Technicals Flashcards
What is enterprise value?
EV is the sum of all ownership interest in a company and claims on its assets from both debt and equity holders
What is the formula for EV?
Equity value + total debt + preferred stock + non-controlling interests - cash and cash equivalents where the equity value is calculated in a fully diluted basis
What is the formula for ROIC and what is it ?
Measures the return generated by all capital provided to a company. Thus, uses pre-Interest earnings statistic on numerator such as EBIT or EBIAT and a metric that captures both debt and equity in the denominator
EBIT / (average net debt + equity)
What is ROE?
Measures return generated in the equity provided to the company by its shareholders. Thus earnings is net of interest expense
Net Income / Average shareholders equity
What is ROA?
Measures the return generated by a company’s asset base
Uses net income / average total assets
What is the formula for implied dividend yield?
Recent quarter dividend per share x 4 / current share price or
Annualised dividends paid / market cap
What is the general formula for leverage and why?
Debt / EBITDA or
Debt / Total capitalisation
EBITDA is a rough proxy for the firms operating cash flow, thus this ratio measures how many years of a company’s, cash flows it will take to repay its debt
What is coverage and it’s general formula ?
Broad term that refers to a company’s ability to meet its interest expense obligations. Numerator consists of a statistic representing operating cash flow (LTM EBITDA) and LTM interest expense in the denominator. Better coverage translates to better credit profile
How do I calculate LTM financial data? With example.
LTM financials = last FY financials + current stub - prior stub
E.g if currently is 3Q2012, then LTM = FY2011 + 3Q12 - 3Q11
How do I calendarize Financials?
Month of fiscal year end/ 12 x sales number + ((12-month of fiscal year end/12)x following year sales )
What is the formula for P/E?
Market Cap / Net Income or
Share price / EPS
When do I use use p/e and when do I not?
Use: when the firm is large and mature with consistent earnings
Don’t use: when firm is small with little or negative earnings as denominator would be too small.
When the disparities due to capital structure or D&A or Taxes will make two otherwise very similar companies very different
What type of enterprise value multiples exist and why?
EV/EBITDA, EV/Sales, EV/EBIT
EV represents interests of both debt and equity holders and thus is a multiple of unlevered financial statistics.
Why is EV/EBITDA the most popular compared to the rest?
EBITDA does not reflect disparities caused by debt or D&A. For example, if one firm decides to spend heavily on new equipment while the other chooses to defer this spending to a future period, EBIT margins would be quite different but not reflected in EBITDA. Moreover, EBIT is also affected by recent acquisition related amortization
When do I use EV/EBIT?
When information about D&A is unavailable, or for companies with high capex
When do I use EV/Sales?
When the company has little or negative earnings. EV/Sales gives an indication of size but not Profitability or cash flow generation. For example good for early stage tech company going through aggressive sales but not profitable yet
What sectors do I consider using EBITDAR?
Casinos, Restaurants, Retail
What sectors do I consider using EBITDAX?
Natural gas, Oil and gas
X = exploration expense
What sectors do I use price/Net asset value?
FIG, Mining, Real Estate
What enterprise multiple can I consider for media and telecommunications firms?
EV/Subscriber
When projecting Sales without reliable guidance, what do I need to consider?
- Need to step down growth rates incrementally in the outer ward to arrive at a reasonable Long term growth rate by the terminal year (2-4%)
- For highly cyclical businesses like steel or lumber, sales levels need to track movements of the underlying commodity cycle. However, even so, it is crucial the terminal year financial performance represents a normalised level as opposed to a cyclical high or Low. Otherwise the TV which comprises a substantial portion of the overall value in a DCF will be skewed
What do I tie COGS and SG&A projections to?
COGS tie to gross Margins
SG&A tie to sales
In the case that the DCF is constructed in the basis of EBITDA or EBIT and not sales, what line items will be excluded? Consequently, how will NWC be projected in terms of what they will be tied to?
- COGS and SG&A
2. Tie to sales
How do I calculate FCF?
- Start from EBIT
- Take out tax expense to arrive at EBIAT
- Add back D&A
- Add back changes in deferred taxes if applicable
- Minus Capex
- Minus off NWC
- Arrive at FCF
If there isn’t guidance, how do we project CAPEX and why?
As a percentage of sales in line with historical levels as top line growth is typically supported by growth in the company’s asset base.
What is NWC, formula and in words?
Non-cash current assets - non-interest bearing current liabilities. NWC measures how much cash a company needs to fund its operations in an ongoing basis.
What is days sales outstanding, formula and in words? Do companies strive for higher or lower DSO?
DSO= AR/Sales x 365
It is the implied average number of days
The firm takes to collect payment after making a sale.
Companies strive for lower DSO as it represents a lower use of cash
What can increase a company’s DSO?
Customer leverage, renegotiation or terms, worsening customer credit, poor collection systems, change in product mix
What is days inventory held formula and in words? With the result of DIH, what statement can u make about the company in a year?
Inventory/COGS x 365
DIH implies the average number of days before the company can sell off its inventory.
The firm will have approximately 365/DIH number of inventory turns in a year