Corporate finance and financial statement analysis, in English
A corporate finance tutor for students on English-taught business degrees in Spain. Financial statement analysis, investment appraisal with NPV and IRR, cost of capital and capital structure, taught one to one and online.
This module asks you to do two things that feel unrelated: read a set of accounts and decide whether a project is worth doing. They are the same skill seen from two ends. Both come down to working out what cash a decision produces and what that cash is worth once you account for risk and time.
Reading a set of financial statements properly
Before any ratio makes sense you need to see the shape of the balance sheet: what the company owns, who financed it and over what horizon. We cover working capital and why a negative figure is a warning in a manufacturer and completely normal in a supermarket, the structure of the profit and loss account, and how to trace a number from the notes into the headline figures. Ratios calculated without this reading are just arithmetic.
Ratio analysis: liquidity, solvency, activity and profitability
Current and quick ratios, gearing and interest cover, inventory and receivables turnover, and the profitability family. The important part is interpretation, not the formula: a current ratio of 1.4 means nothing until you compare it with last year, with the sector and with the company's operating cycle. We practise writing the short commentary that carries most of the marks, and on spotting when a ratio has moved for a reason that has nothing to do with performance.
ROA, ROE and the leverage effect
Return on assets measures how well the business uses everything it has, before deciding who financed it. Return on equity measures what is left for the shareholder after interest and tax. The bridge between them is leverage, and it works in both directions: when return on assets beats the cost of debt, borrowing lifts shareholder return, and when it does not, borrowing accelerates the damage. We work the relationship algebraically so you can prove it rather than assert it.
Investment appraisal: NPV, IRR and payback
Net present value, internal rate of return, discounted payback and the profitability index. We work on building the incremental cash flow properly, which is where most marks are lost: including working capital movements, excluding financing costs because they live in the discount rate, handling tax and the tax shield on depreciation, and deciding what counts as relevant. Then we look at where NPV and IRR disagree, on mutually exclusive projects and on projects with unconventional cash flow signs.
Cost of capital and WACC
The discount rate is not given to you in real life, so the module makes you build it. Cost of equity from CAPM or from a dividend growth model, cost of debt after tax, and the weighted average that combines them using market values rather than book values. We also cover when a project should not be discounted at the company WACC, which is whenever its risk differs from the firm's, and how to adjust for that.
Capital structure and dividend policy
Modigliani and Miller with and without taxes, what the propositions actually claim and what they assume, and the trade-off between the tax shield of debt and the cost of financial distress. Then dividend policy: whether it creates value, the signalling argument, and the practical constraints. These topics come up as essay questions as often as calculations, so we work on structuring the written answer too.
If your module is called something else
Corporate finance and financial management are, in almost every programme, the same module under two names, and that is where most of the searching goes wrong. If your module appears as any of these, this is the syllabus:
- Financial Management — the most frequent name in English-taught Spanish degrees, and the exact same content: appraisal, cost of capital and capital structure.
- Business Finance — the common British naming, usually a single introductory module.
- Managerial Finance — the American textbook name, approached from the manager decision rather than from the market.
- Corporate Finance I and II — the split over two semesters: appraisal and cost of capital first, then structure, dividends and valuation.
- Financial Statement Analysis — the diagnostic half on its own: ratios, ROA against ROE and the leverage effect.
- Capital Budgeting — the appraisal block as a module of its own: NPV, IRR, payback and project selection under constraints.
- Dirección Financiera — the same syllabus taught in Spanish, if you would rather have the lessons in the language of your exam.
The content is the same throughout: reading the statements, ratio analysis, NPV and IRR, the cost of capital and WACC, and capital structure. What changes is how much of each your lecturer asks for, so the lessons are built on your syllabus and your past papers.
Where almost everyone gets stuck
Putting interest into the project cash flows
Financing costs belong in the discount rate, not in the cash flow. If you deduct interest from the flows and then discount at the WACC you have charged for the debt twice and your NPV is wrong. The project cash flow answers what the project produces; the discount rate answers what it costs to fund it.
Ranking mutually exclusive projects by IRR
IRR is a percentage, so it ignores scale. A small project with a 40% return can create less value than a large one at 15%. When you have to choose one project and only one, NPV is the criterion. IRR is useful as a supporting comment, and the exam often builds the numbers so that the two rankings conflict on purpose.
