EV decreases when increasing Sales
Hello everyone,
I have 2 sources of sales, one is sales of phones other is sales of chargers. This year we will lose 10% in sales of chargers, and when I project in 10 yrs, my COGS and SG&A are static - 80% COGS, 16% SG&A, 30% Taxes over EBIT. When i increase sales by 2% (USD) it loses value, however when i maintain it static at 0% growth, I gain EV.
Why could this be? How would you guys check this, becuase NPV in gross profit vs. 2% growth and 0% has a difference of US$5M. The problems become in my Working capital. Is there a way I can check anything. My working capital is based both in total sales & total costs, dont have a differentiated. Thanks!
Okay, bear with me here because we're trouble shooting over the internet on WSO.
That said, I'll give this a go since no one else has. As a general feature, I would try to build in some 'audit-ability' into your models. I don't think anyone here is going to be able to tell you exactly what's wrong, but we can try to help you figure out how to visualize where the problem is. Obviously, FCF can be broken down into its different components of:
Revenue - COGS - SG&A - Tax - Change in Working Capital - Capex.
It sounds like you already isolated the impact to working capital. But just to confirm, you should discount each of these components at your WACC for your base case, and then compare these NPVs to those when you increase your sales by 2%.
Is the result actually driven by a change in working capital? If so, why? What are your AR assumptions, and what are your AP assumptions?
Again, I don't think anyone here (based on the information given) is going to be able to say 'oh yeah, looks like you've got a bad XYZ assumption.' But I'd go through the exercise of seeing what components of your FCF actually changed, and try to reconcile that.
Hi Motley_accrual,
Thank you very much for your help. Actually it is new for me to check this way and it makes so much sense. Is another way to check and my boss is trying to make me think more managerial etc. However it wasnt a problem in the model, it was that my COGS increased in one line of business even staying flat it had a problem with the days in WK. So my total revenues increased also my COGS, but my WK was worst. So that is why it lowered my EV.
Thanks again, and if you have something where I could read how to change my chip from analyst to more managerial interpretations i would appreciate.
Cheers and thanks again
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