Chapter 1: Analysis & Evaluation Of Data Flashcards
Current ratio (working capital ratio)
Measures a company’s ability to pay short term obligations using short term assets.
CA / CL
The higher the better.
Quick ratio
More conservative measure of a company’s ability to service short term debt.
(CA - Inventory) / CL
The higher the better.
Debt to equity ratio
Compares the proportion of a company’s assets that are financed with debt vs. shareholder investment.
Debt / shareholders’ equity
Accounts payable is usually deducted from the debt calculation.
Debt to capital ratio
Liquidity measure that compared debt to total invested capital.
Debt / (debt + shareholders’ equity)
Or
Total liabilities / total assets
The higher the ratio, the more leveraged the company.
The cash conversion cycle
Measures how quickly a business turns expenditures for raw inputs into cash received.
= DIO + DSO -DPO
expressed as the average number of days in each cycle that working capital is unavailable for other uses.
Inventory turnover ratio
Measures how many times a company’s inventory is sold & replaced over an accounting period.
= COGS / avg. inventory for the period
Days inventory outstanding
= 365 / inventory turnover ratio
Receivables turnover ratio
Measures how many times during an accounting period a company collects it’s accounts receivables.
= net credit sales (or sales) / avg. accounts receivable
A low ratio compared to industry norms may have collections issues or liberal credit policies.
Days sales outstanding
= 365 / receivables turnover ratio
Payables turnover ratio
Measures the time the company takes to pay its suppliers
= COGS / avg. payables
A low ratio could indicate cash flow issues, or that the company has negotiated favorable credit terms.
Days payable outstanding
= 365 / payables turnover ratio
Free cash flow
The amount of money a company has left over after all operational expenses that can be reinvested, used to pay debt, or distributed to shareholders
= EBIT + D&A - taxes - cap ex - change in working capital
Free cash flow yield
A ratio that allows free cash flow to be compared to comps.
= FCF / market cap
Or
FCF / enterprise value
Profitability
A company’s ability to convert revenue into profit.
The balance sheet
Snapshot of financial position
Balance sheet equation
Assets = Liabilities + Owners’ Equity
Assets
Anything a company owns that has an economic benefit.
Current assets
Assets that are likely to be converted to cash within 12 months.
Long-term assets
Assets that the company does not expect to convert to cash within twelve months.
Liabilities
Any financial obligation the company owes.
Current liabilities
Obligations that are expected to be paid off within twelve months.
Long-term liabilities
Financial obligations that do not need to be repaid within one year.
Shareholders’ equity
The amount of money that would be left over if a company would be left over if a company liquidated all of its assets and paid off all it’s liabilities.
Additional paid in capital
The amount of money a company receives above and beyond the par value of stock.
Not based in current mv of stock.
Represents amount of $ a company receives from initial stock sale.
Treasury stock
Amount of its own stock a company owns.
Shares still considered issued.
No voting rights or dividends.
Usually negative number on balance sheet.
Retained earnings
Cumulative figure that represents a company’s total profit since inception, less dividends paid.
Revenue
Total amount of $ the company brought in from the sales of goods and services during the period in question.
COGS
Direct cost to company to produce the goods or services during the period.
Primarily variable costs
Operating expenses
Expenses that support the company’s operations, but are not directly linked to the production of goods or services.
Depreciation and amortization
Method of accounting for the wear and tear and obsolescence of tangible and intangible assets.
The cash flow statement
Depicts the flow of cash into and out of the company.
Shows whether the company is generating enough cash to pay its expenses and invest in the business in the short term.
Liquidity
A company’s ability to meet its short term obligations.
Working capital
Current assets - current liabilities
The amount of $ a company has to fund its operations and expand its business
Net debt
S-T debt + L-T debt - cash & cash equivalents
Amount of debt a company holds in relation to its liquid assets.
Current ratio
Current assets / current liabilities
Measures a company’s ability to satisfy short term obligations.
