Investment Projects | Any enterprise investment projects, whether it is a manufacturing enterprise or a service enterprise, should first have market information to open and operate.
First, the accurate judgment of market supply and demand is the basis for project decision-making.
Any enterprise investment project, whether it is a manufacturing enterprise or a service enterprise, should first have market information to open and operate. Without access to systematic and continuous market information, decisions made will inevitably lack a solid foundation and may even run counter to reality, resulting in business failure.
The accurate judgment of market supply and demand is the basis for enterprise investment and bank loans. In the planned economy period, it is easier to grasp the market supply and demand information, all commodities are produced in the plan, and the market regulates supply and demand in the plan. In the current market economy period, the market relies on itself to regulate supply and demand. Therefore, it is difficult to grasp market supply and demand, and the difficulty is that it is impossible to count the scale, capacity, output, national consumption, import, and forecast demand of a certain product in the country.
Although some statistics can be obtained from statistical departments and industry associations, they are not complete, and it is difficult to grasp accurate data at the national or regional level. Market demand analysis, supply analysis and comprehensive analysis of project products, "demand" refers to the quantity of a certain commodity that consumers are willing to and can buy in a certain period of time at various price levels, that is, the prediction of the purchasing power of goods, which is an effective social demand.
This demand contains two meanings, one is the actual social demand, and the other is the potential demand in the future, that is, the market forecast. Then, objective, fair and scientific judgment and prediction can the conclusions obtained be correct, so that we can have a clear idea and compress the risk to the lowest point.
Second, cash flow is an important indicator to assess the true financial status of the project.
The cash flow statement contains important financial information, and the analysis of the cash flow statement can clearly reflect the ability of the company's projects to generate net cash flow, and more clearly reveal the liquidity and financial status of the company's assets. Companies with sufficient cash will have a correspondingly stronger ability to pay dividends and repay debts, and their prospects for development will be broader.
In the project evaluation, the phenomenon of focusing on the analysis of enterprise profits and ignoring the cash flow statement is more prominent, if the amount of profits obtained by the enterprise is simply used as the standard, it is easy to cause decision-making errors, because the accrual basis and matching principle adopted by the enterprise in accounting include estimation factors, and the profits obtained within a certain period do not represent that the enterprise really has the ability to repay debts or pay.
In some cases, although the operating results reflected in the income statement of the enterprise are considerable, it is financially difficult to repay its debts as they mature; There are also companies that are solvent despite the fact that the operating results reflected in the income statement are not impressive. It can be seen that the use of earnings information and cash flow information need neither be mutually exclusive nor substitute for each other. But profit is more abstract after all, and cash is very concrete.
(1) The role of cash flow statement analysis in project evaluation
As a statement reflecting the cash inflow, cash outflow and net cash flow of an enterprise in a certain period, according to the requirements and standards of the five-level classification method of loans, the net cash flow generated by the borrower's main business income is the core of loan risk analysis, and it is also the first source of repayment, which has very important management value, mainly manifested in:
1. The cash flow statement can understand the cash inflow and outflow information of the enterprise in a certain period, clarify the ins and outs of the funds, and make an objective evaluation of the overall financial status of the enterprise. That is, from the overall situation of the cash flow of the enterprise, we can roughly judge whether its operating turnover is smooth.
2. It can be used to analyze the solvency and dividend payment ability of enterprises. Through cash flow analysis, you can not only understand the current financial situation of the enterprise, but also predict the future development of the enterprise. Creditors should make judgments on whether to borrow through the analysis of the cash flow of the enterprise, and investors should make a decision on whether to invest according to the dividend payment ability of the enterprise.
3. It can be used to verify the quality of after-tax profits reflected in the income statement. The income statement is prepared on an accrual basis, while the cash flow statement is prepared on a cash basis, and the year in which an enterprise is profitable does not represent cash flow, and similarly, a loss does not mean no cash flow. From this point of view, the cash flow statement is at least an important basis for lending banks to conduct risk analysis and make decisions on whether to lend to enterprises.
(2) Use the cash flow statement to analyze the main technical indicators of the financial status of the enterprise
1. Analyze the return-on-investment projects of the enterprise.
(1) Cash recovery (or remaining cash flow).
The formula is: net cash flow from operating activities - cash paid to pay interest. This indicator is equivalent to the net profit indicator and can be assessed in absolute numbers. When analyzing, attention should be paid to whether there are other abnormal cash inflows and outflows in the cash flow from operating activities.
(2) Cash recovery rate.
The formula is: cash recovery amount / invested funds or all funds. The cash recovery divided by the invested funds is equivalent to the return-on-investment projects, and if divided by the total funds, it is equivalent to the return on funds.
2. Analyze the solvency of enterprises.
Although the current ratio and quick ratio can also reflect the liquidity or solvency of assets, this reflection has certain limitations, because it is cash that can really be used to repay debt, and cash flow and debt comparison can better reflect the ability to repay debt.
(1) Cash maturity debt ratio.
