Quantify the impact of cashflow and growth capital’s dampening of equity gains (and losses) in growth or expansion investments.
Module Category: Capital Structure Drivers
Key Concept: In growth and expansion investments, changes in company equity ratios (ERs) are driven by the amount of excess cash on the balance sheet and cash burned or accumulated over the hold. This allows analysts to break the Leverage Effect (see Module 03) into Gearing (the drag of excess cash on equity value creation) and Cashflow Generation (or cash burned). Excess cash dampens equity gains in successful investments and dampens equity losses in unsuccessful investments.