skills/full-company-analysis/references/appendices/Appendix-L-integrated-worked-company-case.md

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<!-- Appendix: L | Title: INTEGRATED WORKED COMPANY CASE -->

# APPENDIX L - INTEGRATED WORKED COMPANY CASE

> This fictional case is deliberately simplified enough to calculate by hand but complete enough to demonstrate the workflow from reported statements to operating drivers, cash flow, valuation, reverse expectations, scenarios, and monitoring. Numbers are illustrative and do not describe a real issuer.

## Case company: Orion Grid Systems

Orion sells grid-control equipment and recurring monitoring/service contracts. Equipment is 75% of current revenue and service is 25%. Equipment has lower gross margin and consumes inventory/working capital; service has higher recurring margin. The company has $280 million of debt, $80 million of cash, and 50 million diluted shares.

| Current-year income statement | $mm | Analyst note |
| --- | --- | --- |
| Equipment revenue | 750 | Model units, realized price, product mix, and capacity |
| Service revenue | 250 | Model installed base, attach, renewal, price, and usage |
| Total revenue | 1,000 | Reported revenue base |
| COGS | 600 | 40% consolidated gross margin |
| Gross profit | 400 | Reconcile equipment/service mix |
| SG&A | 180 | Separate variable sales expense from fixed corporate cost |
| R&D | 60 | Treat as operating investment analytically when assessing returns |
| EBITDA | 160 | Before $40 D&A |
| D&A | 40 | Linked to productive asset base |
| EBIT | 120 | 12% EBIT margin |
| Interest expense | 18 | Financing item, excluded from FCFF |
| Pretax income | 102 |  |
| Tax expense at 25% | 25.5 | Simplified case |
| Net income | 76.5 | Equity earnings, not the DCF starting point |



| Current-year balance sheet | $mm | Current-year balance sheet | $mm |
| --- | --- | --- | --- |
| Cash | 80 | Accounts payable | 90 |
| Accounts receivable | 150 | Accrued liabilities | 80 |
| Inventory | 120 | Deferred revenue | 60 |
| Other current assets | 50 | Debt | 280 |
| PP&E, net | 500 | Other liabilities | 90 |
| Goodwill/intangibles | 100 | Equity | 400 |
| Total assets | 1,000 | Total liabilities + equity | 1,000 |



## 1. Statement and cash reconciliation

- Net debt is $200 million: $280 million debt less $80 million cash. Whether all cash is excess cash must still be tested; the simplified case assumes it is available.

- Assume current-year CFO is $106.5 million: $76.5 million net income + $40 million D&A + $10 million other noncash/SBC - $20 million working-capital use. Capex is $60 million, producing $46.5 million simplified equity free cash flow before debt repayment/buybacks/dividends.

- A $10 million credit sale at 60% gross margin initially increases revenue by $10 million, EBIT by $6 million before other costs, receivables by $10 million, inventory/COGS according to shipment cost, retained earnings by after-tax profit, and CFO by less than net income until cash is collected. This is why revenue and cash cannot be analyzed independently.

- The reported statements are the immutable layer. Any normalization for SBC, restructuring, acquisition costs, or unusual items must appear in a separate analyst layer with a reconciliation.

## 2. Working-capital diagnostic

| Measure | Calculation | Result | Interpretation |
| --- | --- | --- | --- |
| DSO | $150 AR / $1,000 revenue x 365 | 54.8 days | Collection/billing intensity |
| Inventory days | $120 inventory / $600 COGS x 365 | 73.0 days | Manufacturing/channel inventory intensity |
| DPO | $90 AP / $600 COGS x 365 | 54.8 days | Supplier financing |
| Cash conversion cycle | 54.8 + 73.0 - 54.8 | 73.0 days | Simplified working-capital cycle |
| Five-day DSO deterioration | $1,000 / 365 x 5 | $13.7mm cash use | Translate KPI movement into cash |



- If revenue rises 12% but receivables rise 25%, do not conclude manipulation. Test billing timing, customer mix, payment terms, milestones, acquisition scope, and collections first.

- If DPO rises sharply and CFO improves, inspect supplier-finance disclosures and payment terms before treating the cash improvement as sustainable.

- If inventory days rise while management says demand is exceptionally strong, compare backlog, cancellations, lead times, channel inventory, and production plans.

## 3. Driver forecast

The simplified base case assumes revenue growth decelerates from 12% to 5%, EBIT margin rises from 12.5% to 14%, D&A stays at 4% of revenue, capex at 5.5% of revenue, net operating working capital at 12% of revenue, and cash tax at 25%. The operating model should normally be built from equipment units/price and service installed-base economics; consolidated growth is shown here only to keep the arithmetic compact.

| Year | Revenue | Growth | EBIT margin | NOPAT | FCFF |
| --- | --- | --- | --- | --- | --- |
| 1 | $1,120.0 | 12.0% | 12.5% | $105.0 | $73.8 |
| 2 | $1,232.0 | 10.0% | 13.0% | $120.1 | $88.2 |
| 3 | $1,330.6 | 8.0% | 13.5% | $134.7 | $102.9 |
| 4 | $1,410.4 | 6.0% | 14.0% | $148.1 | $117.4 |
| 5 | $1,480.9 | 5.0% | 14.0% | $155.5 | $124.8 |



- Year 1 FCFF = NOPAT $105.0 + D&A $44.8 - capex $61.6 - increase in NWC $14.4 = $73.8 million.

