Financial Statements 2 Flashcards
Gross Profit =
Revenue - Costs
Operating Profit =
Gross Profit - Expenses
Earnings Before Tax =
Operating Profit - Interest
Net Income =
Earnings before tax - Tax
Gross Profit Margin =
Gross Profit / Sales
Operating Profit Margin or EBIT margin =
Operating Profit / Sales
Interest Cover Ratio =
EBIT / interest
Effective tax ratio =
Tax cost / EBIT
Cash flow to the firm =
CFO + (Interest expense x (1 – Tax rate)) – CAPEX
CFO = Cash Flow from Operation
Cash Flow to Equity =
CFO – CAPEX +/– Net debt issued
Change in cash position
CFO + CFI + CFF
cash flow from operations (CFO)
cash flow from investment (CFI)
cash flow from financing (CFF).
Working Capital =
Receivables + Inventory − Payables
Receivable Days =
(Receivables / Revenue) x 365
Inventory Days =
(Inventory / COGS) x 365
Payable Days =
(Payables / COGS) x 365
Total asset turnover =
Revenue / Average of total assets
Current ratio =
Current assets / Current liabilities
Quick Ratio =
(Cash + Marketable Securities + Receivables) / Current Liabilitiea
Leverage =
Assets / Equity
Leverage =
Assets / Equity
Net debt to Equity ratio =
Net Debt / Total Equity
Interest Coverage Ratio =
EBIT / Interest
Return on Equity =
Net Income / Average Equity
Return On Equity =
Net Profit Margin x Asset Turnover x Leverage Ratio
Return on Equity =
(Net Income / Sales ) x (Sales / Assets ) x ( Assets / Equity)
Return on Assets =
Net Income / Average assets
Return on assets=
(Net Income / Sales ) x (Sales / Assets )
Return on assets=
(Net Income / Sales ) x (Sales / Assets )
Dividend payout ratio =
Dividend / Earnings
Receivable days =
(Receivables ÷ Sales) × 365
Receivable days =
(Receivables ÷ Sales) × 365
Inventory days =
(Inventory ÷ Costs) × 365
Payable days =
(Payables ÷ Costs) × 365
EBIT (operating profit) =
Gross profit - Operating expenses
Risk premium =
Expected market return – Risk-free rate
Required return =
Risk-free rate + Risk premium
Beta =
Covariance between the company and the market / variance of the market
Required return =
Risk-free rate + (ß × Risk premium)
Interest rate =
Interest expense / average total debt
Cost of Debt =
Interest rate × (1 – Tax rate)
WACC =
(% Equity)x(Cost of equity) + (% Debt)x(Post-tax cost of debt)
Cost of Equity =
CFO - CAPEX + Net debt issued
CFO: Cash Flow from Operations
Net debt: Debt minus Cash.
WACC =
With CFO
CFO + (IE × (1 - TR)) - CAPEX
IE: Interest Expense. TR: Tax Rate.
Dividend as a cash flow input for calculating return is useful for
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.
Dividend as a cash flow input for calculating return has weakness
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.
Cash flow to equity as a cash flow input is useful for
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.
Cash flow to equity as a cash flow input has weakness
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.
Cash flow to the firm as a cash flow input is useful for
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.
Adjustments needed if using cash flow to the firm as a cash flow input:
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.
Value =
Interim cash flows + Terminal value
Interim cash flows are those that have been modelled in the financial statements – typically three to five years forward.
Terminal value =
With cash flow
(Cash flow x (1+g)) / (r-g)
If dividends or cash flow to equity are the return input
then the price to earnings or price to sales are frequently used.
If cash flow to the firm is the return input
the enterprise value to EBITDA ratio is the most commonly selected multiple of choice
Equity Value =
Enterprise value – Net debt
Per share value =
Equity Value / Total outstanding number of shares
PE or Earnings multiple =
price / earnings
The weakness of the PE ratio is
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.
PEG ratio =
PE ratio / earnings growth.
PS multiple
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
PS multiple weakness
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.
PS multiple =
Price / Sales
EV / EBITDA multiple =
enterprise value / EBITDA
Enterprise value = Market cap + Debt – Cash
EV / EBITDA multiple has strength
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.
EV / EBITDA multiple has weakness
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.
Dividend yield
Dividend / price
The strength of the dividend yield
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.
Weakness of the dividend yield
that many companies pay no dividend, so it is not applicable to all firms
Cash flow yield =
Free cash flow / market value
free cash flow from the cash flow statement : calculated by taking operating cash flow and deducting capital expenditure.
Free cash flow yield has strength
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.
Free cash flow yield has weakness
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.
price to book multiple =
market value / equity
PB multiple has strength
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.
PB multiple has weakness
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.
A sum of the parts approach
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’.
Startup
Company value = PV of terminal value =
Exit value / (1+r)^n
Startup
% holding required =
investment / PV of exit value
Startup
Implied post-deal value =
Investment / % holding received
Startup
New shares =
(% ownership / (1- % ownership)) x old shares
Startup
Price per share =
Company value / (old shares + new shares)
Startup
Exit value =
Exit multiple x exit-year earnings
Startup
% holding required =
Investment / PV of exit value
Startup
Retention rate =
1 - (% holding required)
Startup
Adjusted required ownership =
Pre-dilution required ownership / retention rate
Bank
Common equity tier -1 (CET1) =
balance sheet equity figure - preferred stock, non-controlling interest and any intangibles (goodwill, etc.).
Bank
Tier-1 ratio =
CET1 / risk weighted assets
Bank
Asset yield =
Interest Income / average interest bearing assets
Bank
Deposit cost =
Interest expense / average deposit
Bank
Provision ratio =
Provision for losses / Average net loans
Bank
Net interest margin =
Interest income / Average loans
Bank
PB =
(ROE - g) / (r-g)
Bank
Growth =
ROE × (1 - dividend payout ratio)
