CFA Institute Research ChallengeHosted by New York Society of Security Analysts (NYSSA)

Adjunct Professor:Robert J. Fuest

r.fuest@LANDORFUEST.COM

Team MentorMike Kiernan, CFA

Today’s Presenter:JinMing Liu, PhD

Sr Vice PresidentEquity Research

Ardour Capital Investments, LLC

Financial Ratios

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

Graduate School of Business Administration

Introduction

Classification

Calculation

Applications

Beyond ratios

FORDHAM

• Financial ratiosProfitability

Returns (assets; capital; equity)Margins (gross, op; net)

Growthsingle period (y-o-y)compound

Efficiencyturnover (assets; cash)

Liquidity & solvencycurrentlong-term

Classification

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

• Market ratios

ProfitabilityEV/sales, EV/EBITDA, EV/EBITP/S, P/E, P/FCF

Returns

D/P

Value

P/B, P/tangible BV,

GrowthPEG

Price vs. Value

Classification

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

Calculation

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

Net Income

less: Income from discontinued operations

=Earnings from continuing operations

less: equity income

=Earnings from core operations

Add: tax

=EBT

add: Net interest

=EBIT

less: One-time adjustment

=EBIT after one-time charge

Add: D&A

=EBITDA

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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

• Formatting is key! • Make sure you use

the correct formatting. • Margins are %, ratios

are a multiple!

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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 Cycle 32.9

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

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

Applications

• Standalone

• Cross sectional (snapshot)

Between peers; cross industries

• Longitudinal (time series)

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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.

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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.

Closing Price EV/EBITDA P/E Price/SalesCompany Symbol 9/25/2011 Rating FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2American Ecology Corporation ECOL $15.53 NR 9.02 6.00 5.37 23.89 17.07 14.51 2.71 1.89 1.75Casella Waste Systems, Inc. CWST $5.42 NR 6.87 6.55 6.15 0.31 0.30 0.29Republic Services Inc. RSG $27.79 NR 7.19 7.09 6.74 16.25 14.77 13.23 1.29 1.27 1.22Stericycle Inc. SRCL $80.35 NR 17.33 15.30 13.80 31.88 28.65 25.05 4.81 4.20 3.88Tetra Tech Inc. TTEK $19.16 NR 6.05 5.59 15.45 13.52 11.83 0.82 0.67 0.62Waste Connections Inc. WCN $32.79 NR 10.09 8.82 7.98 26.44 22.27 19.22 2.81 2.47 2.26Waste Management Inc. WMI $30.81 NR 6.69 6.63 6.16 14.67 14.42 12.63 1.16 1.10 1.06

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

Applications

Comparable Company AnalysisRevenues Inventory

Company Ticker 2005 2006 2007 2008 2009 2010 2011 ttm 2005 2006 2007 2008 2009 2010 2011

Median #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM!

Mean #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Min $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Max $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Comparable Company AnalysisInventory as % of Revenues COGS as % of Revenues

Company Ticker 2005 2006 2007 2008 2009 2010 2011 ttm 2005 2006 2007 2008 2009 2010 2011 ttm

Median #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM!

Mean #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Min 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Max 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

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.

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

Beyond Ratios

Is cash “cash”?

• Remember Auction Related Securities?

• Where is it?

• FCF—Depreciation vs. CapEx

Market sentiments

Time (timing and investment horizon)

Graduate School of Business AdministrationFORDHAM

Introduction

Classification

Calculation

Applications

Beyond ratios

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