Morning, Afternoon, and Evening all,

I’ve finally grabbed some time to put our latest newsletter together. We’ve put out some new ESG content and focussed on how analysts (we think) should integrate ESG into their fundamental valuation work (and no, the answer isn’t just to nudge the cost of capital up or down a few basis points!). Indeed, I think ESG suffers a little from its label, with analysts thinking this is a single discrete risk that needs to be incorporated into its valuation work. We don’t think it that. Check out the content links below.

We’ve just had an upgrade to our AI Avatar Tech platform, which I am excited about. We can now record live video and then use the AI to overdub multiple languages onto yours truly. I need to road-test this a bit when I return to London (mid-December). I’ll report back on what we’ve found out.

On a similar topic, check out what we’ve put out on Depreciation Waterfalls (below). We’ve used AI screen capture for these videos, and I think they’ve come out really well.

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Best wishes

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What’s New?: New Content (of course!)

Discover powerful new investing resources on InsightOne. From market fundamentals to advanced strategies, our latest content helps experienced analysts and newcomers make more informed decisions. Launch the app now to explore our newest tools and insights.

What's New on InsightOne?

1. ESG Integration: Beyond the Checkbox - A Valuation Framework) Premium Plus Subscribers)
   
   Stop treating ESG as a compliance exercise. This comprehensive series shows investment professionals how to directly integrate environmental, social, and governance factors into their fundamental analysis. We break down complex sustainability considerations into concrete valuation inputs that enhance traditional financial models. Whether evaluating a renewable energy startup or a legacy industrial company, you'll learn systematic approaches to capture ESG risks and opportunities in your valuations.

   

2. How loans work...
   
   Have you ever wondered how banks orchestrate those massive corporate loans you read about in the business news? This series pulls back the curtain on corporate lending, walking you through how major loans come together. We'll start with the basics - what exactly is a corporate loan, and how does a term sheet lay out the critical details of the deal?

   

3. Deconstructing ESG Risk: A Structured Path to Robust Valuation: In the complex valuation world, ESG risks have become a critical consideration - yet many analysts still struggle with adequately incorporating them into their models. Our latest video cuts through the complexity, offering a structured approach to understanding how different ESG risks impact company value in distinct ways.

   

4. Unlock Capex Insights: Building Powerful Depreciation Waterfalls: Want to level your financial modeling? Learn how to build a powerful Depreciation Waterfall in Excel that clarifies your capital expenditure analysis. This comprehensive guide breaks down how to track and forecast investment and maintenance capex over time, giving you unprecedented insight into asset management strategies.
   
   Follow along to master this essential tool, which helps you answer critical questions about sustainable growth rates, capital intensity, and maintenance requirements. It is perfect for analysts and investment professionals who need to build robust, defendable investment theses through detailed capital allocation analysis. 

   

Ok, we love this video….

Working Capital: The Hidden Complexity in Financial Modeling

Working capital represents a challenging (yet seemingly simple) aspect of financial modeling, frequently causing forecast balance sheets to fall out of balance. The root of this complexity lies in the counterintuitive relationship between working capital movements and their cash flow implications, mainly when dealing with sign conventions in financial statements.

The Core Challenge

The fundamental issue stems from the dual nature of working capital changes. While the balance sheet reflects absolute positions at specific points in time, the cash flow statement must capture the cash impact of movements between these positions. This translation from position to movement often trips analysts, especially when dealing with naturally negative items like accounts payable or deferred revenue.

Consider accounts receivable: an increase represents a negative cash flow impact (as more cash is tied up in receivables), while the change is positive. This inverse relationship creates a cognitive disconnect, leading to model sign errors. The situation becomes even more complex with naturally negative items, where negative balance sheet position increases can represent positive cash flows.

Common Modeling Pitfalls

The most frequent modeling errors occur when analysts:

• Fail to link working capital changes to the cash flow statement properly

• Misinterpret the sign of the change in naturally negative accounts

• Incorrectly handle timing differences between accrual and cash impacts

• Oversimplify the relationship between P&L items and their working capital implications

Practical Solutions and Mental Models

Two powerful mental models can help analysts navigate these complexities:

The "Good or Bad for Cash" Framework

• Before recording any working capital movement, ask: "Is this change good or bad for cash?"

• An increase in receivables is bad for cash (negative in cash flow)

• An increase in payables is good for cash (positive in cash flow)

• This intuitive approach helps avoid sign convention errors

  The "Investment/Divestment" Perspective

• Think of working capital as an investment decision

• Increasing working capital means investing more cash in operations

• Decreasing working capital means divesting or releasing cash from operations

• This framework aligns naturally with the cash flow presentation

Implementation Guidelines

To maintain model integrity, analysts should:

• Create explicit linking between balance sheet positions and cash flow movements

• Use control checks to verify that working capital changes sum correctly

• Document sign conventions explicitly in the model

• Build in reconciliation checks between the three financial statements

• Consider creating a working capital schedule that clearly shows the bridge between balance sheet positions and cash flow impacts.

Applying these frameworks and maintaining a rigorous model structure can significantly reduce the likelihood of working capital-related errors in financial models. The key is establishing a consistent analytical approach prioritizing logical clarity over mechanical calculations.

What have you missed? 3,000+ digital assets: Highlights from the back catalogue

Now that we’ve built a pretty extensive portfolio of digital assets, we can explore the vault and highlight a few programs you might have missed.

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We’ve also put together a punchy video of the InsightOne platform - no chat - just some flash graphics and music showing off InsightOne at its best. If you have 100 seconds, take a look at this short video:

So, I think we are doing the right stuff. I know I can’t and don’t think of everything, so let me know if you have any ideas or feedback. I’m on [email protected].

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