Author: thanhnambui

I am a bank employee specializing in trade finance- a field that is not directly linked to my university major in Financial Investment. However, with a passion for economics and finance, I determined to pursue a higher education degree and successfully achieved a Master in Economics of Banking and Finance from CFVG in 2019. During that study time, I encountered many difficulties in consolidating background knowledge studied at university, which made me realize the necessity of building foundation for effective learning outcomes. Therefore, my friend and I decided to create Econfin-Invest to record basic knowledge of economics, banking, finance, and investment fields. The articles I write are carefully selected and collected from a wide range of different reliable sources such as textbooks, economic and financial reports and relevant journals. Most importantly, these articles are not A to Z lectures of subjects related to the aforementioned fields, yet simply articles I consider to be accessible to all interested readers as well as being essential to apply in everyday practices. Thank you for reading and supporting!


Why can’t the world of ­finance be simpler? Let’s think about a simple version of capital markets. On one side, there would be individuals and households that have savings that they want to invest. These are people like you and me who want to save for college or retirement and want to use that money to generate a return. On the other side are companies that need capital to build new projects and grow. So, a simpler ­financial world would just have the savers and ­firms, and we wouldn’t need the mess of ­finance that exists in the middle.

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­Finance professionals look to the future for the most important questions regarding the value implications of any decision. In short, the source of all value today is future performance as manifested in cash-flows.

Would you be indifferent to a dollar received today and a dollar received in ten years? Clearly, no. So, ­finance prescribes thinking about the free cash-flows an asset will generate in the future and figuring out what they are worth now.

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The ­final cash measure is free cash-flows, one of the most important measures of economic performance in ­finance. You’ll see this number again and again when you look at how companies are valued or when companies discuss how they’re doing. The equation for calculating free cash-flows provides a measure of the amount of cash-flows truly unencumbered by the operations of a business. It’s the purest measure of cash and forms the basis of valuation. It removes the distorting effects of non-cash charges such as depreciation and amortization (like EBITDA), accounts for changes in working capital (like operating cash ‑ow), and fi­nally, acknowledges that capital expenditures are required for growth and have been avoided so far. In short, free cash ‑ow isolates the cash that is truly free to be distributed or used however the company sees ­fit.

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Given the obsession with cash, it’s not surprising that there is a separate ­financial statement dedicated to it: the statement of cash‑flows. Many ­finance professionals consider the statement of cash‑flows a company’s most important ­financial statement. Rather than focusing on the income statement, which has the problems of noncash expenses and managerial discretion, or a balance sheet, which has the problems of historical cost accounting and conservatism, many people in fi­nance focus on the statement of cash‑flows because it looks purely at cash.

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Which of those many ratios is the most important for managers to focus on?

This question is controversial, but many ­financial analysts focus on return on equity (ROE), since that number measures the returns to owners, who are arguably the ultimate bosses within a company. Because ROE is a widely used measure, it’s important to understand the factors that contribute to an ROE. The DuPont framework, a method of analyzing a company’s ­financial health originated by the DuPont Corporation in the early part of the twentieth century, provides a useful way to understand the levers of ROE.

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After the retailers and service companies, we’re left with a motley crew – Microsoft, Nordstrom, Duke Energy, P­fizer, and Dell.

Three of the companies, C, D, and F, have barely any PP&E, while the remaining two companies have very significant PP&E. One is likely Duke Energy, which has power plants, and the other is likely Nordstrom, a brick-and-mortar retailer. But which is which?

To double-check, look at the three remaining companies and gauge their property, plant, and equipment. Dell, Pfi­zer, and Microsoft don’t really do any heavy manufacturing so their low levels of PP&E make sense.

Which of the two companies with signifi­cant property, plant, and equipment is Duke Energy and which is Nordstrom? The key differentiating factor here is inventory.

Nordstrom would have a large amount of inventory, while Duke Energy has very little (electricity can’t be stored). So, company L turns out to be Duke Energy, and company J is retailer Nordstrom.

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