Corporate Finance, 5th Edition
by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
Chapter 14 Conclusion of financial analysis
As one journey ends, another probably starts
By the time you complete a financial analysis, you must be able to answer the following two questions that served as the starting point for your investigations:
- Will the company be solvent? That is, will it be able to repay any loans it raised?
- Will it generate a higher rate of return than that required by those that have provided it with funds? That is, will it be able to create value?
Value creation and solvency are obviously not without links. A firm that creates value will most often be solvent and a company will most likely be insolvent because it has not succeeded in creating value.
Section 14.1 Solvency
Here we return to the concept that we first introduced in Chapter 4.
Since, by definition, a company does not undertake to repay its shareholders, its equity represents a kind of life raft that will help keep it above water in the event of liquidation by absorbing any capital losses on assets and extraordinary losses.
Solvency thus depends on:
- the break-up value of a company’s assets;
- the size of its debts.
Do assets have a value that is independent of a company’s operations? The answer is probably “yes” for the showroom of a carmaker on 5th Avenue in New York and probably “no” as far as the tools and ...