How to Find Investment Banking Opportunities with the Income Statement - dummies

How to Find Investment Banking Opportunities with the Income Statement

By Matt Krantz, Robert R. Johnson

The income statement is fertile ground for investment bankers looking for holes in a business that may be filled with some financial products. Part of the magic investment bankers subject the income statement to is based on financial ratios. Another technique is comparing a company’s financial statements to the industry. But there are opportunities to spot just by glancing at the income statement, including the following:

  • Capacity to handle more debt: Investment bankers love finding ways to get companies to take on more debt. Adding debt to a company, or leveraging it, creates different ways for the investment bank to make money, including the selling of the bond offering. When used properly, leverage can also boost a company’s profitability.

    The income statement, particularly the interest expense line item relative to the company’s net income, can be especially telling when an investment banker is going to suggest a company add more debt.

  • Ripe for a boost in growth: When investment bankers see the revenue line either stalling or creeping higher at a snail’s pace, they see opportunity. Investors usually demand that companies generate growth, which can get increasingly difficult as companies get bigger.

    But when CEOs are looking for a fast and easy way to grow, they may turn to investment bankers for buyout candidates that may help the company get the top line moving higher again.

  • Candidates for divestiture: Sluggish growth in net income, even as revenue is expanding, is a possible indication that the company may be involved in a low-margin business. A low-margin business is one that generates substandard levels of net income relative to the revenue it brings in. Sometimes a low-margin business can act as an anchor around a company because it ties up employees and resources, with little payback.

    Enterprising investment bankers may identify these low-margin businesses as candidates to be sold to another company, to private investors, or even to the public as an initial public offering (IPO) or spin-off. Although these low-margin businesses may be anchors to the company, if operated as stand-alone businesses, by management that focuses on that business, they may become quite profitable. As evidence of that, researchers find that spinoffs perform quite well.