Fixed Income

Coupon Payment

Market Price

Income Statement

Revenue - COGS - SG&A

Analyzing Financial Statements: Liquidity Metrics

Note: Measure of a company's short-term solvency.

Current Assets - Current Liabilities

Analyzing Financial Statements: Liquidity Metrics

Current Assets

Current Liabilities

Analyzing Financial Statements: Liquidity Metrics

Note: Takes into account liquid current assets and leaves out inventory and accounts payable.

Cash & Cash Equivalents + Marketable Securities

Current Liabilities

Analyzing Financial Statements: Liquidity Metrics

 Note: Measure of how efficiently a company transforms its receivables into cash.

% Sales on Credit x Sales*

Average Receivables**

*aka Net Receivables Sales

 **(AR₁ + AR₂)/2

Analyzing Financial Statements: Liquidity Metrics

Note: The average # of days between a sale and the collection of cash from the sale.

365

Receivables Turnover*

 *Receivables Turnover = (% Sales on Credit x Sales)/Average Receivables

Analyzing Financial Statements: Liquidity Metrics

Note: A measure of a firm's speed in moving its inventory.

COGS

Average Inventory*

*Average Inventory = (AI₁ + AI₂)/2

Analyzing Financial Statements: Liquidity Metrics

365

Inventory Turnover

*Inventory Turnover = COGS/Average Inventory

**Average Inventory = (AI₁ + AI₂)/2

Analyzing Financial Statements: Liquidity Metrics

Note: Measure of how quickly a firm pays its bills.

Ending Inventory + COGS - Begining Inventory*

Average Payables**

*aka Credit Purchases

**Average Payables = (AP₁ + AP₂)/2

Analyzing Financial Statements: Liquidity Metrics

365

Payables Turnover*

*Payables Turnover = (Ending Inventory + COGS - Begining Inventory)/Average Payables

Analyzing Financial Statements: Liquidity Metrics

Note: A measure of how quickly a company can turn assets into cash.

Days in Inventory + Days Sales Outstanding - Days Payable Outstanding

Analyzing Financial Statements: Liquidity Metrics

Note: A measure of how much debt is used to fund the company's assets compared to equity.

Total Liabilities*

Shareholder's Equity**

*Short-term Debt + Long-term Debt

**Total Assets - Total Liabilities

Analyzing Financial Statements: Liquidity Metrics

 Note: A measure of how much long-term debt is used to fund the company's assets compared to equity.

Long-term Debt

Shareholder's Equity*

*Shareholder's Equity =Total Assets - Total Liabilities

Analyzing Financial Statements: Liquidity Metrics

Note: A measure of the percentage of debt to all capital raised.

Total Debt

Total Debt + Shareholder's Equity

Analyzing Financial Statements: Liquidity Metrics

Long-term Debt

Long-term Debt + Shareholder's Equity

Analyzing Financial Statements: Liquidity Metrics

Note: Can also be thought of as net cash.

Short-term Debt + Long-term Debt - Cash & Cash Equivalents

Analyzing Financial Statements: Profitability Metrics

 Note: The measure of how much of a period's earnings are available to a common shareholder.

Net Income - Preferred Stock Dividends

Shares Outstanding

Analyzing Financial Statements: Profitability Metrics

Note: Measures the amount of return (as measured in net income) each dollar an investment receives.

EPS

Price/sh.

Analyzing Financial Statements: Profitability Metrics

Note: A measure of how much return (measured in free cash flow) is earned for each dollar invested.

(Operating Cash Flows - Capital Expenditures)/sh.*

Price/sh.

*aka Free Cash Flow Per Share

Analyzing Financial Statements: Profitability Metrics

Note: A measure of how well a company is using its assets to generate sales.

Sales

Average Assets

*Average Assets = A₁+ A₂

Analyzing Financial Statements: Profitability Metrics

Note: A measure of how well a company is using its equity to generate sales.

Sales

Average Equity

Analyzing Financial Statements: Profitability Metrics

Note: Percentage of sales in gross profit.

Sales - COGS

Sales

Analyzing Financial Statements: Profitability Metrics

Note: Percentage of sales accounted for in operating income.

Sales - COGS - SG&A*

Sales

*aka Operating Income

Analyzing Financial Statements: Profitability Metrics

Note: Percentage of sales accounted for in pretax income.

Earnings Before Taxes (EBT)

Sales

Analyzing Financial Statements: Profitability Metrics

Note: Percentage of sales accounted for in operating income.

