Monkeys - was asked by a friend to come up with a list of 10 (or so) of the "go-to", primary financial ratios, metrics, etc that would be used for financial analysis.
Anyone have thoughts here? If you could only look at a few metrics to get a feel for a companies performance, what would they be?
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ROE and DuPont Analysis for equity investors. Leevrage and coverage ratios for credit investors.
Revenue Growth + ROIC
EBITDA multiples
That is way too broad OP. Not only does it vary by industry (i.e. banking vs. industrials), but also by what you are using the analysis for (i.e. M&A vs. equity valuation)
I realize it is broad but that is how the question was posed to me. It wouldn't necessarily be for any one specific industry or purpose (eg M&A). In the most general sense, if you asked someone "Hey, give me your 10 'go-to' metrics" -- what would they say?
Fair enough.
Gross Margin, EBITDA Margin, EBITDA Multiples, P/FCF, Debt/Equity (or Debt/Total Capital), ROA, ROIC, EBIT/Interest.
Why are you doubling up on margins? you either want EBITDA or NI margins if you're Equity or Debt, respectively. Gross means shit if the accountants are gunna fiddle it (far easier than EBITDA and NI). At least from EBITDA you could use the FCFF conversion to get something meaningful. D/E, why? Totally industry unspecific and cash flow unspecific.
Multiples Analysis - URGENT HELP (Originally Posted: 01/04/2011)
Guys,
I have an interview coming up and would very much appreciate some help. When calculating the average multiple based on the peer group (say P/E), what earnings value should you use? Current or expected?
Also, when you apply this multiple to your target firm, do you use the current/future earnings value?
With regard to DCF, to calculate FCF, what would you do if the company is incurring losses?
Many thanks!
It depends, with comps typically you show multiples based on LTM and forward multiples - but when you apply it to the target Co. to get a valuation - just be consistent... with regards to DCF with FCF negative firms, you can project out to the year when it has positive FCF or just use exit multiple method, where all of your value comes from the terminal period...
If the losses that are being incurred are of temporary nature, you replace them with normalized income. Otherwise, I'd do an equity valuation, as an option to liquidate.
Regarding multiples, I'd use expected earnings as they provide insight into the future value of the company.
Then again, I'm still a student, so you shouldn't rely on me too much ;)
When doing valuation based on trading comps, the first step is to properly identify the peer group and tier the different companies. Usually you would tier companies based on market cap so your comparing apples to apples. Once you do that, you usually want to compare values for LTM, forward 1 year and forward 2 years. That way you know how a company will fair in the future and you will also be able to evaluate the past year's performance. Once you compile P/E multiples for the peer group, do an average, median, high and low on the entire group - and those will be your different ranges of P/E multiples for the group.
For your second question, just because the company has negative cash flow in the earlier years - assuming you have the company growing in later years - the company should reach a point where it has positive cash flow. This positive cash flow will be the basis of your perpetuity growth terminal value which will comprise a large chunk of your entire firm value. In essence you can still do a DCF but it may not resemble the true value of the firm. A better way to value the firm would be to use an EBITDA multiple for the terminal value so the earlier loses wont heavily affect the terminal value. Many people in the industry would agree that a terminal value derived through an EBITDA multiple is probably a better metric to use than one derived through perpetuity growth.
Hope that helps!
Ratio Analysis (Originally Posted: 11/03/2011)
Hi fellow monkeys,
So i was reading through ratio analysis, and was wondering how often are the following ratios used in investment banking:
Liquidity: Current, Quick Asset Management: Inventory/Asset TO Debt: Debt-to-equity, TIE, Equity Market: BVPS
I know that the profitability ratios such as ROE, ROA, and other market ratios like P/E and P/B are commonly used, but how about those aforementioned?
Interested to hear your views. Thanks in advance :)
.
I think these ratios are quite important to understand the overall state of the company, however these are based on the company's balance sheet, which represent a snapshot of the company's financial at a given time. Such ratios should be compared with industry averages to see if the company is over/under-performing the competition.
I understand that they're important because they offer different areas of comparison between firms in terms of asset mgmt etc, but which are more frequently used? Pardon my lack of experience.
bump
2 twice a day by analysts, once every 4 hours by MDs
Sorry, could you elaborate?
Would appreciate more feedback from current ibankers, thanks.
Comparable Analysis - What multiple is best for a company with little to no debt? (Originally Posted: 10/13/2014)
Hi WSO,
For a company in the security alarm system industry (almost all residential home customers) with little to no debt what would be the best multiple to use when conducting comparable company analysis and why?
Currently I am leaning towards simply using P/E but I wanted to get some other opinions.
Thanks,
Mogel
I know P/E is distorted by leverage but can it also be distorted if there is almost no leverage at all? I was under the impression that EV/EBITDA was typically only used as a multiple for highly capital intensive companies.
where can you go for ratio analysis? (Originally Posted: 01/24/2017)
i don't have access to a terminal or FactSet... so where can I go for a quick look at a comparable ratio spread (profitability, efficiency, solvency, liquidity, etc.) of an industry?
find public comps, download their financials using EDGAR and derive their ratios
ok, is there a way to download a full industry's financials for a spread (the way you would in factset for ratios or key metrics) at once? i'm lazy, and SEC.gov sucks. just wanted a quicker, efficient way
multiple analysis (Originally Posted: 05/07/2013)
Need help analyzing multiples. Why are trading multiples (LTM) lower in the following year. Why won't they go up assuming the company is doing well and not losing market share etc.
Perhaps there are issues with the market as a whole?
First off, apologies if this misses the mark as I'm not entirely clear on what you're asking.
Is your question: "Why are forward multiples lower than LTM multiples?" If that's your question, the numerator (share price / equity value / EV) is staying the same, while generally speaking forward metrics are improved vs LTM metrics (a company's projected Revenue / EBITDA / EPS is higher than its LTM metric). If the reverse is true and the business is projected to decline, the forward multiples will be higher than the LTM multiples.
This.
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