B5 - Reading Business & Financial Information CH5 Analysis & Benchmarking

Analysis, Vertical/Horizontal, Benchmarking & Due Diligence

What is horizontal analysis used for?

Trend analysis across periods

What is vertical analysis used for?

Proportion analysis within a statement (% of base)

Why benchmark against peers?

To assess relative performance and industry norms

Two sources for benchmarks?

Internal portfolio comparables and third-party data (IBISWorld, CapitalIQ)

What are efficiency ratios?

Ratios showing how assets generate revenue

Asset turnover formula?

Revenue ÷ Total assets

Why perform horizontal + vertical together?

To understand both trends and structural proportions

What is working capital funding gap?

Receivable days + inventory days − payable days

How to convert days gap to financing requirement?

(Funding gap × COGS) ÷ 365

Why do lenders want sources & uses?

To see where money comes from and how it’s deployed

What’s the role of stress testing in analysis?

Assess covenant and repayment resilience under adverse scenarios

Why reconcile cashflow model to balance sheet?

Ensure model integrity and that ending cash matches

What is horizontal analysis warning sign?

Rising receivable days, falling margins, or shrinking cash flow

How to treat one-offs in benchmarking?

Exclude or normalise to compare recurring performance

Why review management compensation?

High owner withdrawals can reduce EBITDA and equity

What documents are essential for due diligence?

3–5 years financials, projections, sources & uses, appraisals, UBO personal finances.

Why get Ultimate Beneficial Owner’s personal financials for private firms?

To assess guarantees and personal support in stress

What is loan amortisation sensitivity?

Effect of tenor on annual principal payments and DSCR

What is covenant headroom?

Cushion between projected metrics and covenant thresholds

Why check audit notes?

For contingencies, going concern flags, and accounting issues

How to spot earnings quality issues?

Large non-cash addbacks, frequent one-offs, poor OCF vs net income

What is LTV?

Loan ÷ collateral value

Why is seasonality important in models?

It affects peak funding needs and covenant timing

What’s the analyst’s approach to related-party transactions?

Scrutinise terms, frequency and cash leakage risk

Why verify appraisals?

To confirm market value and assumptions used

How to treat capex in coverage analysis?

Include maintenance capex as required cash outflow

What is the PMT Excel check used for?

Compute loan payment for amortisation schedules

Why monitor covenant waiver history?

Frequent waivers indicate recurring covenant stress

What’s a quick way to test liquidity?

Check OCF and available committed facilities vs peak funding gap

Final analyst mantra?

Verify numbers, normalise one-offs, stress the model