The calculation formula is: cash maturity debt ratio = cash balance ÷ debt due in the current period. Here, maturing debt refers to long-term debt and notes payable that are about to mature in the current period. If the interbank cash maturity debt ratio is examined, the company's immediate solvency can be judged according to the size of the indicator.
(2) The short-term solvency of the enterprise.
It mainly looks at the ratio of the company's actual cash to current liabilities. Namely: closing cash and cash equivalents balances/current liabilities. Due to inconsistent repayment due dates for current liabilities, this ratio is generally between 0.5 and 1. This low indicator indicates greater pressure to rely on cash to service short-term liabilities.
(3) Total cash-to-debt ratio.
The calculation formula is: total cash debt ratio = cash balance ÷ total debt. The higher the indicator ratio, the stronger the ability of the company to take on debt.
3. Analyze the problems existing in the net cash flow of operating
activities.
(1) Analyze whether the net cash flow of operating activities is normal.
Under normal circumstances, net cash flow from operating activities > finance expense + current period depreciation + amortization of deferred assets of intangible assets + amortization of amortized expenses. If the calculation result is negative, it indicates that the enterprise is a loss-making enterprise and the cash income from operations cannot offset the relevant expenses.
(2) Analyze whether the cash purchase and sales ratio is normal.
Cash purchase and sale ratio = cash received for the purchase of goods and payment for services / cash received for the sale of goods and services. In general, this ratio should be close to the cost of goods sold ratio. If the purchase-to-sales ratio is not normal, there may be two situations: the purchase of sluggish backlog of goods; Operating business contracted. Both scenarios can adversely affect businesses.
(3) Analyze whether the operating cash collection rate is normal.
Operating cash recovery rate = cash recovered from sales of goods sold in the current period / operating income in the current period * 100%. This rate should generally be around 100%, if it is lower than 95%, it means that the sales work is not normal; If it is lower than 90%, it means that there may be a relatively serious false profit and loss.
(4) Whether the cash ratio paid to employees is normal.
Cash ratio paid to employees = cash spent on various cash expenses of employees / cash recovered from the sale of goods and services. This ratio can be compared with the past situation of the enterprise, or with the situation of the same industry, such as too large the ratio, it may be that human resources are wasted, labor efficiency is declining, or due to the uncontrolled distribution policy, the proportion of employee income distribution is too large; If the ratio is too small, it reflects that the employee's income is low.
(3) Analysis of cash flow can preliminarily determine whether the borrower can repay the loan and whether the source of repayment is sufficient
The activities that enterprises can generate cash flow can be divided into three types: operating activities, investment projects and financing activities. Under normal operating conditions, cash inflows from operating activities must first meet their cash outflows and cannot be used for repayment. The following two cases can be distinguished:
1. When the net cash flow of operating activities > 0:
if the net cash flow of investment projects > 0, the cash generated by operating activities can be used to repay the loan; In case of shortfall, surplus cash from available investment projects activities; When it is still insufficient, it is necessary to borrow new debts to pay off old debts.
The source of repayment may be business activities, as well as investment and financing activities. If the net cash flow of investment projects < 0, the cash generated by operating activities must first make up the cash requirements of investment projects, and then repay the loan; When it is not enough to cover the investment needs or repayment, the borrower must obtain external financing. The source of repayment may be business activities or financing activities.
2. Net cash flow from operating activities < 0:
If the net cash flow from investment projects < 0, it is necessary to make up the cash outflow from operating activities before repayment; When it is insufficient to cover the cash outflow or repayment of business activities, the borrower has to raise external financing. In this case, the source of repayment may be investment projects or financing activities.
If the net cash flow from investment projects < 0, the borrower must finance to cover the cash outflow from operating activities and investment projects, in which case the source of repayment can only be financing activities.
Cash flow is an accounting statement that summarizes the cash flow of cash inflows, investment projects and financing activities of an enterprise during the reporting period and is a dynamic statement. It explains the ability of enterprises to obtain cash, repay debts, pay dividends and interest through the cash inflow and outflow of enterprise operating activities, investment projects and financing activities, and can explain the operating results of each link of the enterprise through the analysis of the increase or decrease of each item in the table.
Cash flow is the amount of cash inflows and outflows from a business or project over a certain period of time. The faster the economic development, the greater the impact of cash flow in the survival and development of enterprises and business management, and one of the major changes in modern financial management is the emphasis on cash flow.
In the project evaluation, most of us pay more attention to the income statement and balance sheet, look at the profit and liability of the enterprise, although some enterprises have profits, but cannot be realized, it is difficult to repay bank loans. Therefore, to see whether the ability an enterprise can have to repay bank loans, the focus should be on the cash flow statement of the enterprise.
In addition, there are two main ideas for the solvency analysis in the evaluation of real estate development loans: one is to analyze and measure the solvency of the project; The other is to analyze and measure the borrower's comprehensive solvency.
The solvency analysis of the project mainly considers the source of repayment from the perspective of the project and analyzes the repayment capacity from the perspective of the project.
