Chapter 1 - Comparable Companies Analysis

Question 1

What are the steps in comparable companies analysis?

Answer 1

1. Create a universe of companies
2. Obtain the relevant financial data needed
3. Spread the financial info, ratios, and multiples (by inputting the data into the relevant sheets that calculate the needed outputs)
4. Perform benchmark analysis of companies
5. Determine valuation

Question 2

Gross profit margin

Answer 2

Gross profit (sales - cogs)/ sales

Question 3

EBITDA margin

Answer 3

EBITDA/ sales

Question 4

EBIT margin

Answer 4

EBIT/ sales

Question 5

Net income margin

Answer 5

Net income/ sales

Question 6

Growth profile

Answer 6

Obtained from looking at historical and projects EPS (projected comes from consensus reports)

Question 7

Return on invested capital (ROIC)

Answer 7

EBIT/ avg. net debt + equity

Question 8

Return on equity (ROE)

Answer 8

Net income/ avg. shareholders equity

Question 9

Return on assets (ROA)

Answer 9

Net income/ avg. total assets

Question 10

Implied dividend yield

Answer 10

(Most recent quarterly dividend per share * 4)/ current share price

Question 11

Leverage ratio

Answer 11

Debt/EBITDA

Question 12

Debt to total capitalization

Answer 12

Debt/ (equity + debt + preferred stock + minority interest)

Question 13

Interest coverage ratio

Answer 13

EBITDA, (EBITDA - CAPEX), or EBIT/ interest expense

Question 14

What is the equity value multiple and how do you calculate it?

Answer 14

P/E ratio = share price/ diluted EPS or Equity Value/ Net Income

(Higher P/E = higher growth expectations)

Question 15

What is the enterprise value multiple and how do you calculate it?

Answer 15

Enterprise value to EBITDA = EV/ EBITDA or Enterprise value to EBIT = EV/EBIT (EV/EBITDA is more commonly used)

Question 16

Enterprise value to sales

Answer 16

=EV/Sales (used as sanity check to earnings based multiples)

Question 17

What are the 5 things to look at in step 3 of a comparable companies analysis?

Answer 17

Size, profitability, growth profile, ROI, and credit profile

Question 18

Pros to comparable companies analysis

Answer 18

1) market-based - info used is from the actual market, so it includes market sentiment
2) relativity - easily measurable and comparable data among companies
3) quick and convenient - valuation depends on basis of a few easy calculateable inputs
4) current - based on market data that is updated daily

Question 19

Cons to comparable companies analysis

Answer 19

1) market based- data can be skewed during certain periods
2) absence of relevant comparables- May be difficult to identify similar companies or may not exist at all
3) potential disconnect from cash flows - doesn’t take into account past or future predicted cash flows, which could vary valuation.
4) company specific issues - may leave out target specific strengths, weaknesses, opportunities and risks