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CFA Institute Research Challenge Hosted by New York Society of Security Analysts (NYSSA) Adjunct Professor: Robert J. Fuest Team.

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Presentation on theme: "CFA Institute Research Challenge Hosted by New York Society of Security Analysts (NYSSA) Adjunct Professor: Robert J. Fuest Team."— Presentation transcript:

1 CFA Institute Research Challenge Hosted by New York Society of Security Analysts (NYSSA) Adjunct Professor: Robert J. Fuest r.fuest@LANDORFUEST.COM Team Mentor Mike Kiernan, CFA Todays Presenter: JinMing Liu, PhD Sr Vice President Equity Research Ardour Capital Investments, LLC Financial Ratios

2 Purpose: to evaluate the overall financial condition of a corporation and to derive the related valuation/investment decision Users: 1. Managers 2. Shareholders * 3. Creditors 4. Other Introduction Graduate School of Business Administration Introduction Classification Calculation Applications Beyond ratios FORDHAM

3 Financial ratios Profitability Returns (assets; capital; equity) Margins (gross, op; net) Growth single period (y-o-y) compound Efficiency turnover (assets; cash) Liquidity & solvency current long-term Classification Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios

4 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Market ratios Profitability EV/sales, EV/EBITDA, EV/EBIT P/S, P/E, P/FCF Returns D/P Value P/B, P/tangible BV, Growth PEG Price vs. Value Classification

5 Basics: Market cap=price x # of shares Total Capital=debt + BV + preferred + minority interest EV=market cap – cash +total debt +preferred + minority interest EPSbasic or diluted? GAAP or adjusted? FCF= CFFO – maintenance CapEx EBITDA Calculation Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Net Income less: Income from discontinued operations =Earnings from continuing operations less: equity income =Earnings from core operations Add: tax =EBT add: Net interest =EBIT less: One-time adjustment =EBIT after one-time charge Add: D&A =EBITDA

6 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Calculation Profitability Return on Assets % 7.4% Return on Capital % 12.7% Return on Equity % 30.4% Return on Common Equity %32.9% Margin Analysis Gross Margin % 17.5% EBITDA Margin % 16.1% EBIT Margin % 11.7% Net Income Margin % 9.8% Normalized Net Income Margin % 7.9% Asset Turnover Total Asset Turnover1.0x Fixed Asset Turnover3.4x Accounts Receivable Turnover9.4x Inventory Turnover7.4x Formatting is key! Make sure you use the correct formatting. Margins are %, ratios are a multiple!

7 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Calculation Short Term Liquidity Current Ratio1.6x Quick Ratio1.1x Cash from Ops. to Curr. Liab.0.4x Avg. Days Sales Out. 38.9 Avg. Days Inventory Out. 49.1 Avg. Days Payable Out. 55.2 Avg. Cash Conversion Cycle 32.9 Long Term Solvency Total Debt/Equity 64.3% Total Debt/Capital39.1% Total Liabilities/Total Assets 63.7% EBIT / Interest Exp.7.7x EBITDA / Interest Exp.10.6x Total Debt/EBITDA1.4x Net Debt/EBITDA0.9x

8 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Calculation Growth Rate: Growth over prior year Compound Over Two Years Compound Over Three Years Compound Over Five Years Total Revenue Gross Profit EBITDA EBIT Net Income Normalized Net Income Diluted EPS before Extra

9 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Calculation EV/LTM Total Revenue EV/NTM Total Revenues EV/LTM EBITDA EV/LTM EBIT EV/LTM Total Revenue P/LTM EPS P/LTM Normalized EPS P/BV P/Tangible BV TEV/LTM Unlevered FCF Market Cap/LTM Levered FCF

10 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Applications Standalone Cross sectional (snapshot) Between peers; cross industries Longitudinal (time series)

11 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Applications Each company can be entered individually on your master sheet. Use a company specific sheet when collecting the data and then aggregate the data for presentation and comparison. There is no one way to present the data. Use the data to support your recommendation.

12 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Applications Each company can be entered individually on your master sheet. Use a company specific sheet when collecting the data and then aggregate the data for presentation and comparison. There is no one way to present the data. Use the data to support your recommendation.

13 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Applications Using medians and means, you can visually make the point of where a company is in terms of operating margins or valuation by making a comparison to the comparable groups median or mean.

14 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios Beyond Ratios Is cash cash? Remember Auction Related Securities? Where is it? FCFDepreciation vs. CapEx Market sentiments Time (timing and investment horizon)

15 Graduate School of Business Administration FORDHAM Introduction Classification Calculation Applications Beyond ratios APPENDIX CFFO – Cash Flow from Operations FCF – Free Cash Flow BV – Book Value EBITDA – Earnings before interest, taxes, depreciation and amortization LTM – Latest Twelve Months ARS – Auction Related Securities CAPEX – Capital Expenditures EV – Enterprise Value


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