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Valuation > Financial Statements 2 > Flashcards

Financial Statements 2 Flashcards

1
Q

Gross Profit =

A

Revenue - Costs

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2
Q

Operating Profit =

A

Gross Profit - Expenses

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3
Q

Earnings Before Tax =

A

Operating Profit - Interest

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4
Q

Net Income =

A

Earnings before tax - Tax

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5
Q

Gross Profit Margin =

A

Gross Profit / Sales

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6
Q

Operating Profit Margin or EBIT margin =

A

Operating Profit / Sales

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7
Q

Interest Cover Ratio =

A

EBIT / interest

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8
Q

Effective tax ratio =

A

Tax cost / EBIT

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9
Q

Cash flow to the firm =

A

CFO + (Interest expense x (1 – Tax rate)) – CAPEX

CFO = Cash Flow from Operation

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10
Q

Cash Flow to Equity =

A

CFO – CAPEX +/– Net debt issued

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11
Q

Change in cash position

A

CFO + CFI + CFF

cash flow from operations (CFO)
cash flow from investment (CFI)
cash flow from financing (CFF).

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12
Q

Working Capital =

A

Receivables + Inventory − Payables

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13
Q

Receivable Days =

A

(Receivables / COGS) x 365

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14
Q

Inventory Days =

A

(Inventory / COGS) x 365

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15
Q

Payable Days =

A

(Payables / COGS) x 365

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16
Q

Total asset turnover =

A

Revenue / Average of total assets

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17
Q

Current ratio =

A

Current assets / Current liabilities

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18
Q

Quick Ratio =

A

(Cash + Marketable Securities + Receivables) / Current Liabilitiea

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19
Q

Leverage =

A

Assets / Equity

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20
Q

Leverage =

A

Assets / Equity

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21
Q

Net debt to Equity ratio =

A

Net Debt / Total Equity

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22
Q

Interest Coverage Ratio =

A

EBIT / Interest

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23
Q

Return on Equity =

A

Net Income / Average Equity

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24
Q

Return On Equity =

A

Net Profit Margin x Asset Turnover x Leverage Ratio

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25
Q

Return on Equity =

A

(Net Income / Sales ) x (Sales / Assets ) x ( Assets / Equity)

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26
Q

Return on Assets =

A

Net Income / Average assets

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27
Q

Return on assets=

A

(Net Income / Sales ) x (Sales / Assets )

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28
Q

Return on assets=

A

(Net Income / Sales ) x (Sales / Assets )

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29
Q

Dividend payout ratio =

A

Dividend / Earnings

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30
Q

Receivable days =

A

(Receivables ÷ Sales) × 365

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31
Q

Receivable days =

A

(Receivables ÷ Sales) × 365

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32
Q

Inventory days =

A

(Inventory ÷ Costs) × 365

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33
Q

Payable days =

A

(Payables ÷ Costs) × 365

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34
Q

EBIT (operating profit) =

A

Gross profit - Operating expenses

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35
Q

Risk premium =

A

Expected market return – Risk-free rate

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36
Q

Required return =

A

Risk-free rate + Risk premium

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37
Q

Beta =

A

Covariance between the company and the market / variance of the market

38
Q

Required return =

A

Risk-free rate + (ß × Risk premium)

39
Q

Interest rate =

A

Interest expense / average total debt

40
Q

Cost of Debt =

A

Interest rate × (1 – Tax rate)

41
Q

WACC =

A

(% Equity)x(Cost of equity) + (% Debt)x(Post-tax cost of debt)

42
Q

Cost of Equity =

A

CFO - CAPEX + Net debt issued

CFO: Cash Flow from Operations
Net debt: Debt minus Cash.

43
Q

WACC =

A

CFO + (IE × (1 - TR)) - CAPEX

IE: Interest Expense. TR: Tax Rate.

44
Q

Dividend as a cash flow input for calculating return is useful for

A

It is useful for companies that have a predictable dividend payout strategy, and is therefore typically applied to more mature companies. These often include banks, large oil and gas companies, and utilities.

45
Q

Dividend as a cash flow input for calculating return has weakness

A

Its weakness is that the timing and scale of dividends from growth companies is hard to predict, and therefore it is generally avoided as the cash flow of choice for less mature or high-growth sectors like online services.

46
Q

Cash flow to equity as a cash flow input is useful for

A

It’s a solid method for companies without complicated debt structures. This is therefore most commonly used as a means of valuation for companies with limited debt.

47
Q

Cash flow to equity as a cash flow input has weakness

A

as soon as debt does become a material factor, it runs the risk of significant estimation error, as cash flows from debt issuance or repayment can be large and substantially influence the end output.

48
Q

Cash flow to the firm as a cash flow input is useful for

A

This is the most broadly used and generally recommended – so if in any doubt, use this one. Can be applied consistently across all types of company, no matter the payout ratio or volatility in debt issuance.

49
Q

Adjustments needed if using cash flow to the firm as a cash flow input:

A

However, as the cash flow is to the firm (both debt and equity), there are two further adjustments required: • Debt will need to be subtracted from the end output to determine the underlying equity value (equity = assets – debt). • A weighted discount rate that incorporates both debt and equity will need to be applied – the WACC covered in the last chapter.

50
Q

Value =

A

Interim cash flows + Terminal value

Interim cash flows are those that have been modelled in the financial statements – typically three to five years forward.

51
Q

Terminal value =

A

(Cash flow x (1+g)) / (r-g)

52
Q

If dividends or cash flow to equity are the return input

A

then the price to earnings or price to sales are frequently used.

