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

Introduction 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 Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM

Classification FORDHAM Graduate School of Business Administration 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 Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM

Price vs. Value Classification FORDHAM 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 Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM

Calculation FORDHAM Graduate School of Business Administration Basics: Market cap=price x # of shares Total Capital=debt + BV + preferred + minority interest EV=market cap – cash +total debt +preferred + minority interest EPS—basic or diluted? GAAP or adjusted? FCF= CFFO – maintenance CapEx EBITDA 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 Graduate School of Business Administration FORDHAM

Calculation FORDHAM Formatting is key! 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 Turnover 1.0x Fixed Asset Turnover 3.4x Accounts Receivable Turnover 9.4x Inventory Turnover 7.4x Introduction Classification Calculation Applications Beyond ratios Formatting is key! Make sure you use the correct formatting. Margins are %, ratios are a multiple! Graduate School of Business Administration FORDHAM

Calculation FORDHAM Graduate School of Business Administration Short Term Liquidity Current Ratio 1.6x Quick Ratio 1.1x 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/Capital 39.1% Total Liabilities/Total Assets 63.7% EBIT / Interest Exp. 7.7x EBITDA / Interest Exp. 10.6x Total Debt/EBITDA 1.4x Net Debt/EBITDA 0.9x Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM 7

Calculation FORDHAM Growth Rate: Total Revenue 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 Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM 8

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

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

Applications FORDHAM Graduate School of Business Administration 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. Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM

Applications FORDHAM Graduate School of Business Administration 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. Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM 12

Applications FORDHAM Graduate School of Business Administration 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. Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM

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

APPENDIX FORDHAM 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 Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM 15