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Analyst Interview
Mar 31, 2022
In General Discussion
Except in capital-intensive industries such as oil and gas, EBITDA is a fantastic proxy for cash flow, especially in the financial sector. EBITDA reduces the business to its most basic operating cash flows because it eliminates any cash adjustments resulting from changes in the business's capital structure, the impact of a jurisdiction's laws, or management decisions. For example, the cost of financing and interest is a proponent of the capital structure of the company. When considering cashflows to investors, the idea of using EBITDA as a proxy makes sense because it removes the impact of debt structures from the equation. If a company currently borrows funds at 4 percent instead of 12 percent, this does not reflect the company's operations, but rather the current financing environment in which the company operates. In a similar vein, by removing taxes from the equation, you eliminate any external impact of the jurisdiction that is not indicative of the business operations. If a company is established in California rather than Nevada, this does not preclude the company from reorganising in the future to take advantage of a more favourable tax structure. Once again, this is not a reliable indicator of the operating cashflows of the company. Finally, it is true that EBITDA does not take into account capital expenditures, which is why EBITDA is only a good proxy for industries that do not require significant capital expenditures. The oil and gas industry, for example, relies on the expenditure of cash to drill additional wells in order to run its operations effectively and efficiently. However, if you look at the retail industry, the decision to renovate the store (capital investment) is a decision made by management in order to try to increase profits by improving the customer experience. This renovation may not take place under a different management team, and as a result, the proforma cash flows will not be accurate. Any other ideas please drop in comments below.
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Analyst Interview
Mar 29, 2022
In General Discussion
If we are analyzing and comparing companies within the same industry, such as Consumer Goods, how does Gross Margin / EBITDA Margin and EBITDA multiple valuation relate to one another and to the industry as a whole? It is also possible to have a company with higher gross margins (higher aggregate value of the product or higher price point of the product as compared to the mainstream), and still have a similar G&A structure, and still have a higher EBITDA margin. In what way will the relative valuation of a premium segment company in comparison to a commodity product company change? What about applying an ad hoc rules of thumb, such as the following: premium product companies have lower EV/EBITDA multiples because their EBITDA is higher, and so on? How about comparing and contrasting companies from various industries? Are there any general rules of thumb that can be used to determine this without having specific knowledge of the industry and cost structure?" Quick question: which sector, A or B, will have a higher multiple than the other? The valuation is based on discounted cash flows, and the multiple is inferred from this calculation. Furthermore, free cash flow should be considered alongside margins because different businesses within the same industry will have different capital expenditure programs and leverage profiles. When looking at cross-industry comparisons, I would expect an energy company to trade at a significant EBITDA multiple discount to a software company due to (a) high capital expenditure requirements and (b) concerns about long-term cash flow growth. ------------------------------------------------------------------------------------------------------------------------------------------------ When looking at EBITDA-based valuations, margins are typically not taken into consideration. What you will see are normalized or adjusted EBITDA values, which are adjusted to take into account operational efficiency gains as a result of the acquisition. You may also need to adjust revenue and cost of goods sold (COGS) for ecommerce businesses in order to account for differences in how shipping is reported. Depending on whether your client charges for shipping and whether the buyer intends to charge for shipping after the purchase (since the trend is toward free shipping), you may have to cut that revenue stream from your bottom line. In the case of COGS, the buyer may have a better shipping network and contracts in place, resulting in an immediate cost synergy. If we are comparing apples to apples companies, and one of the companies is a premium company and the other is a commodity company, the premium company will almost always have a higher EBITDA multiple than the other. It is because they have established some kind of moat (i.e., competitive advantage) that allows them to capture higher prices and thus, more bottom line value that premium product companies are considered premium. Premium product markets, in contrast to commoditize markets, are typically less saturated and do not experience the same downward pricing pressures as commoditized markets. This is a difficult question to answer without making a lot of assumptions, but the simplest way to go about it is to consider the potential moats associated with specific industries. The following are some things to consider if you're looking at technology and consumers: In the end, your "brand" will determine your worth unless you have a proprietary formula or technology, or some other aspect of your business that others cannot duplicate. Most consumer companies sell for 1-2 times their revenue and 8-14 times their EBITDA. Technology - once again, this is largely dependent on the moats established by the company, but on average, you'll find more tech companies than consumer companies in the market. There are a couple of other considerations, including (a) revenue model (is it licensed or recurring, and how much revenue is generated from services or labor-intensive work (less is better), and (b) whether the product is targeted at consumers or enterprises (this relates to market potential and repeatability of revenue). Technology overhauls in businesses are expensive investments that are generally avoided when at all possible. (See also: Additionally, technology companies typically take longer to achieve profitability and are frequently valued based on revenue or ARR (annual recurring revenue), rather than EBITDA. Top line multiples are more consistent than bottom line multiples because they also experience significant margin expansion as a result of growth. In general, technology multiples outperform those of consumer goods.
