Module 5 · Equity

Company Analysis: Past and Present

EN: Financial profile, business strategy, and competitive positioning.
VN: Hồ sơ tài chính, chiến lược, vị thế cạnh tranh.

1. Financial Profile Components Concept

About: Five dimensions — growth, profitability, capital structure, returns (ROIC/ROE/ROA), CF quality. Together describe historical financial track record.Tóm tắt: 5 chiều: growth, profitability, capital, returns, CF quality. Hồ sơ tài chính lịch sử.

Growth Historical revenue, earnings, FCF growth.
Profit Margins (gross, op, net) and trends.
Capital Capital structure, leverage, liquidity.
Returns ROIC, ROE, ROA.
CF quality CFO vs NI, FCF generation.

2. Business Profile Concept

About: Strategy (cost leader / differentiation / focus per Porter), product/geographic/customer mix, competitive position (market share, brand). Drives sustainability of returns.Tóm tắt: Chiến lược, mix sản phẩm/địa lý/khách hàng, vị thế cạnh tranh.

Strategy Cost leader, differentiation, focus (Porter generic strategies).
Mix Geographic, product, customer concentration.
Position Market share, brand strength, scale.

3. Industry Analysis Inputs Concept

About: Lifecycle (embryonic → growth → shake-out → mature → decline), 5 Forces, PEST. Frames the playing field before evaluating the company.Tóm tắt: Lifecycle (5 giai đoạn), 5 Forces, PEST. Khung phân tích ngành.

Lifecycle Embryonic, growth, shake-out, mature, decline.
5 Forces See M6 (competitive intensity, supplier/buyer power, substitutes, new entrants).
PEST Political, economic, social, technological drivers.

4. Degree of Operating Leverage (DOL) Core

About: DOL measures how operating income responds to a change in unit sales. High DOL (lots of fixed costs) → operating profit swings amplified vs. revenue swings. Cyclicals + capital-intensive firms have high DOL.Tóm tắt: DOL đo độ nhạy của EBIT với thay đổi sản lượng. DOL cao = nhiều chi phí cố định → EBIT biến động mạnh khi sales thay đổi. DN cyclical/thâm dụng vốn có DOL cao.

\[ DOL = \frac{\%\Delta EBIT}{\%\Delta Q} = \frac{Q\,(P - V)}{Q\,(P - V) - F} = \frac{\text{Sales} - VC}{\text{Sales} - VC - FC} \]

Algebraic variants

Solve for %ΔEBIT$ \%\Delta EBIT = DOL \times \%\Delta Q $Đề luôn hỏi: tăng X% sales → tăng bao nhiêu % EBIT
From margins$ DOL = \dfrac{\text{Contribution margin}}{\text{Operating income}} = \dfrac{Q(P-V)}{EBIT} $

Components

$Q$ Units sold.
$P$ Price per unit; $V$ = variable cost per unit.
$F$ Fixed operating costs.
$Q(P-V)$ Contribution margin (total) — numerator.
$Q(P-V) - F$ = EBIT — denominator.

Insight: The closer Sales is to the break-even point, the higher DOL — small revenue moves cause huge % EBIT swings.

Practice problem

A firm sells 100,000 units at $10. Variable cost $2/unit, fixed costs $500,000. Compute DOL.

Show solution

Contribution = 100,000 × (10 − 2) = $800,000

EBIT = 800,000 − 500,000 = $300,000

DOL = 800,000 / 300,000

≈ 2.67 → 1% sales change → 2.67% EBIT change

5. Degree of Financial Leverage (DFL) Core

About: DFL measures how net income responds to a change in operating income (EBIT). High DFL = lots of fixed financing costs (interest) → EPS swings amplified vs. EBIT swings. Debt-heavy capital structures have high DFL.Tóm tắt: DFL đo độ nhạy của NI với thay đổi EBIT. DFL cao = nhiều chi phí lãi vay cố định → EPS biến động mạnh khi EBIT thay đổi. DN nhiều debt có DFL cao.

