Financial Ratios
4 February 2016
Fundamental Analysis
-Financial Ratios
Qian Shunan
Han Song
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Financial Ratios
4 February 2016
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4 February 2016
REVIEW OF FA FRAMEWORK
Economy level
Industry & Sub Industry
Financial Ratios Screening
Business Model &
Management Analysis
Valuation
Timing
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4 February 2016
PRICE RATIOS
Price-to-Earnings Ratio (P/E)
P/E Ratio = Price per share / Earnings per share
Amount paying for every one dollar of earning
Price-to-Book Ratio (P/B)
P/B Ratio = Price per share / Book Value per share
Growth Potential
Dividend Payout Ratio
Dividend Payout Ratio = Dividend / Net Income
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4 February 2016
PROFITABILITY RATIOS
Return on Assets (ROA)
ROA = Net Income / Average Total asset
Efficiency of company in using its asset to generate earnings
Return on Equity (ROE)
ROE = Net Income / Average Stockholder Equity
How efficient is the company in using money invested to generate earnings
Profit Margin
Profit Margin = Net Income / Sales
How much Revenue with can keep as profits
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LIQUIDITY RATIOS
Current Ratio
Current Ratio = Current Asset / Current Liability
Ability to pay back short term debt
Varies with industries
Too high  Inefficient use of current asset
Quick Ratio
Quick Ratio = ( Current Asset – Inventory ) / Current Liability
Ability to pay back up coming bills
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4 February 2016
DEBT RATIOS
Debt to Equity Ratio
Debt to Equity Ratio = Total Liability / Total shareholder Equity
Risk
Interest Coverage Ratio
Interest Coverage Ratio = Operating Income / Interest Expense
High  Stronger ability to pay interest
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EFFICIENCY RATIOS
Asset Turnover Ratio
Asset Turnover Ratio = Sales / Average Total Asset
Efficiency in using its asset to generate revenue
Inventory Turnover Ratio
Inventory Turnover Ratio = COGS / Average Inventory
Low  Poor sales
High  Do not have an efficiency inventory planning plan
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4 February 2016
INDUSTRY SPECIFIC RATIOS/KPIS
Industry
Pharmaceuticals/healthcare
services
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Relevant Ratios
Pipeline duration, R&D as % of Sales
Average Revenue /patient,
Operating Expense/ Net Operating Income per
Adjusted Discharge
Utilities
Power & Energy Purchase Agreements
IT/Tech
Burn Rate (for startups), user base, R&D ratio,
Airlines
Revenue / available seat mile
Automobile
Fleet Sales / Seasonally Adjusted Annual Rate of
Sales
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4 February 2016
INDUSTRY SPECIFIC RATIOS/KPIS
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Industry
Relevant Ratios
Telecommunications
Average Revenue Per User (ARPU),
Minute Of Usage (MOU), Churn Rate
Oil & Gas
Production to Reserves ratio
Reserve Replacement Ratio (RRR)
Finding Cost Ratio
Refinery Utilization Rate
Banking
Capital Adequacy Ratio
Loan/Deposit Ratio
Deposit Growth Rate
Credit Quality
Retail
Sales by store, Inventory per retail square foot,
No. of stores
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4 February 2016
STOCK SCREENING
Finding the perfect match
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4 February 2016
STOCK SCREENING
Investing methodology
Ideal stock profile & trading offs
Ideally:
Characteristics:
Cheap
Low P/E
High Earnings
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High EPS
High Asset Turnover ratio
High Gross Margin
Low debt
Low Debt/Equity
Good liquidity
High interest coverage
Dividends
High Dividends
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4 February 2016
GILEAD SCIENCE
TTM
Revenue USD Mil
Gross Margin %
Operating Income
USD Mil
Operating Margin %
Net Income USD
Mil
Dividends USD
Book Value Per
Share USD
Operating Cash
Flow USD Mil
Cap Spending USD
Mil
Free Cash Flow USD
Mil
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2014-12
2013-12
2012-12
31,447
24,890
11,202
9,703
87.3
84.8
74.5
74.5
20,902
15,265
4,524
4,010
66.5
61.3
40.4
41.3
16,912
12,101
3,075
2,592
12.08
9.05
7.09
6.13
18,476
12,818
3,105
3,195
-748
-557
-191
-397
17,728
12,261
2,914
0.86
2,798
Source: Morningstar
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4 February 2016
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Financial Ratios
4 February 2016
RELATIVE VALUATION
Relative valuation technique determine the value of a stock by
comparing it to similar entities (within the same industry or
sector) on the basis of several relative ratios that compare its
stock price to relevant variables that affect the stock's value,
such as:
Price/Earnings
Price/Book
Price/Sales
EV/EBITDA
EV/FCF
Derive industry mean as a comparison
Multiples can be misleading, fundamentals decide multiple
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Financial Ratios
4 February 2016
FOR INSTANCE…
Suppose a comparable hot dog stand, Joe’s Dogs, was purchased for
$1 million several months ago
If we know that Joe’s Dogs generated EBITDA of $100,000 in the last
twelve months (LTM) prior to acquisition (that’s an Enterprise Value /
EBITDA multiple of 10.0x)
And we know that our hot dog stand generated LTM EBITDA of
$400,000, we can apply the recently acquired EV/EBITDA multiple to
our company, and estimate that we should expect a value of
somewhere around $4.0 million for our hot dog stand today.