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Analyst Interview
Jan 27, 2022
In Questions & Answers
Note: You can share your own Suggested Answer in below comment box Q1) What is WACC? Q2) What is Cost of Equity? Q3) Tell me the logic behind of valuing of cost of equity through CAPM ? Q4) What is Risk free return ? Q5) Why do you take risk free return of 10 year bond. why not any other period? Q6) What is risk free return in India and what is the meaning of risk free return? Q7) What is risk premium? Q8) What is Beta? Q9) How would you find the cost of Equity which is a unlisted company and a private company ? Q10) How to calculate beta of Private company? Q11) Why you take median of the Beta of the peer group ? Q12) Tell me about something in finance? Q13) How terminal value calculated ? Q14) Tell me why we use EBITDA multiple instead of EBIT multiple? Q15) What factors are taken into consideration while selecting comparable companies Q16) How will FCFF using EBITDA and without deducting depreciation? Q17) Tell me why book value of debt is used for wacc, not market value.? Q18) Give me the formula of cost of equity, cost of debt , cost of preferred stock? Q19) Tell me under which heading unearned revenues are shown in balance sheet ? Q20) Why FCFF and FCFE are require different discount rate ? Q21) Think you have a task to prepare real estate development model then how you will prepare and what will be your assumptions ? Q22) What will your approach while building the financial models? Q23) Is there anything apart from comparison of IRR to that of expectations that would help you in analyzing the best options? Q24) How do you calculate FCFF in different ways? Q25) Tell me why free cash flow use? Q26) Explain about changes in Net WC while calculating FCF? Q27) Formula to calculate Terminal Value? Q28) In which case EV/Sales multiple use? Q29) What is the actual term real estate Valuations? Q30) Tell me which industry you follow and why?
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Analyst Interview
Jan 26, 2022
In Questions & Answers
Note: You can share your own Suggested Answer in below comment box along with question number. Q1- Tell me what is the Debt Service Coverage Ratio. When computing DSCR, why is EBITDA used as a numerator while calculating DSCR? Q2- Explain me the different types of Ratios ? Q3- What is Liquidity Ratio? Why is 2:1 the ideal current ratio? Q4- What is Capital Budgeting? Q5-What are the the techniques used in Capital Budgeting Q6-Tell me the between Payback period and Discounted Payback period? Q7- Define Enterprise Value. How to calculate it? Q8- What is Market Capitalization? Q9- What is excess cash ? Q10- What types of debt are included in EV (Enterprise Value)? Q11- Why cash deducted while calculating EV? Q12- What is Unfunded Pension Liabilities and Why do they form a part of debt? Q13-Define Minority Interest. State the reason for its inclusion in EV? Q14- What is EBITDA? As an investor would you consider EBITDA or Net Profit for judging a potential investment? Q15- What is accrued revenue and deferred revenue? Q16- Explain me what is the CAPM formula to calculate the cost of equity? Q17- Explain me about risk free rate, risk premium and beta? Q18- What is the Formula for FCFF how you will calculate? Q19- How you will calculate cost of equity for private companies. Q20- How you will calculate cost of equity of stocks? Q21- What are the steps to calculate beta in Excel? Q22- How to value company using DCF valuation? Q23- What is WACC and steps for calculation ? Q24- What are the Cost of capital components? Q25- Explain the main difference between EV and EV multiples? Q26- Which of the following will you choose to invest your money stocks or bond? Q27- How you will calculate EBIT? Q28- How you will calculate EBITBA? Q29- Did you prepare any Models? Q30- What are your interests? Read Suggested Answer by Analyst Interview
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Analyst Interview
Jan 26, 2022
In Questions & Answers
Note: You can share your own Suggested Answer in below comment box Q1. Tell me what is WACC? Q2. What did you learn during your studies? Q3. Which deal did you track recently? Q4. Tell me about a Vodafone and idea deal? Q5. What is EV? How do you calculate it? Q6. As you indicated, EBITDA reflects operational efficiency; however, don't you believe we should compare apples to apples ? Q7. What does positive EBITDA mean? Q8. What is EBITDA and how to calculate, do you think EBITDA give true picture of firm? Q9. What is FCFE and FCFF? Q10. Company A wants to value a company using FCFF and company B wants to value a company using FCFE. Do you think there would be a difference in their DCF valuations? Q11. Which is more risky -1.0 beta or 1.2? Why? Q12. How is FCFF calculated? Q13. What is the DCF valuation method? Q14. How will you put a money tag on a football team? How will you evaluate it? Q15. What are the main ratios used for evaluation? Q16. What is PE Ratio ? Q17. How do you calculate WACC? Tell me the steps? Q18. How do you calculate beta? Q19. What is the formula for calculation of cost of equity? Q20. Why do you discount cash flow in valuation? Q21. Tell me the Steps used in DCF valuation ? Q22. What are the main inputs used in DCF technique? Q23. What do you mean by EV/Sales multiple? Q24. What do you mean by precedent transaction comps? Q25. What are pro forma financials? Q26. What is Your current job profile? Q27. What is NPV? And how to calculate? Q28. What is IRR? What is the formula for calculating IRR? Q29. Define FCFF. Differentiate the between FCFF and FCFE? Q30. Why is interest not deducted while calculating FCFF? Read Suggested Answer By Analyst Interview
