1. 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
Hosted by New York Society of Security Analysts (NYSSA)

2. 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

3. 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

4. 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

5. 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

6. Calculation FORDHAM Formatting is key!
Profitability
Return on Assets % %
Return on Capital % %
Return on Equity % %
Return on Common Equity % 32.9%
Margin Analysis
Gross Margin % %
EBITDA Margin % %
EBIT Margin % %
Net Income Margin % %
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

7. 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
Avg. Days Inventory Out
Avg. Days Payable Out
Avg. Cash Conversion Cycle
Long Term Solvency
Total Debt/Equity %
Total Debt/Capital %
Total Liabilities/Total Assets %
EBIT / Interest Exp x
EBITDA / Interest Exp x
Total Debt/EBITDA 1.4x
Net Debt/EBITDA 0.9x
Introduction
Classification
Calculation
Applications
Beyond ratios
Graduate School of Business Administration
FORDHAM 7

8. 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

9. 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

10. 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

11. 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
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

13. 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

14. 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

15. 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