Quick ratio
(current assets - inventory) / current liabilities
More conservative measure of short term liquidity than the current ratio.
Debt to equity ratio
Debt / shareholders’ equity
Compares the proportion of a company’s assets that are by debt v. Shareholders’ equity.
- AP is usually deducted from total liabilities when determining the debt figure.
Debt to capital ratio
Debt / (debt + OE)
Or
Total liabilities / total assets
Liquidity measure that compares debt to total capital.
The higher the ratio, the more leveraged the company.
Cash conversion cycle
Days sales outstanding + days inventory outstanding - days payables outstanding
Measures how quickly a business turns expenditures for raw inputs into cash received.
Represents the number of days between the purchase of raw inputs and the collection of cash from the sale of finished goods.
The shorter the ccc, the better.
Inventory turnover ratio
COGS / avg. inventory
Measures how many times a company’s inventory is sold & replaced over the accounting period.
Average inventory
(beginning inventory + ending inventory) / 2
Days inventory outstanding
365 / inventory turnover ratio
Receivables turnover ratio
Sales / avg. receivables
Measures how many times during an accounting period a company collects its accounts receivable.
Average AR
(beginning AR + ending AR) / 2
Days sales outstanding
365 / receivables turnover ratio
Payables turnover ratio
COGS / avg. payables
Average payables
(beginning payables + ending payables) / 2
Days payable outstanding
365 / payables turnover ratio
Free cash flow
= EBIT + D&A - taxes - CapEx - change in WC
The amount of money a company has left over after all operational and capital expenses that can be re-invested, used to pay debt, or distributed to shareholders.
Free cash flow yield
FCF / market cap
Or
FCF / enterprise value
Ratio that converts FCF to a form that can be meaningfully compared to the ratios of the comps.
Profitability
The ability to convert revenue into profit.
Often necessary to adjust for extraordinary and non-recurring expenses.
EBITDA
EBIT + D&A
Or
Net income + taxes + interest expense + D&A
A measure of a company’s profitability that strips away the effect of a company’s capital structure by stripping away interest expense and taxes.
EBITDAR
Earnings before interest, taxes, D&A, and rent (or restructuring)
Used in specific limited circumstances.
Earnings per share (EPS)
Net income / avg. shs outstanding
Expresses the amount of a company’s profit allocated to each outstanding share of common stock.
Preferred dividends are usually deducted from net income before the calc.
Treasury stock method
- Determine # of convertible securities that are in the money
- Calculate the total # of shs if the in the money securities were exercised.
- Calculate proceeds company would receive from exercise.
- Determine # of shs company can repurchase at the current market price with the proceeds.
- Subtract repurchased shs from new shs from exercise & add the result to the original shs outstanding.
Price to earnings ratio
Price per share / EPS
The lower the ratio, the cheaper the stock, relative to the comps.
Earnings yield
EPS / PPS
The percentage of each dollar of the company’s market price that the company earns a profit.
Equity turnover
Sales / avg. shareholder equity
Measures how efficiently a company uses stockholder equity to generate revenue
Return on equity
Net income / owners’ equity
Measures the return generated on capital provided by a company’s shareholders.
Total OE is generally measured at the beginning of the fiscal year or accounting period.
Return on assets
Net income / total assets
Measures how effectively a company is using it’s asset base to generate revenue
Return on invested capital
EBIT (1 - t) / net debt + OE
Measures the return provided by the cumulative capital invested in the company.
Total expense ratio
Total fund operating costs / avg. total fund assets
Measures the total percentage of assets under management that are consumed by management costs.
Used for mutual funds & other investment funds.
Times interest earned
EBIT / interest expense
Leverage ratio that reflects a company’s ability to satisfy it’s interest payments with earnings.
The closer to 1, the more difficult it is to pay interest expense.
Debt to EBITDA ratio
Total debt / EBITDA
roughly determines how many years of earnings are required to pay off the company’s debt completely.