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Analyst Interview
Dec 25, 2021
In General Discussion
Here we will talk about Which methodologies fit which situations and Which methodologies typically have a higher valuation, which ones typically give a lower valuation? DCF (Discounted Cash Flow) : The most variable type of valuation, as a result of which it is highly sensitive to a variety of inputs and assumptions. It has the potential to be the most manipulated, but it also provides the most accurate insight into the intrinsic value. Problematic, especially if you rely heavily on the terminal multiple, and especially if the company has poor revenues and negative EBITDA—it may be difficult to predict its value at this point. Additionally, it is the simplest thing to memorize in an interview. Precedent transactions: Typically, the strategic with the highest valuation, built-in control premium, and built-in control premium will have to pay a premium over what their shares are currently trading at in order to entice the seller. However, precedent transactions are still considered to be a type of comparison, and transaction comparisons can be extremely hit or miss depending on the level of M&A activity in the industry you are covering and the type of company you are advising. Aside from that, goodwill is frequently created as a result of premiums. This can be problematic, especially if you have to write it down if you discover that the assets or company you acquired are worse than the IBD analysts you hired predicted. LBO: Given that private equity firms are unable to realize certain synergies that strategic buyers can, this is typically the lowest or "floor" valuation, as financial buyers pay lower multiples than strategic buyers. The most complex type of valuation, which is dependent on future assumptions and on the ability of a company to generate cash flows to pay down debt, is discounted cash flow valuation. It's the word "leveraged" that I like the most because it makes me feel intellectual. IRR can be easily manipulated through certain activities such as dividend recapping, and MOIC can be deceiving because it does not take into consideration time elapsed between investments. Comps: Simple, and widely applicable across a wide range of industries. Each industry has its own well-known set of comps that it employs, which can be quite interesting to study. Very straightforward, but also very transferable across investing and banking environments.
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Analyst Interview
Dec 14, 2021
In General Discussion
The price-to-earnings (P/E) ratio is a valuation ratio that investors use to determine whether a business is overvalued or undervalued. However, knowing what a "good" P/E ratio for a stock is necessitates some more background. Let us understand. The P/E ratio isn't helpful on its own. When comparing P/E ratios between similar businesses in the same industry, it's best used as a relative metric. IS A HIGH PE RATIO GOOD OR BAD? The quick answer to the question "Is a high PE ratio good?" is "no." The higher the P/E ratio, the more you pay each dollar of earnings. From a pure price-to-earnings standpoint, a high PE ratio is undesirable for investors. A higher P/E ratio indicates that you will pay more for a share of the company's earnings. So, what is a good PE ratio of a stock? A "good" P/E ratio isn't always a high or low ratio in and of itself. A higher PE ratio than that may be considered bad, while a lower PE ratio could be considered better. The market average P/E ratio now runs from 20 to 25, thus a higher PE ratio above that could be considered bad, while a lower PE ratio could be considered better. When compared to the industry average or historical average, a high P/E ratio indicates that you are paying more for each dollar of earnings, but it also indicates that investors expect the firm to grow earnings quicker in the future, whether compared to its competitors or its own prior growth. A P/E ratio of 10 may be typical for a utility firm, but it may be unusually low for a tech company. The industry PE ratios come into play at this point. What are the company's expectations in comparison to its key peers and competitors? A company's P/E ratio can be compared to its industry or previous P/E ratios to answer this question. A stock market index, such as the S&P 500, can be used to determine if a company is overvalued or undervalued in comparison to its peers. A P/E ratio can also be compared to the industry average P/E, such as comparing McDonald's to other fast food restaurants like burger king average P/E ratios etc.