Net Income

Sales

Analyzing Financial Statements: Profitability Metrics: ROI

Note: Measure of how efficiently a company can use its assets to generate profits. If ROA is high, the company is more efficient in using its assets to generate profit.

Net Income

Average Assets

Analyzing Financial Statements: Profitability Metrics: ROI

Note: Measure of how efficiently a company turns its capital contributions and retained earnings into profits. When ROE is high, the company is efficiently using the capital invested by shareholders or retained by the company.

Net Income

Average Shareholder's Equity

Analyzing Financial Statements: Profitability Metrics: ROI

Note: Return on all capital invested (both debt and equity) in a company.

EBIT x (1 - Marginal Tax Rate)

Total Debt + Shareholder's Equity*

*aka Invested Capital

Analyzing Financial Statements: Leverage Metrics

Note: Measures a company's ability to make its interest expense.

EBIT

Interest Expense

Analyzing Financial Statements: Leverage Metrics

Note: Measure of a company's ability to pay off its debt.

Debt

EBITDA

Analyzing Financial Statements: Leverage Metrics

 Note: Measure of a company's ability to pay off its debt if cash was also included.

Debt - Cash & Cash Equivalents

EBITDA

Company Valuation: EV

Note: The market price for which an investor would have to pay to purchase an entire company.

Market Cap + Total Debt + Capital Leases + Minority Interest - Cash & Cash Equivalents

Company Valuation: Enterprise Value

EV

EBITDA

Company Valuation

 Note: The rate at which an investment would grow if it grew at a steady rate.

(Ending Value/Beginning Value)^{1/# of yrs} -1

Company Valuation

Note: The percentage of net income used to pay dividends.

Annual Dividends Paid

Net Income

Company Valuation

Annual Dividends Paid/sh.

Price/sh.

Company Valuation: Equity Value

Note: How much an investor is willing to pay for each dollar of net income (on a per share basis).

Price/sh.

EPS

Company Valuation: Equity Value

Note: Measures the amount an investor is willing to pay for each dollar of operating cash flow.

Price/sh.

Operating Cash Flow/sh.

Company Valuation: Equity Value

Note: Measure on how much each dollar of book value per share is worth. Companies with low P/B ratios may be considered undervalued.

Price/sh.

Shareholder's Equity/sh.

*Shareholder's Equity = Assets - Liabilities

Company Valuation: Equity Value

Note: An ideally priced stock is going to have ins P/E grow at the same rate as the EPS growth rate. So the benchmark for PEG is 1. Stocks that are over 1 may be overvalued, while a stock under 1 may be undervalued.

P/E

Annual EPS Growth

Capital Budgeting: Discounted Cash Flows

PV(1 + i)^t

*t = # compounding periods, i = interest rate

Capital Budgeting: Discounted Cash Flows

FV_t

(1 + i)^t

*t = # compounding periods, i = interest rate

Capital Budgeting: Discounted Cash Flows

CF_o + (CF₁/(1+i)) + (CF₂/(1+i)²) + ... + (CF_n/(1+i)ⁿ)

CF_o = Initial Cash Outflow, and is a negative number.

Capital Budgeting: Cost of Capital: Common Stock

Note: Used to evaluate the cost of common stock in relation to the broader markets.

Cost of Equity = Risk-Free Rate x (beta + Market Return - Risk-Free Rate)

Capital Budgeting: Cost of Capital: Common Stock

Note: Used to evaluate the cost of common stock for mature companies who consistently pay a dividend.

Market Price = Next Year's Dividend/(Required Rate of Return - Expected Constant Growth Rate)

P₀ = D₁/(k - g)

*P₀ = Market Price, D₁ = Next Year's Dividend, k = required rate of return, g = expected constant growth rate

Capital Budgeting: Cost of Capital: Preferred Stock

Note: Used to evaluate the cost of preferred stock.

Annual Preferred Dividends/sh.

Price of Preferred Stock/sh.

Capital Budgeting: Cost of Capital: Debt

Note: Used to evaluate cost of debt. This is pre-tax.

Interest Expense

Principal - Underwriter's Spread

Capital Budgeting: Cost of Capital

(Interest Expense/Principal Received - Underwriter's Spread) x (1 - marginal tax rate)

Capital Budgeting: Cost of Capital

Component  Weight  Pretax Cost  After-Tax Cost  Weighted Cost

Debt

Preferred

Common

Total            100%

*See pg. 95