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Financial Ratios
4 February 2016
RELATIVE VALUATION
BMW M6 Convertible
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Mercedes-Benz AMG Roadster
0 to 60 mph in 3.7
0 to 60 mph in 3.9
600 hp
621 hp
Torque 700
Torque 738
Price: $130,413
Price: $132,900
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Financial Ratios
4 February 2016
RATIOS & TRENDS
Relativity against company itself and against industry competitors
Analyzing ratios over time will often give a much clearer picture about
a company’s position and trajectory
Ratios helps to raise important questions and helps in understanding
the story of the stock
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4 February 2016
RELATIVE VALUATION
Coach
Kate Spade
Michael Kors
Welcome to the mid-range luxury handbag game
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4 February 2016
COACH PROJECTIONS: FIRST IMPRESSIONS
Current Multiples Last 4 Qtrs Act Next 4 Qtrs Est FY 2016
Price/EPS
Adjusted+
21.05
18.41
19.5
Price/Book
4.01
3.98
3.88
12.67
12.73
13.78
2.32
2.15
2.19
12.56
9.53
10.04
EV/EBIT
17.4
12.05
12.98
Dividend Yield
3.64
3.83
3.64
Price/Cash Flow
EV/Sales
EV/EBITDA
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Financial Ratios
4 February 2016
MICHAEL KORS PROJECTIONS: FIRST
IMPRESSIONS
Current Multiples Last 4 Qtrs Act Next 4 Qtrs Est FY 2016
Price/EPS
Adjusted+
11.47
11.05
Price/Book
4.55
4.33
4.69
Price/Cash Flow
9.48
13.24
10.51
EV/Sales
1.81
1.72
1.78
EV/EBITDA
6.11
6.29
6.22
EV/EBIT
6.99
7.1
7.08
Dividend Yield
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11.37
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0
0
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Financial Ratios
4 February 2016
KATE SPADE PROJECTIONS: FIRST
IMPRESSIONS
Current Multiples Last 4 Qtrs Act Next 4 Qtrs Est FY 2015
Price/EPS
Adjusted+
44.78
27.69
37.32
Price/Book
13.52
11.06
10.86
Price/Cash Flow
23.75
32.79
70.62
2.08
1.85
2.05
27.55
11
12.84
63.7
14.46
19
EV/Sales
EV/EBITDA
EV/EBIT
Dividend Yield
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0
0
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Financial Ratios
4 February 2016
COACH SEGMENT ANALYSIS
In Millions of
USD except
Per Share
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Revenue
1,099.63
1,136.22
1,038.80
1,219.40
929.3
1,004.10
942.8
Operating
Income
262.71
99.79
179.8
275.4
124
38.8
133.7
Gross Profit
781.34
706.37
715.4
840
665.5
687.7
646.8
Pretax Income
260.78
100.32
180.5
275.8
122.8
32.5
127
Revenue
—
—
—
—
—
—
87.5
Pretax Income
—
—
—
—
—
—
7.7
1,011.00
1,014.00
1,019.00
1,021.00
973
1,019.00
1,029.00
Stuart
Weitzman
Direct-toConsumer
Number of
Locations
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4 February 2016
MICHAEL KORS SEGMENT ANALYSIS
In Millions of USD
except Per Share
Retail
Revenue
Operating Income
Same Store Sales %
Revenue Growth %
Retail Square
Feet/Meter
Wholesale
Revenue
Operating Income
Revenue Growth %
Retail Square
Feet/Meter
Licensing
Revenue
Operating Income
Revenue Growth %
Company Operated
Stores
Number of Locations
Stores operated
through licensing p
Number of Locations
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FY 2012
FY 2013
FY 2014
FY 2015
626.94
121.85
39.2
82.1
1,062.64
315.65
40.1
69.5
1,593.01
467.25
26.2
49.9
2,134.58
557.16
10.3
34
316.65
410.68
562.77
859.35
610.16
85
47.5
1,032.12
269.32
69.2
1,577.52
459.77
52.8
2,065.09
610.89
30.9
219.41
291.41
381.57
517.31
65.15
40.83
43.1
86.98
45.04
33.5
140.32
81.15
61.3
171.8
88.93
22.4
237
304
405
526
64
96
150
202
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4 February 2016
KATE SPADE SEGMENT ANALYSIS
In Millions of
USD except
Per Share
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
1,070.38
1,057.31
1,148.13
974.2
1,105.35
1,136.27
1,155.11
1,182.68
—
—
—
15.88
113.04
102.84
110.46
119.23
60.22
51.22
47.52
41.26
33.25
34.03
30.32
29.66
Direct Brands
Revenue
Operating
Income
Adelington
Design Group
Revenue
Net effect = Non significant gains
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PROFITABILITY ANALYSIS
Name(BI
Peers)
Return on
Invested
Capital (TTM
%)
Gross Margin
(TTM %)
SG&A Rate
(TTM %)
KATE SPADE &
CO
59.90%
56.63
7.06%
11.35%
9.71%
12.88%
5.46%
20.07%
MICHAEL KORS
HOLDI
59.44%
33.6
25.86%
30.15%
18.40%
32.73%
40.96%
39.47%
COACH INC
68.78%
55.31
17.01%
22.46%
11.48%
11.83%
19.13%
12.70%
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EBIT Margin EBITDA Margin
(TTM %)
(TTM %)
Net Income
Return on
Return on
Margin (TTM
Assets (TTM %) Equity (TTM %)
%)
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4 February 2016
RELATIVE VALUATION AGAINST INDUSTRY
“Same-store sales fell more than
6% in North America. And the
company's sales and earnings
outlook for the full year is well
below forecasts.”