\[ DFL = \frac{\%\Delta\,Net\,Income}{\%\Delta\,EBIT} = \frac{EBIT}{EBIT - I} \]

Algebraic variants

Solve for %ΔNI$ \%\Delta NI = DFL \times \%\Delta EBIT $
Combine with DOL$ \%\Delta NI = DTL \times \%\Delta Q = DOL \times DFL \times \%\Delta Q $
No-debt case$ DFL = 1 $ when I = 0Không có debt → không có khuếch đại tài chính

Components

$EBIT$ Earnings before interest and tax (operating income).
$I$ Interest expense (fixed financing cost).
$EBIT - I$ Pretax income (EBT).

Insight: If a firm has no debt, I = 0 and DFL = 1 (no amplification). Adding debt raises DFL — boosts NI in good years, magnifies losses in bad.

Practice problem

EBIT = $12,000; interest expense = $2,000. Compute DFL.

Show solution

DFL = 12,000 / (12,000 − 2,000) = 12,000 / 10,000

DFL = 1.20 → 1% EBIT change → 1.20% NI change

6. Degree of Total Leverage (DTL) Core

About: DTL combines operating and financial leverage — how net income / EPS responds to a change in unit sales. DTL = DOL × DFL. Captures the full amplification chain from sales volume to bottom-line.Tóm tắt: DTL kết hợp DOL và DFL — đo độ nhạy của NI với thay đổi sản lượng. DTL = DOL × DFL. Phản ánh chuỗi khuếch đại từ sales tới EPS.

\[ DTL = DOL \times DFL = \frac{\%\Delta\,Net\,Income}{\%\Delta\,Q} = \frac{Q\,(P-V)}{Q\,(P-V) - F - I} \]

Components

$Q(P-V)$ Total contribution margin.
$F$ Fixed operating costs; $I$ = interest expense.
Denominator = pretax income = EBIT − I.

Cyclical risk: A cyclical firm with high fixed costs AND lots of debt (high DTL) can swing from huge profits to losses on modest revenue changes.

Practice problem

Jayco sells 10,000 units at $5. Variable cost $3/unit, fixed costs $8,000, interest $2,000. Compute DOL, DFL, DTL.

Show solution

Contribution = 10,000 × (5 − 3) = $20,000

EBIT = 20,000 − 8,000 = $12,000

DOL = 20,000 / 12,000 ≈ 1.67

DFL = 12,000 / (12,000 − 2,000) = 1.20

DTL = 1.67 × 1.20

DOL = 1.67; DFL = 1.20; DTL = 2.00

7. Break-Even Quantity Core

About: Break-even Q = the unit volume at which operating profit is zero. Below Q_BE the firm loses money; above it earns profit. Operating break-even ignores interest; total break-even adds it back.Tóm tắt: Q_BE = sản lượng hòa vốn (EBIT = 0). Dưới Q_BE: lỗ; trên Q_BE: có lãi. Operating BE bỏ qua lãi; total BE cộng lại.

\[ Q_{BE}^{\,operating} = \frac{F}{P - V} \] \[ Q_{BE}^{\,total} = \frac{F + I}{P - V} \]

Components

$F$ Fixed operating costs.
$I$ Interest expense.
$P - V$ Contribution margin per unit.

Practice problem

P = $25, V = $15, F = $200,000, I = $50,000. Compute operating and total break-even quantities.

Show solution

Contribution per unit = 25 − 15 = $10

Q_BE(op) = 200,000 / 10 = 20,000 units

Q_BE(total) = 250,000 / 10 = 25,000 units

Operating BE = 20,000; Total BE = 25,000 units

Practice problem Practice

Practice problem

A company has revenue growth of 25%/year for 3 years, gross margin rising from 30% to 45%, and ROE doubling from 8% to 16%. Which financial profile element is strongest?

Show solution

Growth: 25% revenue growth = strong.

Profitability: gross margin +15pp and ROE doubling = strong improvement.

Returns improvement is most striking — ROE doubling indicates significant operational leverage.

Profitability (and returns) improvement is the standout — likely scaling with operating leverage.