Market capitalization
Current price per share x shs outstanding
Represents the total market value of the company’s equity.
Equity value
Market cap + value of stock options & convertible securities.
Takes into account all equity interests.
Enterprise value
MV of equity + net debt
The “takeover” value of a company.
Net debt
The total debt on the balance sheet less cash and cash equivalents.
EV / EBITDA ratio
Most frequently used valuation metric.
Independent of a firm’s capital structure, i.e. good for comparing companies.
P/E ratio
Price per share / EPS
Compares the growth expectations that are built into a company’s stock price.
Dependent on capital structure, therefore could have comparability issues.
Price to earnings growth ratio (PEG)
P/E ratio / expected EPS % growth
Stocks with PEG > 1 are over valued
Stocks with PEG < 1 are under valued
Price to book ratio
Market cap / BV of equity
Indicates if a company is over or under valued relative to the value of its assets.
Also called price to net asset value ratio
A company with a price / book ratio < 1 theoretically trades below its liquidation value & is under valued.
Price to cash flow ratio
PPS / operating cash flow per share
Less common alternative to P/E ratio.
Eliminates distortions caused by the accounting treatment of D&A and other non cash charges.
Price to sales ratio
PPS / revenue per share
Measures how much revenue a $1 investment in stock generates.
Revenue per share is usually calculated on an LTM basis.
Sum of the parts analysis
Valuing the individual segments of a company, the summing the values to arrive at the total EV of the company.
Accretion / dilution analysis
- Estimate pro forma net income for the combined entity
- Determine the new share count for the combined entity
- Calculate the pro forma EPS
- Calculate the buyer’s standalone EPS
- Compare the combined EPS to the standalone EPS
If combined EPS is greater than standalone EPS, then transaction was accretive. If less, it was dilutive.
Dividend yield
Annual dividend per share / PPS
Expresses the return per dollar invested that flows back to investors in the form of dividends.
Dividend payout ratio
Annual dividend per share / EPS
expresses the percentage of a company’s earnings that are paid out as dividends.
A relatively high dividend payout ratio may indicate a relatively mature company.
Compound annual growth rate (CAGR)
((end value / beg. value)^(1/n))-1
Calculates the year over year growth rate of an investment if it is assumed that it grew at a steady rate over the time period.
Cost of capital
The expected rate of return that the business could have earned if it invested funds in a different investment with a similar risk profile.
The opportunity cost of all funds, debt and equity, that are invested in a business.
Weighted average cost of capital (WACC)
(Kd * (1-t) * Wd) + (Ke * We)
A company’s cost of capital, based on the percentage of debt and equity in the capital structure.
Cost of equity
Rfr + (beta * Mrp) + Sp +SRp
Market risk premium (Mrp)
Erp - Rfr
The excess return that a stock provides over the risk free rate.
Economic profit
The difference in profit between two alternative investments.
Net present value (NPV)
The sum of the present values of all future cash flows, minus the cost of the initial investment and the present value of all future cash outflows, over some time horizon.
If NPV is > 0, then the investment in acceptable.
If NPV IS < 0, the the investment is not acceptable.
Internal rate of return (IRR)
The discount rate at which the NPV of all cash inflows & outflows is 0.
Generally, the higher the IRR, the more desirable the investment.
Dividend Discount Model
Stock Value = Dividend per share / (discount rate - dividend growth rate)
Stock Volatility
The tendency of a stock’s price to fluctuate over the short term
Beta
The measure of a stock’s average volatility relative to the volatility of the overall market.
The market’s beta = 1
Asset Turnover Ratio
Revenue / Avg. Total Assets
Measures a Company’s ability to use its assets to generate revenue. The higher the better.
Average Total Assets
(Beginning Assets + Ending Assets)/2
Inventory Equation
Beginning Inventory + Purchases - COGS = Ending Inventory
