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Subject 3. Balance Sheet and Cash Flow Statement Modeling PDF Download
Some balance sheet line items, such as retained earnings, flow directly from the income statement, whereas working capital accounts such as accounts receivable, accounts payable, and inventory are very closely linked to income statement projections. A common way to model working capital accounts is to hold efficiency ratios constant - working capital accounts will grow in line with the related income statement accounts.

To project long-term assets such as PP&E, analysts need to project capital expenditures and depreciation.

A company's future capital structure must be projected.

Analysts can determine return on invested capital (ROIC), which measures the profitability of the capital invested by the company's shareholders and debt holders. The numerator is after-tax earnings but before interest expense. The denominator is invested capital, which is equal to operating assets less operating liabilities. High and persistent levels of ROIC are often associated with having a competitive advantage.

Learning Outcome Statements

e. describe approaches to balance sheet modeling;

f. describe the relationship between return on invested capital and competitive advantage;

CFA® 2023 Level I Curriculum, Volume 3, Module 22

User Contributed Comments 2

User Comment
davidt876 ROIC: "the numerator is after-tax earnings but before interest expense"... where interest expense is adjusted for it's current tax benefit. so:

ROIC = NI + I*(1-T)
nmech1984 ROIC = [NI + int(1-t)] / [Oper.A - Oper.L]
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Your review questions and global ranking system were so helpful.


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