CFA Institute Research Challenge

1. 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)

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 • 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. Classification • 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 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 Graduate School of Business Administration FORDHAM

6. Calculation 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

7. Calculation 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 Cycle32.9 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

8. Calculation • Growth Rate: • 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

9. Calculation EV/LTM Total Revenue EV/NTM Total Revenues EV/LTM EBITDA EV/LTM EBIT EV/LTM Total Revenue 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

10. Applications 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 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 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

13. Applications 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 • 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

15. APPENDIX 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 ExpendituresEV – Enterprise Value Introduction Classification Calculation Applications Beyond ratios Graduate School of Business Administration FORDHAM