Debt / Revenue ratio?
Anything over 3.00x
Is it better to have a large or small value for Days Sales Outstanding? Why?
Generally a small value as it represents quicker collection of receivables.
A company is profitable but cash is falling each month. Why would this be the case?
(Provide 3 examples)
1. Building Inventory
2. Paying Suppliers
3. Paying Debt
4. Capital Expenditures
5. Making Distributions to Shareholders
A company is seasonal. When is the best time to lend? When is the worst time to lend?
Best: Right before the seasonal period
Worst: Right after the seasonal period
You are analyzing a company's bank data and notice five wire transfers with no context about who they are from. Which would you assume is/are non-operating (there could be multiple)?
1. $15,234.00
2. $96,815.76
3. $101,894.65
4. $75,000.00
5. $5,061.67
$75,000.00 - it's a rounded number
Why is it dangerous for a company to have other debt on the balance sheet alongside Keep?
(4 answers, name 2)
1. Conflicting payment priorities
2. The other lender might have security
3. Debt payments reduce cash flows
4. We can't control the payment schedule of the other lender
You look at a company's financials and see that the DPO is 92 days, which is relatively high. What could you request to have a better understanding of the company's payables?
A/P Aging
What is the difference between unlevered runway and levered runway?
Levered runway includes debt payments whereas unlevered runway does not.
The company made extremely large one-time payments to suppliers, bringing down free cash flow drastically. We don't expect this trend to continue in the future. What profitability metric can we use as a proxy for future cash flow?
EBITDA
Explain 3 ways you would be able to tell that financials aren't closed.
1. Revenue not booked or is significantly lower than normal
2. COGS isn't booked (but historically is) or is significantly lower than normal
3. OpEX isn't booked (but historically is) or is significantly lower than normal
4. Balance sheet items are stale/unchanging
When would it be beneficial to use the Quick Ratio over the Current Ratio?
The Quick Ratio excludes inventory from its calculation, whereas inventory is included in the Current Ratio.
We should use the Quick Ratio when inventory is stale, slow moving, or not the primary source of cash generation.
How do you calculate the Cash Conversion Cycle?
DSO + DIO - DPO
A company is preparing for the holiday season. What are we expecting will happen to inventory and A/P?
Both should increase. The company will spend money building inventory and will pay their suppliers later for that inventory.
Why is a negative gross margin dangerous? Would we expect cash burn to increase/decrease with growing sales?
The company cannot cover its variable expenses to sell goods (i.e. the costs of production are greater than the revenue generated with each sale). If sales increases, burn will also increase if gross margins are negative.
How would you consolidate two sets of financials?
Paste both balance sheets in the Balance Sheet section, lining up the dates, then tag as normal. Do the same with the Income Statement.