Multiples Analysis
Agenda
Financial Statements
Financial Metrics
Liquidity and Solvency
Evaluating Firm Value and Size
Market Multiples (Comparables)
Financial Statements
• Recall the 3 statements we care about:
Balance Sheet
Income Statement
Cash Flows
Two Important Aspects of the BS
Point-in-time Statement:
• The values of the accounts on the
statement reflect cumulative balances
of those accounts at a specific point in
time (the balance sheet date)
Ex.) A cash balance of $25,000 on the
balance sheet tells us that right now, after
all cumulative operations of the
business’s life, there is $25,000 in their
bank.
Significant Accounts:
• Debt/Liabilities Balance
• Denoted by the term “payables”
• Tells us how much the company
owes
• Legal obligations to pay
• Cash and Current Assets Balance
• Tells us how much money the
company has to pay off its debts
quickly
Income Statement
Shows the financial activities of one
operational period (quarter or year)
Tells us how much we
sold- Revenue
Tells us how much it
cost us- COGS and
Expenses
Tell us how much was
left over- Profit/Net
Income
Sample Income Statement
Revenue
Less: Cost of Goods Sold
Gross Profit
$100,000
($60,000)
$40,000
Less: Operating Expenses except D&A
EBITDA
($7,500)
$32,500
Less: Depreciation and Amortization
Operating Income (EBIT)
($2,500)
$30,000
Less: Interest Expense
EBT
($5,000)
$25,000
Less: Tax Expense
Net Income
($5,000)
$20,000
Statement of Cash Flows
• Usage: Tells us how much cash (not promises of cash) we
brought in and put out during the period.
• Important figures:
– Operating Cash Flow: Cash receipts from customers – cash payments
to suppliers, operating expenses, taxes, and interest
• Does NOT include: Taking on debt/ paying it off or buying/selling LT assets
– Free Cash Flow: Operating Cash Flow – Capital Expenditures Dividends
Multiples: Concept
• If we want to evaluate a company’s health, profitability, debt
burden, etc, it pays to have a standardized number that we can
look at:
– Ex.) Company ABC generated $10,000 in profit and had $20,000 in
assets, $50,000 in debt.
– Is this any good? We can use metrics to compare two figures of
performance, health, or size or standardize size and multiples to
compare two or more similar companies
Previous Example
• Ex.) Company ABC generated $10,000 in profit and had $50,000 in
assets, $20,000 in debt.
– Possible Metrics:
• Profit/Assets = Return on Assets = how much profit does this company
generate for every dollar of productive assets they use?
• Profit/Debt = How much profit will it take to pay off their debts?
• Assets/Debt = what percentage of the assets in the company are funded by
debt?
Multiples and Metrics as Comparable Tools
• By using multiples or metrics, we have a measurement of
value/profitability/health that is not sensitive to the size of the
company
– So we can use multiples to compare two companies that are similar
Company ABC has
a Profit/Asset
(ROA) ratio of .2
XYZ generates
more profit per
dollar of productive
assets, so is more
efficient
Company XYZ has
a Profit/Asset
(ROA) ratio of .3
So what metrics are out there?
• Balance Sheet Metrics:
– Tell us financial health of the company
Current Ratio =
Current Assets
Current Liabilities
Current Assets - Inventory
Quick Ratio =
Current Liabilities
Tells us if the assets
that can be converted
to cash quickly can
cover the liabilities
coming due this period
If we suddenly can’t sell
inventory can we pay off our
debts?
The higher the better,
it means we can pay
off our debts more
easily (less needs to be
sold off in order to
generate enough to
pay off debts)
Income Statement Metrics
• Metrics on the income statement represent financial
performance:
– Some potential values to use: Revenues, Operating Income (EBIT),
Earnings, EBITDA
– A multiple that takes a profit level divided by revenue is referred to as
a margin.