53
Q

If cash flow to the firm is the return input

A

the enterprise value to EBITDA ratio is the most commonly selected multiple of choice

54
Q

Equity Value =

A

Enterprise value – Net debt

55
Q

Per share value =

A

Equity Value / Total outstanding number of shares

56
Q

PE or Earnings multiple =

A

price / earnings

57
Q

The weakness of the PE ratio is

A

That if a company is not profitable, it is of no use, and if earnings are highly volatile, it becomes problematic.

This issue can be partly remedied by ensuring that the earnings used are normalised by exempting any one-off figures.

58
Q

PEG ratio =

A

PE ratio / earnings growth.

59
Q

PS multiple

A

helpful during periods of economic stress or excess, when earnings can swing wildly and it may be difficult to develop or get hold of reasonable forward-looking estimates.

Furthermore, as it does not incorporate the margin profile of a company, it is indifferent to the profitability of the target. This makes it particularly often used for less mature companies, where the margin is understated due to profits being reinvested into the business

60
Q

PS multiple weakness

A

that when compared against peers, it accounts for neither the operational profitability of the company or the capital structure. It is therefore very important that if you use a peer group average, you find peers with a similar long-term return profile.

61
Q

PS multiple =

A

Price / Sales

62
Q

EV / EBITDA multiple =

A

enterprise value / EBITDA

Enterprise value = Market cap + Debt – Cash

63
Q

EV / EBITDA multiple has strength

A

It is a particularly useful means of valuation for companies that are relatively stable operationally but which have volatile earnings due to fixed costs such as depreciation, amortisation and interest expenses.

This is often the case with industrial companies, where non-cash charges are proportionately large and, as a consequence, earnings are often volatile.

64
Q

EV / EBITDA multiple has weakness

A

The key weaknesses of the EV/EBITDA ratio is that it overlooks certain costs. These should therefore be considered when thinking about the premium or discount that it should trade at relative to peers.

For example, how does its effective tax rate compare to peers? This can vary between geography. Also, how capital intensive is its business model? This will influence the level of reinvestment required in the company.

65
Q

Dividend yield

A

Dividend / price

66
Q

The strength of the dividend yield

A

that it informs an investor about the actual income return. that for many companies the dividend is less volatile than other financial line items such as earnings.

67
Q

Weakness of the dividend yield

A

that many companies pay no dividend, so it is not applicable to all firms

68
Q

Cash flow yield =

A

Free cash flow / market value

free cash flow from the cash flow statement : calculated by taking operating cash flow and deducting capital expenditure.

69
Q

Free cash flow yield has strength

A

The advantage of this ratio is that cash flow is harder to manipulate by management than earnings, and it represents the actual cash profitability of the company as a whole.

it is often used for mature companies with stable growth prospects, such as utility and telecom firms.

70
Q

Free cash flow yield has weakness

A

The weakness is that without accrual adjustments, it can be very lumpy between periods, and therefore it is hard to determine a ‘normalised level’.

This is a particular issue for growth companies and those with long working capital cycles.

71
Q

price to book multiple =

A

market value / equity

72
Q

PB multiple has strength

A

most practical use for financial companies such as banks,insurance providers and property developers.

applicable irrespective of profitability (or lack thereof). This makes it a particularly practical multiple during periods of economic stress, when earnings might collapse but the valuation should not – remembering that a single year’s earnings for a company is relatively negligible in the context of its overall value.

As the PB multiple is anchored in the equity value, rather than a measure of performance such as sales or profits, it is also typically far more stable over time.

73
Q

PB multiple has weakness

A

it is a very poor measure of value for companies with large off-balance ‘assets’ such as brand, customer base or intellectual property, or for those with high return growth opportunities.

inflation and technology change can create sizeable discrepancies between the market value and accounting value of some assets over time.

74
Q

A sum of the parts approach

A

valuing the various business segments separately and then summing the parts up

Summing up the operating assets (business segments) of a company will equal a ‘gross asset value’ figure, equivalent to the enterprise value. From this point, equity value can be determined by subtracting net debt.

When completing a SOTP valuation, the resulting equity value figure is often referred to as the ‘net asset value’, as a further premium/discount may be applied to reach a ‘fair value’.

75
Q

Startup

Company value = PV of terminal value =

A

Exit value / (1+r)^n

76
Q

Startup

% holding required =

A

investment / PV of exit value

77
Q

Startup

Implied post-deal value =

A

Investment / % holding received

78
Q

Startup

New shares =

A

(% ownership / (1- % ownership)) x old shares

79
Q

Startup

Price per share =

A

Company value / (old shares + new shares)

80
Q

Startup

Exit value =

A

Exit multiple x exit-year earnings

81
Q

Startup

% holding required =

A

Investment / PV of exit value

82
Q

Startup

Retention rate =

A

1 - (% holding required)

83
Q

Startup

Adjusted required ownership =

A

Pre-dilution required ownership / retention rate

84
Q

Bank

Common equity tier -1 (CET1) =

A

balance sheet equity figure - preferred stock, non-controlling interest and any intangibles (goodwill, etc.).

85
Q

Bank

Tier-1 ratio =

A

CET1 / risk weighted assets

86
Q

Bank

Asset yield =

A

Interest Income / average interest bearing assets

87
Q

Bank

Deposit cost =

A

Interest expense / average deposit

88
Q

Bank

Provision ratio =

A

Provision for losses / Average net loans

89
Q

Bank

Net interest margin =

A

Interest income / Average loans

90
Q

Bank

PB =

A

(ROE - g) / (r-g)

91
Q

Bank

Growth =

A

ROE × (1 - dividend payout ratio)

Valuation (4 decks)

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