Financial Analysis puzzles, solved step by step

Put the lease liability inside EV whenever the rent is outside EBITDA. After capitalisation the leaser's EBITDA is Rs 100 crore, like the owner's. Its shares and debt are worth Rs 723 crore, so dividing those alone gives 7.2x and makes it look cheaper. Add the Rs 77 crore lease and it is 8.0x, the owner's multiple. The numerator and denominator must describe the same claims.

Why does a lease behave like debt?

Think of two families in identical flats. One bought with a home loan; the other rents on a ten year agreement it cannot walk away from. Both owe fixed payments for years. A long lease is a loan from the landlord, repaid in rent, so the rent contains both the use of the asset and the financing of it. Under IFRS 16, and Ind AS 116 in India, the leaser now shows that promise as a lease liabilityThe present value of the rent the company is contractually committed to pay over the lease term, carried on the balance sheet like a borrowing.: Rs 12 crore a year for ten years, discounted at 9%, is about Rs 77 crore.

What changes in the numbers, and what does not?

Capitalisation moves the rent out of operating costs. It comes back as depreciation on a right-of-use asset and interest on the lease, both below EBITDA. So the leaser's EBITDA jumps by the full Rs 12 crore while nothing about its stores, customers or cash has changed. The same move puts about Rs 77 crore of lease on the balance sheet. The two changes are a pair, and a fair multiple has to use both halves or neither.

Where does this bite in real comparables work?

Data providers and peer tables do not always treat leases the same way, and a peer set can mix companies reporting under different standards. Before trusting a multiple, check whether its EV includes lease liabilities and whether its EBITDA is before or after rent, then make every company in the table match. A retailer, airline or restaurant chain that leases most of its sites can look 11% cheaper than an owner purely from this mismatch, which is the whole of the gap in this example.

Say the limitation too. The capitalised figure depends on the discount rate and the lease term the company chose, so two leasers with the same rent can carry different liabilities. Lease-adjusted multiples are better, not exact.

Consolidated net income is Rs 250 crore, Rs 230 crore is attributable to the parent, and non-controlling interest on the balance sheet is Rs 120 crore. Control brings in all of the subsidiary's Rs 50 crore profit. The outside holders' 40%, Rs 20 crore, is shown as profit attributable to non-controlling interest. On the balance sheet, their 40% of Rs 300 crore of book equity sits as a separate line in equity.

Why take in all of a company you only partly own?

Think of a family that controls a shop it co-owns with a cousin. The family runs it, banks its takings and pays its bills, so to describe what the family controls you count the whole shop, then note that a share of the profit belongs to the cousin. Control, not ownership share, decides consolidation, so the parent adds 100% of the subsidiary's revenue, costs, assets and debt, then shows the minority's share of profit and equity on separate lines. That is why consolidated net income is 200 plus 50, Rs 250 crore, and not 200 plus 30.

Where does non-controlling interest show up on each statement?

On the income statement, net income of Rs 250 crore is split into Rs 230 crore for the parent's shareholders and Rs 20 crore for non-controlling interest. EPS uses the Rs 230 crore. On the balance sheet, non-controlling interest of Rs 120 crore sits inside total equity, next to the parent's own equity; if the subsidiary keeps its Rs 50 crore profit for the year, the line grows by Rs 20 crore. On the cash flow statement nothing is deducted, because the minority share of profit is not a cash payment; only dividends paid to the outside holders leave as cash, in financing. Non-controlling interest is a claim on the group by other shareholders, which is why an EV bridge adds it back alongside debt.

State your assumption: the minority is measured at its share of the subsidiary's book equity, with no fair-value uplift or goodwill allocated to it on acquisition. Under the full goodwill method the line would be larger. And note the boundary case: had the parent owned 40% without control, it would use the equity method, report the same Rs 230 crore of net income, but show none of the subsidiary's revenue or debt.

The reported yield is 5.0%; with stock pay treated as a cost it is 3.1%. Market value is 10 crore shares at Rs 800, Rs 8,000 crore. Rs 400 crore over that is 5.0%; Rs 250 crore is 3.1%. You do not need a future share price: deduct stock pay as if it were cash salary, because whatever the price, the shares handed to staff are worth Rs 150 crore.

Why is stock pay a real cost when no cash leaves?

Think of a family shop that pays its manager with a slice of the business instead of a salary. The till looks fuller, but the family now owns less of the shop. Stock-based compensation is wages paid in ownership rather than cash, and adding it back to free cash flow counts the saving without counting the slice given away. For this company, Rs 150 crore of the Rs 400 crore reported, 37.5%, exists only because staff were paid in shares. Put the other way, the reported yield is 60% higher than the yield an owner actually earns.

How does stock pay reach equity value if you do not know the future share price?

There are two consistent routes. Treat stock pay as a cash expense in the DCF, leave it out of the add-backs, and divide the equity value by today's diluted share count. Or keep the add-back and forecast every share that will be issued in future, which needs the future share price you do not know. The first route avoids the circle, because the rupee value handed to staff is fixed by the grant, Rs 150 crore a year, whatever the price turns out to be. Only the number of shares depends on the price: at Rs 400 the grant is 37.5 lakh shares, at Rs 800 it is 18.75 lakh, at Rs 1,600 about 9.4 lakh. Owners give up Rs 150 crore of value each time.

What is the one line that shows you understand it?

The gap between the two yields, 5.0% less 3.1%, is 1.9%, exactly the share of the company given to employees each year. An investor who takes the 5.0% at face value is being paid partly in their own dilution. The limit to say: stock pay retains staff and may cost less than the cash salary it replaces, so it is a real expense rather than a waste. The only point is that it must be counted once, as a cost.

Goodwill is Rs 250 crore. Fair value of net assets is book equity of Rs 500 crore plus the Rs 200 crore brand, less a Rs 50 crore deferred tax liability (25% of 200): Rs 650 crore. Price paid less that is 900 - 650 = 250. On the combined balance sheet cash falls Rs 900 crore, the target's assets arrive with the brand and goodwill, a Rs 50 crore liability appears, and the target's equity disappears.

What exactly is goodwill?

Buying a running restaurant for Rs 90 lakh when its kitchen, furniture and stock are worth Rs 50 lakh, and its name alone could be sold for Rs 20 lakh, leaves Rs 20 lakh paid for things you cannot list: the regulars, the location's habit, the team. Goodwill is the plug: price paid less the fair value of every asset and liability you can identify, including the tax that comes with them. So the work is in the identifiable side, and the brand and its tax are the two lines people miss.

Why does the brand create a tax liability?

The brand goes onto the books at Rs 200 crore, but in a share purchase the tax authorities see no new asset: its tax base stays at zero. As the brand is amortised in the accounts, no matching tax deduction arrives, so future tax bills will be higher than the book profits suggest. That future tax is a real liability, 25% of the Rs 200 crore gap, Rs 50 crore, and it is booked on day one. A liability reduces net assets, so it increases goodwill by the same Rs 50 crore. In an asset purchase where the step-up is tax-deductible, there would be no liability and goodwill would be Rs 200 crore; check which structure and which tax rules apply.

What happens to these numbers after the deal?

The target's equity vanishes because the acquirer now owns it; only the acquirer's equity survives, unchanged by a cash deal. Afterwards the brand, if it has a finite life, is amortised, and the deferred tax liability unwinds in step, which softens the hit to net income. Goodwill is not amortised under Ind AS and IFRS; it is tested for impairment at least once a year, so a disappointing acquisition shows up later as a write-down. Confirm the treatment under the standard the company reports in. The interviewer is checking that you can make the balance sheet balance and explain why each new line exists.