What are some back-of-the-envelope IB tricks you’ve learned?

Based on the most helpful WSO content, here are some additional back-of-the-envelope tricks and frameworks often used in investment banking:

1. Accretion/Dilution Quick Check for All-Stock Acquisitions:

   • Compare the P/E multiples of the acquirer and the target. If the acquirer's P/E is higher than the target's, the acquisition is likely accretive, and vice versa. This is a quick way to assess the impact without diving into detailed modeling.

2. Estimating Terminal Value Using Multiples:

   • Use a terminal multiple (e.g., EV/EBITDA or P/E) based on either the entry multiple or the long-term industry average. This is often preferred over the Gordon Growth Model (GGM) because it avoids sensitivity to assumptions like terminal growth rates.

3. Quick FCF Generation Check:

   • For a company, calculate Free Cash Flow (FCF) as EBITDA minus CapEx. If CapEx isn't provided, ask for it or estimate based on industry norms. This helps gauge the company's ability to generate cash and support leverage.

4. LBO IRR Approximation:

   • For a rough IRR estimate in an LBO, use the rule of 72. For example, if you double your money in 5 years, the IRR is approximately 14% (72 ÷ 5). This is a quick way to sanity-check your returns.

5. Revenue Growth Impact on EBITDA:

   • If a company has a fixed EBITDA margin, you can estimate incremental EBITDA by multiplying the revenue growth by the margin. For example, if revenue grows by $10M and the EBITDA margin is 20%, incremental EBITDA is $2M.

6. Quick Valuation Using EV/Sales:

   • For companies with suppressed cash flows or early-stage growth, use EV/Sales with a target margin to estimate valuation. For example, if the target margin is 20% and the industry trades at 10x EV/EBITDA, you can back into an EV/Sales multiple of 2x (10x * 20%).

7. Debt Capacity Estimation:

   • To estimate how much debt a company can take on, use a leverage multiple (e.g., 5x EBITDA). Multiply the company's EBITDA by the multiple to get a rough debt capacity.

8. Quick DCF Sanity Check:

   • Use a perpetuity growth method for terminal value:
     $$ \text{Terminal Value} = \frac{\text{Final Year Free Cash Flow} \times (1 + \text{Growth Rate})}{\text{Discount Rate} - \text{Growth Rate}} $$
     Then, add the present value of cash flows to the terminal value to get a rough enterprise value.

These tricks are not substitutes for detailed analysis but are great for quick assessments or sanity checks during discussions or interviews.

Sources: Notes for Technical Interview Questions, Is value investing dead?, POPULAR ACCOUNTING/FINANCE QUESTIONS, Long term, concentrated, deep fundamental investing, PE professional, what's your process while judging an investment?