Name(BI
Peers)
Price to
Sales
(FY1)
Price to
Price to
Sales
FCF (TTM)
(TTM)
Price to Current
Book Enterpris
(Qtr) e Value
Average
22.33
7.23B
22.07
12.52
1.72
1.78
1.53
1.66
66.24
4.84
7.86B
MICHAEL
KORS
HOLDING
S
9.25
7.34B
9.36
5.09
1.5
1.54
1.55
1.74
12.09
3.9
6.93B
KATE
SPADE &
CO
36.2
2.27B
19.34
17.85
1.99
2.03
1.67
1.87
71.65
13.11
2.46B
COACH
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Est P/E
Mkt Cap P/E Ratio EV/EBITDA EV/Sales EV/Sales
Current
(USD)
(TTM)
(TTM)
(FY1)
(TTM)
Yr
19.54
10.31B
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21.24
10.49
2.20
2.33
2.25
2.43
17.71
4.02
9.86B
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4 February 2016
PRELIMINARY TAKEAWAYS
Coach seems to fit “mature” enterprise category
Michael Kors emerges as the favourites no matter how I look at
it. Mean reversion is likely.
Kate Spade is a “new kid in town”, great potential,
fundamentals yet to be tested
Fashion is fickle, weakening global demand , not particularly
attractive valuations
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4 February 2016
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LIMITATIONS
Current
Multiples
Last 4 Qtrs Act Next 4 Qtrs Est
Price/EPS
GAAP+
445.02
120.84
Price/Book
19.43
20.06
Price/Cash
Flow
21.75
28.88
EV/Sales
2.41
1.99
EV/EBITDA
30.27
19.07
EV/EBIT
115.4
60.29
Dividend Yield
0
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FY 2016
FY 2017
FY 2018
117.17
14.45
62.48
9.94
37.59
7.98
22.71
1.99
18.85
64.93
0
15.46
1.66
14.05
40.95
0
12.22
1.4
10.31
22.65
0
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Financial Ratios
4 February 2016
?!
Name
Earnings
EPS Adjusted
EPS GAAP+
Sales
Q4 2015 Act
1.821
1
35.747B
Gross Margin %
31.908
Operating Profit
1.108B
EBIT
1.108B
EBITDA
2.860B
Pre-Tax Profit
938.000M
Net Income Adj
875.900M
Net Income GAAP+
482.000M
AMAZON.COM
INC
Current
Premium to
Comps Mean
Mean
(Including
AMZN US)
VIPSHOP
HOLDINGS LTD
- ADR
MERCADOLIBR
E INC
ALIBABA
GROUP
HOLDING-SP
ADR
E-COMMERCE
CHINA-SPON
ADR -A
JD.COM INCADR
EBAY INC
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Mkt Cap (USD)
NTM P/E
NTM
EV/EBITDA
NTM EV/EBIT
NTM EV/Rev
LF P/BV
259.95B
55.9x
18.3x
61.5x
1.9x
19.4x
173%
17%
271%
-35%
--
70.67B
20.4x
15.6x
16.6x
3.0x
4.2x
7.22B
16.9x
13.5x
16.1x
0.8x
12.5x
4.24B
32.1x
20.5x
23.3x
5.9x
11.7x
161.16B
19.9x
16.1x
25.9x
7.9x
4.9x
516.07M
71.2x
--
--
--
5.7x
34.13B
189.5x
116.4x
--
0.8x
6.0x
27.45B
12.3x
8.1x
10.3x
3.2x
4.2x
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4 February 2016
CONCLUSIONS
Financial ratios are useful throughout different stages of
fundamental analysis
Ratios should not be taken at face value, further research is
needed for investment decision to be made
Nature of industries typically dictate the ratios
Behind every number is a story to be told
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4 February 2016
THE END
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