HF Case Study - Projected Balance Sheet Required?

I have a case study for a HF interview process coming up this weekend. I have done multiple PE case studies before, but have never done a HF case study.

For PE, it was obviously important to model out the balance sheet for debt paydown, but is this useful for hedge funds? I feel like as a public investor you have no insight into the company's financing plans, so a balance sheet would mostly contain standard assumptions (% of revenue, DSO / DPO / DIO, flatline items) that may not provide meaningful insights.

I'm fairly certain it's going to be a software company, so I was going to model out a deferred revenue schedule and A/R forecast, but was not sure if it was necessary to build out the rest of the balance sheet. My only thought is that building the balance sheet would allow FCF to be calculated easier. I also am thinking that building the balance sheet is probably smart just to show that I can do it. Let me know your thoughts, just want to make sure I am budgeting my time for the case study most efficiently. Thanks.

 

If you have the time to do it, then do it. I've been in similar situations before when I was interviewed and chose to just do cash flow models or whatever I deemed was necessary; the first piece of feedback I always received was to do a full 3 statement model. Now having sat at the other side of the table, I see why. 

Look, if you're in a pinch for time and value is clearly added more elsewhere, then focus on those other areas. But a fully fleshed out model should always work in your favour. At the very least it shows them that you can do it (even when they have no reason to believe you can't). It also allows for more detailed discussions on capital structure, debt payments etc that might not be brought up if you don't build one. 

 

Assuming this is a timed case study my answer is:

No, don't waste time on it.

What matters is top line, profit and cash flow generation. Model NWC as a % of sales for the FCF calculation. Spend any time you save fleshing out the rationale behind your driving assumptions and making a comprehensive list of questions you'd ask management, additional work you'd do etc.

 
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