Forgetting the working capital movements
A project that grows sales usually needs more inventory and gives more credit, and that cash goes out at the start and comes back at the end. Leaving the working capital investment out overstates the early flows and the NPV. It is a small line and it is examined constantly.
Using book values in the WACC
The weights in a weighted average cost of capital should reflect what equity and debt are worth now, not what they cost historically. Book value equity in particular can be wildly different from market capitalisation. If the question gives you a share price and the number of shares, that is a signal it wants market values.
Worked example: working capital, ROA, ROE and leverage
A company shows the following position at 31 December. Non-current assets 600,000 euros. Current assets 400,000 euros (inventory 150,000, receivables 100,000, cash 150,000). Equity 400,000 euros, non-current liabilities 300,000 and current liabilities 300,000. In the income statement: operating profit (EBIT) 120,000 euros, interest expense 30,000 euros, tax rate 25%. Calculate working capital, the current ratio, gearing, ROA and ROE, and say whether financial leverage is working for or against the shareholder.
- Working capital = current assets - current liabilities = 400,000 - 300,000 = 100,000 euros. Current ratio = 400,000 / 300,000 = 1.33. Current assets cover the short-term debt with a cushion left over.
- Gearing: total liabilities = 300,000 + 300,000 = 600,000 euros. Debt to equity = 600,000 / 400,000 = 1.5. As a share of total assets: 600,000 / 1,000,000 = 60% funded by debt.
- ROA = EBIT / total assets = 120,000 / 1,000,000 = 12%. The numerator is operating profit, before interest and tax, because ROA asks how well the assets perform regardless of who financed them.
- Net profit: 120,000 - 30,000 of interest = 90,000 before tax; tax at 25% = 22,500; net profit = 67,500 euros. ROE = 67,500 / 400,000 = 16.875%.
- Check with the leverage formula: average cost of debt i = 30,000 / 600,000 = 5%. ROE = [ROA + (ROA - i) x D/E] x (1 - t) = [12% + (12% - 5%) x 1.5] x 0.75 = 22.5% x 0.75 = 16.875%. It matches.
SolutionWorking capital 100,000 euros, current ratio 1.33, gearing 1.5 (60% of assets), ROA 12% and ROE 16.875%. Because ROA (12%) exceeds the average cost of debt (5%), financial leverage is positive: on these terms, borrowing more raises the return to shareholders.
About these lessons in particular
My module is called Financial Management. Is that this page?
Yes. Corporate finance, financial management and direccion financiera cover essentially the same ground in Spanish business degrees. Send me the syllabus and I will confirm the overlap before we start.
Can you help with a company analysis assignment, not just the exam?
Yes. We can work through the ratios and the interpretation together so you can write it yourself. I will help you understand and structure the analysis, but the submitted work has to be yours.
Do you teach this in English?
Yes, the whole module. I live and study in the United States, so the English terminology is what I use daily, and we can switch to Spanish for any concept that lands better that way.
When NPV and IRR disagree, which one do I follow?
NPV, and the exam wants you to say why. IRR assumes the interim cash flows are reinvested at the IRR itself and it breaks when the projects differ in size or in timing, or when the cash flows change sign more than once and there are several IRRs. NPV adds value in euros and is additive, so it is the criterion that survives.
What discount rate am I supposed to use?
The one that matches the cash flow. Free cash flow to the firm goes with WACC; cash flow to equity goes with the cost of equity. Mixing them is the single most expensive mistake in this module, because the arithmetic looks right and the answer is wrong by a long way.
Can we work on the financial statement analysis part only?
Yes. Ratios, ROA against ROE and the leverage effect are a self-contained block and a frequent request, often from students whose module is called Financial Statement Analysis. We can do that alone and leave appraisal out.
Do you use Excel in the lessons?
When it helps. Amortisation schedules, cash flow projections and sensitivity tables are faster and clearer in a spreadsheet, and you keep the file. For the exam we also practise it by hand, because that is how you will be asked to do it.
Do you work as a corporate finance tutor for students at Spanish universities?
Yes, and almost always for the same list: NPV and IRR on an investment appraisal, the WACC with the after-tax cost of debt, leverage, and the ratio and Dupont analysis that comes with it. Spanish programmes label that content Financial Management, Business Finance, Managerial Finance, Capital Budgeting or Direccion Financiera depending on the faculty, and it is the same module underneath. Lessons are online, one to one, and in English or Spanish as you prefer.
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Shall we work on it together?
Tell me where you are, which university you are at and when the exam is. I will get back to you as soon as I can.