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Analyst Interview
Dec 13, 2021
In General Discussion
It is complicated to understand the nature of the relationships that exist between various financial variables and conclude in the financial statements. Financial modelling, on the other hand, is regarded as one of the most difficult assignments, even in the financial area. There are various reasons for this erroneous assumption of complexity. Some of the causes are discussed farther down in this post. Generally speaking, there are many disciplines of finance where the computations are either forward-looking or backward-looking, depending on the situation. For example, financial reporting is based entirely on computations that are performed in the past. Keep track of what happened in the past and report the results to various stakeholder groups like as tax authorities, shareholders, suppliers and other parties involved. The challenge with financial modelling is that it has to be both backward-looking and forward-looking at the same time, which is difficult to accomplish. It is necessary to extract certain parts of financial modelling from financial data, whilst other elements must be extracted from costing plans. Combination of Backward and Future-Looking Statements in Financial Modelling Output variables are determined during financial modelling. Following that, efforts are performed to define the link between the output variables and the underlying cause factors. For example, revenue might be thought of as an output variable that a financial modeller might be interested in. A financial modeller is necessary to examine the firm's previous financial statements. This is done to identify the unknown factors that influence revenue growth. The causal chain is rarely straightforward. The causal factors that affect revenue may be influenced by other causal factors. As a result, a financial modeller is expected to scrutinise backward-looking financial statements with considerable care. This must be done in order to uncover the hidden parameters that influence the real figures. This is what makes financial modelling so much more difficult than financial accounting. To uncover the causal relationships and develop a model, the financial modeller must look backward. However, after this model has been built, the financial modeller must now look ahead. This is due to the fact that, once the inputs have been properly characterised, the financial modeller is expected to detect the probable variances in these inputs. It must be determined if the inputs will change all at once or whether only part of them will change at the same time. The financial modeller is then expected to forecast key factors such as interest rates, tax rates, and so on. These judgements must be made based on current events knowledge. Additionally, some extreme scenarios must be considered for stress testing purposes. This adds to the complication of financial modelling. Assumptions in Financial Modelling Another issue with financial modelling is that many assumptions are buried and the modeller may be unaware of them. Some of these assumptions are based on actual data and so may not be entirely accurate. This is due to the possibility that these assumptions will be discovered to be false if black swan events occur. Prior to subprime mortgages, for example, all financial models were based on the premise that loan defaults could not occur in big numbers across the country. This is why mortgages from Texas were pooled with mortgages from other far-flung places like Wisconsin, because it was considered that all of the mortgages couldn't fail at the same time. However, when the subprime mortgage was issued, property prices began to decline across the country, resulting in widespread mortgage defaults. Because of the underlying assumption, the models were ill-equipped to predict this occurrence. As a result, the markets were a shambles! The level of detail in financial modelling Another factor that contributes to the complexity of financial modelling is the level of detail that must be included in the model. Decision-makers would prefer to see information with as much granularity as feasible. As a result, the model should ideally allow the user to dig down the data from the aggregate to the granular level. The financial modeller must create this capability. As a result, a financial modeller is expected to have a deeper understanding of how numbers function at both a high level and at a detailed level. The points described above are only a few of the highlights of what makes financial modelling difficult. It should also be noted that, in addition to comprehending financial specifics, a financial modeller must also be a technological specialist. This is due to the fact that comprehending the process is insufficient. It must be expressed in the form of a reusable model, which necessitates the use of technology. Financial modelling professions are among of the highest-paying occupations in the whole finance area since they demand a person to be an expert in so many fields.
