In doing model ratio analysis, I want to make sure that my figures look sensible, that the consensus estimates fit nicely into my forecast figures as well. Before I do that though, I want to make sure I've got interest flowing into the income statement. So I'm gonna go to my Info tab, the circular switch has been turned to a one. Then I go to File, Options, File, More, Options, and in the Formulas tab, I am gonna make sure I've got enable iterative calculations ticked. If you're on a Mac, you'll click on Excel, and then Preferences. Let's go to the top of Model 1. Make sure that we've got interest flowing through here and we do.

So back down to the bottom, I want to start looking at my consensus estimates versus my forecasts. The consensus assessments given to us were for revenue and EBITDA, and here we've got revenue growth and EBITDA margin. If I go back to the Model 1 Assumptions tab, there are the three revenue figures given to us by consensus estimates, and we calculated the growth figures underneath. The EBITDA figures. There are the three consensus estimates for EBITDA and we came up with the margins. I can see those figures have now flown through onto the Model 1 tab.

If you look at revenue growth, it goes from 5.3 to 7.3 to 7.4, and then my figures start to go down. This is why I've had to come up with the assumptions myself and my assumptions go down to 6, 5, 4, all the way down to 2.5%. If you're doing your model for valuation purposes, such as a discounted cash flow, then we always say that the long-term growth rates has to be in line with GDP growth rates. That's fine. That's exactly what I'm doing here. So I am more than happy with my trajectory of revenue growth. If you look at EBITDA margin, the three figures for consensus assessments were between 20.2 and 22.1. My figures thereafter were ever so slightly higher. I'm not too worried about that. I've got a good reason for that. I'm happy with that in my model. Now I'm gonna start looking at EBIT margin and my EBIT margin going forward comes down from 18% all the way down to 16.9. And I noticed my recurring net income margin does a similar kind of trajectory.

I just want to make sure that that's okay because in my model, revenue is still growing, albeit at a slower pace, an EBITDA margin is flat. So I just want to ask myself, why is that coming down? Do I have a good reason? And it's something worth investigating. A couple of other notable ratios I want to point out. Well, firstly is net debt. If we look at this model, we can see that it's actually a negative number. And net debt is debt minus cash. A negative net debt means this company has net cash and that net cash position is growing and growing and growing. This company is making loads of cash. Well done to this company, assuming my model is correct. I won't go through any of the other debt ratios because this company has virtually no debts. But what I do want to look at is return on average equity and return on average invested capital. I noticed that my return on average equity starts at a pretty high 15.7% but by the end of my model, it's down to 9.8.

Whereas if I look at my return on average invested capital, starts around the 15%, then jumps up to 18 and stays around the 18 level. So why do we have this? It makes me question, have I done something wrong in my model? Well, the answer is it's the cash. The cash is causing that discrepancy. My return on average equity, my equity is actually shooting up. It's shooting up so quickly because we're retaining all of that cash. So as the equity jumps up and the returns aren't quite keeping pace with that equity, the return on average equity comes down. However, if we look at invested capital, invested capital is calculated as your equity plus your debt minus cash minus long-term investments. So for this company, it's really equity minus cash. This company's equity is shooting up but their cash is also shooting up. So if you take the high equity minus the high cash, it gives you a reasonably flat invested capital. So even though I do see the return on average equity and the return on average invested capital diverging, I've got a good reason for it. These ratios have helped me to investigate what I think could be some anomalies and come up with an explanation. The last thing that we could do is we could go to the Model 1 Assumptions tab and we could change the case that we're in. We could change from case one, the base to a two or to a three and feel free to investigate how the ratios have changed.