Analysis in practice

The earlier modules taught the tools one at a time. These lessons use them together on real questions. The first tests a valuation with scenarios, the second shows how growth can drain a profitable business of cash, and the last three set Apple beside Microsoft, two companies of similar size that report in dollars under the same accounting rules, so that the differences are real ones.

Each lesson ends with a calculator that lets the reader change the inputs and watch the answer move. The company figures come from the filed accounts and are checked by code, and the one fictional business, used to show how a profitable company can run out of cash, is labelled as fictional.

5 lessons, about 1 hour 39 minutes of reading in all. Start at the top and go in order.

After this module you will be able to

• test a valuation with one-at-a-time sensitivities and a worst, base and best case
• show how fast growth can use up cash in a profitable business
• take two companies' operating margins apart into cost of sales and operating costs
• compare how two companies split cash between investment and payouts
• compare the growth that two market values imply, and say how far the comparison can be trusted

The lessons

1. Sensitivity and scenarios20 minHow to test a valuation: move one input at a time, then build worst, base and best cases, with a live calculator using Apple's accounts.
2. Why profit runs out of cash19 minHow growth turns profit into a cash shortage through receivables, stock and payables, with a live calculator and Apple and Microsoft compared.
3. Operating margin and cost structure19 minTake an operating margin apart into cost of sales, R&D and administration, and compare Apple and Microsoft with a live calculator.
4. Capital spending and payouts20 minHow Apple and Microsoft split cash from operations between capital spending and payouts, and how long each pattern could last, with a live calculator.
5. What two prices imply21 minRun a reverse DCF on Apple and Microsoft side by side to see the growth each market value needs, with a live calculator.

Start with the first lesson