How much money a business has made

Hi all,

If I want to work out how much money a company been able to keep in the bank per year over the last 7 years, which item on the financial statements should I look at for the most accurate assessment?

Would it just be net profit over the last 7 financial statements and then add those numbers up? Or Free cash flow? Or cash from operating activities? Or some other item?

What I want to know is that if I owned 100% of the company, how much money I would have set aside per year over the last 7 years

The figure I am looking for is after everything for that year has been accounted for. Obligations such as payments to keep assets running, salaries, taxes, interests, investments made and every other payment needed to be paid in order for company to operate, what is left over is what I am looking for


Thanks guys

The idea behind it is

If I buy 100% of the company for $150,000,000 and the company is able to set aside/save in a bank 21.5 million per year, it would take that company 7 years to roughly make back that $150,000,000, and I could essentially withdraw that money and I would have made my $150,00,000 back in 7 years and I would have covered my initial investment.

This is what I am trying to figure out, my first post might have been a little difficult to understand.

viciam said:

The figure I am looking for is after everything for that year has been accounted for. Obligations such as payments to keep assets running, salaries, taxes, interests, investments made and every other payment needed to be paid in order for company to operate, what is left over is what I am looking for
Thanks guys

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Hi my Friend

Unfortunately I cant give you the answer you are looking for, Its a great question tho.
I did try a quick Google for you but nothing come up, I would recommend calling you accountant and asking them,

Simple Answer
I think and this is just be speculation, You would just take the net income and deduct the running costs,
I'm sure It's not that easy tho,

What company are you going to buy? this might help us find your answer.

Have a great day
Regards Mr.wilson

I'm going to assume that the venture is funded by equity.

To my thinking, what becomes critical here is the discount rate of the market, r. Because you have not specified any reinvestment of your earnings per year ( ie, no growth), PLUS you own 100% of the company (so for the sake of the exercise you get the 100% of the free cash flow), you ultimately determine whether your internal rate of return beats the market's discount rate. If not you don;t reinvest your cash flow. If projects beat the market discount rate, you DO reinvest a portion of your free cash flow.

Example:

You have capital - capex, working capital, accounts receivables, accounts payable

Your Invested Capital per Share ( ICPS) = Capital/share
Your ROI > 0
EPS is your free cash flow per share = ICPS*ROI

Cash Flow per Share has two branches :
i. Dividend/EPS ( 1-b) AND
ii Retained Earnings/EPS (b)

So, say your company earns 10% on existing assets (ROI)
ICPS = $2 capital per share
Market Cap rate is 12% (r)
No growth plan (g=0)

EPS= 2*0.1 = $0.20

You own 100% of the equity which is 2 millions units.

You pay yourself a perpetuity of 100% of free cash flow since there is no reinvestment to replenish your capital.

So essentially you are setting aside 2Mx0.2 = $400,000

If this was more than an academic conundrum, you would need help, because -

you would need to determine the true market risk premium, like minded companies equity betas, the different probabilitoes of your company returning positive cashflows, debt/equity ratios.

Once you have that, you can look at your cost of capital and see whether it beats what the rest of the market is doing. AND also compare your investment to other ventures - looking at NPV etc

Tax paid is always a great indicator.
You should get the tax returns.

what about the retained earnings on the balance sheet?

So your Cash Flows generated from your assets should be paid out in three ways:

Dividends and debt payments
Retained Cash flows ( reinvested back into company assets)
Taxes

Depending on the Capital structure of the firm, the non current liability of $150M would likely be paid out as an interest payment to the bondholder (lender). In this case, the payments would be made wholly to the lender of $150M.

If the structure sees the company owner as having 100% equity the repayments could be based on a portion of the EPS - A portion goes to the equity owners and a portion reinvested as Retained Earnings ( I think ).