Chapter 1 - Comparable Companies Analysis Flashcards
What are the steps in comparable companies analysis?
- Create a universe of companies
- Obtain the relevant financial data needed
- Spread the financial info, ratios, and multiples (by inputting the data into the relevant sheets that calculate the needed outputs)
- Perform benchmark analysis of companies
- Determine valuation
Gross profit margin
Gross profit (sales - cogs)/ sales
EBITDA margin
EBITDA/ sales
EBIT margin
EBIT/ sales
Net income margin
Net income/ sales
Growth profile
Obtained from looking at historical and projects EPS (projected comes from consensus reports)
Return on invested capital (ROIC)
EBIT/ avg. net debt + equity
Return on equity (ROE)
Net income/ avg. shareholders equity
Return on assets (ROA)
Net income/ avg. total assets
Implied dividend yield
(Most recent quarterly dividend per share * 4)/ current share price
Leverage ratio
Debt/EBITDA
Debt to total capitalization
Debt/ (equity + debt + preferred stock + minority interest)
Interest coverage ratio
EBITDA, (EBITDA - CAPEX), or EBIT/ interest expense
What is the equity value multiple and how do you calculate it?
P/E ratio = share price/ diluted EPS or Equity Value/ Net Income
(Higher P/E = higher growth expectations)
What is the enterprise value multiple and how do you calculate it?
Enterprise value to EBITDA = EV/ EBITDA or Enterprise value to EBIT = EV/EBIT (EV/EBITDA is more commonly used)
Enterprise value to sales
=EV/Sales (used as sanity check to earnings based multiples)
What are the 5 things to look at in step 3 of a comparable companies analysis?
Size, profitability, growth profile, ROI, and credit profile
Pros to comparable companies analysis
1) market-based - info used is from the actual market, so it includes market sentiment
2) relativity - easily measurable and comparable data among companies
3) quick and convenient - valuation depends on basis of a few easy calculateable inputs
4) current - based on market data that is updated daily
Cons to comparable companies analysis
1) market based- data can be skewed during certain periods
2) absence of relevant comparables- May be difficult to identify similar companies or may not exist at all
3) potential disconnect from cash flows - doesn’t take into account past or future predicted cash flows, which could vary valuation.
4) company specific issues - may leave out target specific strengths, weaknesses, opportunities and risks
