Like the title says I want to get better at modeling, especially going from GAAP to non-GAAP numbers. While I'm currently building models from scratch I find myself getting stuck modeling companies that don't provide broken down adjustments to Adj EBITDA.
What are some tips I can utilize as an internal check-list to minimize the amount of wheel-spinning?
Do you mean walking from EBITDA to adjusted EBITDA when the company does (or does not) provides an adjusted EBITDA number?
does not
Are there any sell-side models/walkthroughs you can look at and then make your assumption on whether the add-back/deductions are warranted? Otherwise, go through the extraordinary/one-time line items and add backs on the CF statement, and make your assumptions on which ones make sense to include for your analysis.
Yea srry, I meant going from EBITDA to Adj EBITDA. I have a harder time when companies just have a small section called something "Net Loss to Adjusted EBITDA reconciliation" or something like that.
I have an easier time when companies have a couple pages dedicated to listing out their adjusted EBITDA figures (SG&A, R&D...). I know at some point getting to granular doesn't help the investment thesis but for now as I'm a 1-st year SS ER associate I want to overdevelop this skill so that in a couple years I can intrinsically know what to look for and what is important to know.
This could be a useful thread - any senior guys or smart analysts (@anchor) want to chime in? Any useful tips or processes to keep in mind (gaap or non-gaap)? Maybe things beyond rev / cogs / opex builds; how much time do you guys spend on modeling other stuff (below the line, fx, FDSO, b/s, cfs etc)? Thanks
The answer is always, how relevant is it?
Majority of the time a lot of that stuff is plugged with 0s in future periods and IR can just tell you what some adjustments will be like if you need to put them in. The real answer 90% of the time is "what IR tells you".
For some firms, maybe you really want to focus on the EBITA and adj. EPS because they are amortizing down a bunch of customer contracts from previous acquisitions or whatever - so in that case you actually are modeling more closely the true economics of the business as it is today, then you can have a GAAP bridge at the end if you need your GAAP EPS or whatever, but your adj. #s more closely reflect cash flow as well.
Don't lose sight for what you are trying to model and the key questions you want to answer.
I do recognize some shops or pods will have a reputation for being more granular than others, but my gut still says they aren't obsessing over the details that aren't important. Trying to really accurately model time intensive accounting nuance that has little to no impact on the story is not productive (especially when its always going to be very wrong)
What part is the biggest struggle? Most of the time it is just a bridge after whatever you model right? You may need to look more closely at all the filings and the quarterly presentations etc. - usually there is a bridge there for adjustments
Really don’t want to argue with anyone on whether or not it’s relevant. Bottom line - regardless of whether or not you use it in practice, you should know it and know how to it, which is all I wanted to see. Obviously the key debates matter more than interest expense. Let’s not spend 36 replies arguing this back and forth.
On the other hand, it would be beneficial to get a thread going about modeling best practices for stuff beyond rev / cogs / opex builds - which is more proprietary, everyone has their own style, and is well covered. Think a lot of us juniors could benefit from info on below the line stuff. Thanks
Interested
If you are looking at publicly traded companies, then just follow the company's reconciliation. You can then try to model or extrapolate that into future periods, if they apply.
"Cleaning" numbers to approximate a truer number (e.g. cleaning out d&a from GM) is labor intensive and is pretty idio to a company or vertical. Here are some examples and ways to practice:
1. Clean out d&a from GMs to determine adj. EBIT -- need to build out depreciation schedule of assets. Practice by looking at cap intensive businesses (data centers, telecom, major industrial OEMs) with 1 primary line item (so you know the GM is tied to the stated capex you are analyzing, vs. LMT or BA where there's too many moving parts).
2. Estimating SBC -- model headcount growth, turnover, and ave grant per employee using the option data provided. Practice by looking at software co's and modeling their future SBC.
3. Asset impairments/write downs or upgrades -- easier to practice on capex or r/e heavy businesses. Strip out the value of an individual asset (or group of assets) and apply a mark down. Then flow the change into the line item (EBIT, Net income, etc.).
Try to estimate it on a historical basis and compare vs. VA estimates to see if you're getting it in the ballpark. These are some of the major adjustments to track (there are a few others too, such as amort schedule for intangibles/IP, fx impact, etc.), but once you feel good about the ones above, you should find it fairly easy to "do the math". The hard part (idio) is that the company's reporting might not be detailed enough for you to rely on it solely, and you may need to cross reference against peers.
What is GM?
Gross margins.
Also: here's an argument for why tracking granular items makes sense. If you're in an alpha-seeking role, then the game you're playing is some version of front-running estimate revisions. If consensus for company ABC is $1000 and you estimate a 4% fx headwind that is not priced in, and the stock prints $998, then your opinion of performance is much different than if you just took consensus ("they missed!"). These little details add up -- the goal of the analysis is to arrive at a much cleaner view of the underlying business momentum of a company.
Following
following
Bump
Following
Eum porro qui et tempore sit dolores. Itaque nihil est ut vitae quo iste. Assumenda quia officia delectus quaerat. Fuga sed assumenda et ut dolorum eius totam eos.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...