- The forecast must be rebuilt if equipment/service mix changes because consolidated margin, capex, inventory, and deferred revenue would no longer scale mechanically with total revenue.

- A forecast is not validated because the spreadsheet balances. Validate units, customer demand, price, capacity, lead times, and reinvestment against external and issuer evidence.

## 4. DCF construction and terminal consistency

- Use WACC of 9.0%, a five-year explicit period, and midyear discounting for illustration. The explicit FCFF present value is approximately $402.7 million.

- Terminal growth is 3.0% and terminal ROIC is 12.5%. The sustainable-growth identity requires a 24% reinvestment rate: 3.0% / 12.5% = 24%.

- Year 6 terminal NOPAT is approximately $160.2 million. Terminal FCFF is $160.2 x (1 - 24%) = approximately $121.7 million.

- Terminal value at the end of Year 5 is $121.7 / (9.0% - 3.0%) = approximately $2,028.7 million. Discounted at the midyear timing used in this case, its present value is approximately $1,376.6 million.

- Enterprise value is therefore approximately $1,779.2 million. Subtract $200 million net debt to get $1,579.2 million equity value. Divide by 50 million diluted shares for approximately $31.58 per share.

- The terminal value contributes most of enterprise value, so the analyst must explicitly stress terminal margin, reinvestment/ROIC, growth, and WACC. A precise $31.58 output does not imply precise intrinsic value.

| DCF bridge | $mm except per share |
| --- | --- |
| PV of explicit FCFF | 402.7 |
| PV of terminal value | 1,376.6 |
| Enterprise value | 1,779.2 |
| Less net debt | (200.0) |
| Equity value | 1,579.2 |
| Diluted shares | 50.0 |
| Illustrative value/share | $31.58 |



## 5. Reverse expectations

- Assume Orion trades at $25 per diluted share. Equity value is $1,250 million and, adding $200 million net debt, enterprise value is $1,450 million.

- Holding the same growth path, reinvestment mechanics, WACC, and terminal assumptions, an approximately 11.44% constant EBIT margin would reproduce a $1,450 million enterprise value in this simplified model.

- The research question is therefore not merely whether a $31.58 DCF is above $25. The analyst must determine whether evidence supports an operating path materially better than the roughly 11.4% margin economics embedded in the simplified reverse case, after considering uncertainty and alternative assumptions.

- Reverse DCF conclusions should be translated into equipment units, service attach/retention, price, mix, capacity, and cost evidence before becoming a thesis.

## 6. Scenario design

| Scenario | Operating assumptions | WACC / terminal | EV | $ / share |
| --- | --- | --- | --- | --- |
| Bull | Growth 14% -> 7%; EBIT margin -> 16% | 8.5% / 3.25% | $2,516.7 | $46.33 |
| Base | Growth 12% -> 5%; EBIT margin -> 14% | 9.0% / 3.0% | $1,779.2 | $31.58 |
| Bear | Growth 8% -> 3%; EBIT margin near 11% | 10.0% / 2.5% | $976.8 | $15.54 |
| Stress | Flat/negative early growth; EBIT margin trough 7% | 11.5% / 2.0% | $553.0 | $7.06 |



- The scenarios alter operating drivers and discounting coherently. They do not simply apply higher or lower valuation multiples.

- Probability weights, if used, must be shown separately from the unweighted outcomes and must not hide a liquidity or dilution pathway.

- If Orion needed external capital in the stress case, the $7.06 value would be too high unless the share count and financing terms were updated. Scenario integration must include the balance sheet.

## 7. Forensic overlay

- Assume management reports adjusted EBIT that excludes $10 million of recurring SBC and $8 million of integration expense for the third consecutive year. Rebuild the adjustment history before accepting either exclusion as nonrecurring.

- Assume inventory rises 30% while revenue rises 12%. Test planned capacity ramp, long-lead safety stock, product transition, cancellations, channel inventory, and obsolescence reserve before deciding whether the build is healthy or a warning.

- Assume gross margin improves 200 bps while CFO weakens. Reconcile receivables, inventory, deferred revenue, supplier terms, and capex before calling the margin improvement high quality.

- Assume the company switches from backlog to a new bookings KPI after backlog conversion slows. Reconstruct both series and treat definition drift itself as an open diligence item.

## 8. Mini investment-memo conclusion

A disciplined conclusion would say: Orion can create value if recurring service mix and equipment utilization lift EBIT margin toward 14% while growth remains supported by real grid demand and capacity. The simplified base DCF is $31.58 per share versus a hypothetical $25 market price, but most value resides in the terminal period and the reverse case shows that the market can be rationalized with roughly 11.4% EBIT margin under the same other assumptions. The decisive research work is therefore evidence on service retention/attach, equipment capacity and pricing, working-capital quality, and reinvestment returns, not the arithmetic spread between $31.58 and $25.

## 9. Monitoring sheet

- Quarterly equipment units, realized price, backlog conversion, cancellation rate, capacity utilization, and gross margin.

- Service installed base, attach, renewal/gross retention, expansion, realized price, and service gross margin.

- DSO, inventory days, DPO, deferred revenue, capex, and maintenance/growth split.

- Net debt, interest cost, covenant headroom, SBC/dilution, repurchases, and cash taxes.

- Explicit thesis break: evidence that normalized EBIT margin cannot exceed the market-implied range without unsustainable working-capital, underinvestment, or customer deterioration.