Profit Margin =
Earnings
Revenue
Cash Flow Metrics
• On its own, Statements of Cash Flows don’t have too many
multiples to take within itself
– Potential Values:
• Operating Cash Flow, Free Cash Flow, Capital Expenditures
• This leads us to using different values between statements…
Examples of Metrics
• There are numerous ways to combine accounts and values to
arrive at financial metrics, some of the most used are:
– Profit/Balance Sheet Account : Tells how much profit is generated per
dollar of asset, debt funding, equity invested
• ROE, ROA, ROIC
– Cash Flow/ Debt Account: Tells if cash generated this period could
pay off/ how long it will take to pay off debt
– Profit/Cash Flow: tells how much of profits are actually turned into
cash during the year
Example of Using Metrics
• Company ABC has a net operating cash flow of $50M and net profit of
$200M for 2013. Company XYZ, a similar competitor has a net operating
cash flow of $25M and net profit of $50M. What conclusions can you
make regarding the financial performance of the two companies?
Net Operating Cash Flow
50M
=
Net Profit
= 25% conversion for ABC
200M
25M
=
= 50% conversion for XYZ
50M
Based on the multiples,
ABC converts only 25%
of its sales to cash, and
by comparison, XYZ is
doing better.
Internal Metrics
• What do all of these metrics we have seen have in common?
– They are internal, meaning that they tell us only about the company’s
state of being.
– While good for evaluating health of the company, it tells us nothing
about the worth of a company
Market Multiples
• Previously, we found that in order to get value from metrics,
we had to compare against similar companies to get a gauge of
“what’s good”.
• We can apply the same thinking in comparing price to a
measurement, then comparing this multiple to other similar
companies to see if a company is cheap, expensive, or at
market value
General Form of Market Multiples
Size/ Value Measurement
Financial Performance
Measurement
What are ways we can
measure the size of a
company?
Measuring Company Size
Market Capitalization “Market Cap”
Enterprise Value “EV”
Price x Shares outstanding
Market Cap + Net Debt - Cash
Tells us how much it would take to buy all
of a company’s stock on the public
markets
Measures the “takeover value” of a
company, how much you would have to
pay to buyout all investors and creditors
What is the problem with this?
We take out cash because you’re paying
cash for cash, cancels out.
Does not take into account a firm’s full
capital structure: meaning it accounts for
a firms equity value, not its debt value
Best way to measure size of a company
because it takes into account capital
structure
Market Multiples
• Now that we know size measurements, and we already know
financial performance metrics, we can create a market multiple
Size/ Value Measurement
Financial Performance
Measurement
Market Cap
P/E Multiple =
=
Earnings
Price
Price x Shares Outstanding
=
Earnings per share x shares
outstanding
Earnings per Share
Other Market Multiples
•
•
•
•
•
Price to Earnings
Price to Book Value Per Share (Mcap/Assets-Liabilities)
Price to Revenue (Mcap/Revenue)
Enterprise Value/EBITDA
Enterprise Value/EBIT
Market Multiple Example:
• Company ABC is trading at $50 per share and had EPS of $5 for
the last period. Company XYZ is trading at $100 per share and
had an EPS of $20. What are the P/E multiples for each?
ABC
$50/$5 = 10x
XYZ
$100/$20 = 5x
So for every dollar of
earnings, you pay 10x the
amount in market price
So for every dollar of
earnings, you pay 5x the
amount in market price
So in this case, XYZ is trading at a
cheaper price relative to ABC
because you are paying less per
dollar of earnings of the company.
We can make the argument that XYZ
is undervalued relative to ABC.
Comps
• The previous example illustrates the ideology behind a comps
model:
– We assemble similar companies to our target company in a peer
group, then compare their average/median multiples in order to
determine if a company is undervalued, over valued, or trading at
market relative to their peers.
Valuing a company using Multiples
Avg. Comp’s Price to Earnings x Company Earnings = Company Market Cap
Company Market Cap / Company Shares Outstanding = Implied Share Price
For an enterprise value multiple, after you get Company Total Enterprise Value
(TEV) simply add their Debt and subtract out their Cash to arrive at Market Cap
LTM, TTM, T12M, FTM, NTM, WTF?
• When looking at multiples online, you see this terminology, but
what does it mean?
– Last Twelve Months (LTM), Trailing Twelve Months (TTM and T12M)
are multiples that obtain their financial performance metric from the
last twelve months worth of data
– Forward Twelve Months (FTM), Next Twelve Months (NTM) are a
current size measurement divided by an estimate of financial
performance for the next twelve months.