The comprehensive solvency analysis of borrowers is from the original benefits of the enterprise, the profitability of the projects under construction and the proposed projects to the evaluation of the overall solvency of the enterprise, that is, the security of the loan is evaluated by the borrower. For loans in different industries and different purposes, there may be great differences in the calculation of solvency, in the evaluation of commercial housing development loans, measuring the source and use of funds during the calculation period, and determining the source of repayable funds in each year, is actually from the perspective of cash flow to analyze the problem.
Because the development of commercial housing has the characteristics of strong liquidity, the assets formed by loans are also the current assets of enterprises, and because of their strong liquidity ability, it is more meaningful to examine the liquidity of projects.
In the evaluation of commercial housing development loans, cash flow analysis is reflected in the source and application of funds, including cash sources generated by operating activities (sales income, rental income), cash sources generated by financing activities (own funds, bank loans, other liabilities), other sources, etc.; The use of funds includes project operating costs, operating taxes and surcharges, financial expenses, land value added tax, all taxes, as well as retained earnings of enterprises, shareholder dividends, etc.
After the source of funds and the use of funds are offset offset, the surplus funds of the project, that is, the source of repayment of the project, are used to measure the debt repayment guarantee ratio of the project. By analyzing the problem from the perspective of cash flow, it is easier to understand its internal meaning and characteristics, and find the problems existing in the project.
In the evaluation of commercial housing development loans, we will find that when the sales revenue is not realized during the project construction period, the surplus funds are zero or even negative (that is, there is a funding gap).
After entering the sales period of the project, the surplus funds are positive, indicating that the project has a source of repayment.
However, too much or too little surplus funds can reflect the possible risks of the loan to varying degrees, such as in the alternating period between project construction and sales, excessive surplus funds indicate that the project funds are relatively excessive, there may be excessive loan amount or other problems in the operation of funds, the issuance of the loan will increase the potential risk of borrowers misappropriating funds, and the assessor should be more vigilant about this.
Of course, cash flow analysis is not suitable for all projects when examining their solvency, but it is a good way to help us analyze projects, and it helps evaluators to rationalize their evaluation ideas and improve the quality and efficiency of evaluation.
Third, the internal rate of return and return on invested capital are indicators that cannot be ignored
As one of the main conditions for judging the economic viability of investment projects, the internal rate of return has long been familiar to the majority of evaluators. The internal rate of return (IRR) refers to the discount rate at which the cumulative net cash flow of each year equals zero for the entire evaluation period.
It reflects the profitability of the funds occupied by the project and is the main dynamic evaluation index to examine the profitability of the project.
The internal rate of return of the project can be obtained by the test difference method according to the net cash flow in the financial cash flow statement, which is actually obtained by solving the equation or through repeated iteration trial calculations, and there is no ready-made formula for solving the internal rate of return. (IRR) The larger the value, the better, when the obtained (IRR) is not less than the industry benchmark rate of return or the set discount rate, its profitability is considered to have met the minimum requirements and can be considered acceptable in financial evaluation.
Return on Investment Capital (ROIC), which mainly reflects the ability of the company's business activities to effectively use operating capital to create returns, is a comprehensive index that comprehensively reflects the business activities of an investment center, an enterprise, or even an industry, and is the main static evaluation index to examine the ability of an enterprise or company to create value. Investors engage in various investment projects in the expectation of obtaining returns and returns through such behaviors.
The expected rate of return is the return on investment. If the return on investment is higher than the weighted average cost of capital of various types of capital of the enterprise, and can create new incremental value for the company, this investment behavior is feasible, and it is generally higher than the bank's loan interest rate in the same period.
The return on invested capital index reflects the ability of the company to use capital to create returns in its business activities, and is the main static evaluation index to examine the ability of enterprises or companies to create value, and only when the return on capital invested by the company or enterprise exceeds the weighted average cost of capital used to discount cash flows.
The internal rate of return indicator refers to the discount rate at which the cumulative net cash flow of the project is equal to zero throughout the evaluation period. It reflects the profitability of the funds occupied by the project, and is the main dynamic evaluation index to examine the profitability of the project, and only when the calculated internal rate of return of a project is greater than the industry benchmark internal rate of return, can the investment plan be considered economically feasible.
Return on invested capital is an annual valuation indicator of an enterprise. It is a key driver of enterprise value and free cash flow, and value is only created when the return on capital invested exceeds the weighted average cost of capital used to discount cash flows.
Financial Internal Rate of Return:
An indicator of the evaluation of a project throughout the evaluation period. It is an important criterion for determining whether to invest in a project, that is, only when the calculated financial internal rate of return (IRR) of a project is greater than the industry benchmark internal rate of return (ic), it can be considered that the financial profitability of the project can meet the requirements and is worth investing.
It can be seen that the difference and connection between the return-on-investment capital and the internal rate of return is the inherent difference and connection between value appraisal and project evaluation.
With the deepening of USA's financial system reform, project evaluation plays an increasingly important role in credit decision-making and management.
In order to meet the development and needs of joint-stock banks and improve the quality of credit assets, it is necessary to further strengthen project evaluation, standardize the content, depth, and requirements of project evaluation, fundamentally improve the professional quality of evaluators, master and apply the scientific methods and operational skills of project evaluation, and make project evaluation truly become a reliable basis for credit decision-making.
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