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127
Analyst Interview
Nov 21, 2021
In General Discussion
The greatest valuation will usually come from the Precedent Transactions technique, because a firm will pay a premium for the predicted synergies from the merger, out of the four basic valuation techniques (Market Value, Market Comps, Precedent Transactions, and DCF). Because those creating the DCF model tend to be relatively optimistic in their assumptions and expectations, a DCF study will usually offer you the next highest valuation. The lowest valuations are usually produced by using Market Comps and Market Value. The another point It is debatable. It relies on the discount rate used in the DCF model, the similar companies chosen, whether the market is bullish or bearish, and whether the companies are overvalued or undervalued for no reason. Transaction comps, on the other hand, would often yield the greatest valuation because a transaction value would include a premium for shareholders above the actual worth. The DCF is probably the second highest valuation because it involves a lot more assumptions (growth rate, discount rate, terminal value, tax rates, and so on), but it can also be the most accurate depending on how strong the assumptions are.
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Analyst Interview
Sep 21, 2021
In General Discussion
While the preceding approach for calculating Enterprise Value as a multiple of EBITDA, as determined by a variety of business characteristics, is most commonly used in private equity and investment banking, it is not the only method for valuing private companies. Asset Based Valuation Method: This method analyses the company's balance sheet by subtracting the total liabilities value from the total net asset value. An asset-based valuation can be approached in two ways: Going Concern Approach: If the company intends to continue operations without selling any assets right away, the going-concern approach to asset-based business valuation should be used. Liquidation Value Approach: If, on the other hand, the company is closing down, the liquidation value asset-based valuation technique should be used. The value is based on the net cash that would exist if the business was terminated and the assets were sold. Predictably, this method frequently results in a valuation that is lower than the true market value. Discounted Cash Flow (DCF) Valuation Method: The DCF valuation method, often known as the income approach, is more reliant on a company's financial data. This enables one of DCF’s key advantages over other valuation techniques: it analyses companies on an absolute basis, removing subjectivity. A business is valued using DCF based on its projected cash flow over a reasonable time period, which is then adjusted to present value using a reasonable discount rate. Market Value Valuation Method: This method compares a company to others in its industry. In an ideal world, a company would use financial data from previous transactions to arrive at an accurate valuation. As stated at the outset of this piece, some business owners use market capitalization data about public firms in their field to estimate a value for their companies based on industry averages. A word of caution: this strategy ignores variations in capability, predicted growth rates, intangible assets, and other pertinent aspects. At best, an increase in the average market capitalization of public companies in their industry may suggest a significant growth rate for the market as a whole.
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Analyst Interview
Sep 08, 2021
In General Discussion
Know About Some Industry Multiples. 1) EV/Revenue - Definition- The Enterprise Value to Revenue Multiple is a valuation tools that divides the enterprise value (equity + debt minus cash) by annual revenue to determine the value of a company. It is For early-stage or high-growth businesses that do not yet have positive earnings, the EV to revenue multiple is widely used. EV to Revenue Multiple Formula = EV / Revenue Where: EV (Enterprise Value) = Equity Value + All Debt + Preferred Shares – Cash and Equivalents Revenue = Total Annual Revenue 2) EV/EBITDA Definition- EV/EBITDA is a ratio metric that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). The EV/EBITDA ratio is a popular tool for comparing the relative worth of different firms. The EV/EBITDA ratio is used to compare a company's total worth to the amount of EBITDA it generates on a yearly basis. This ratio tells investors how much they would have to pay if they bought the entire company. This ratio mainly use by Many Industrial and Consumer industries, but not Banks, Insurance, Oil & Gas and Real Estate. EV to EBIDTA =EV / EBIDTA Where: EV=Enterprise Value=Market capitalization +total debt−cash and cash equivalents EBITDA=Earnings before interest, taxes, depreciation and amortization 3) EV/EBITA Earnings before interest, taxes, and amortization (EBITA) is a measure of profitability of the company used by investors. It is beneficial when comparing one company to another in the same industry. It can also provide a more realistic picture of a company's true performance over time in some scenarios. One advantage is that it shows how much cash flow a company has on hand to reinvest in the business or pay dividends more clearly. It is also regarded as a measure of a company's operational efficiency. This ratio commonly used in several Media industry sub-sectors, Gaming, Chemicals and Bus & Rail Industries. EV to EBITA =EV / EBITA Where: EV=Enterprise Value=Market capitalization +total debt−cash and cash equivalents EBITA=Earnings before interest, taxes and amortization 4) PE Ratio The price-to-earnings ratio (P/E ratio) is a valuation ratio that compares a company's current share price to its per-share earnings (EPS). The price-to-earnings ratio, also known as the price multiple or the earnings multiple, is a ratio that compares the price of a stock to its earnings. In an apples-to-apples comparison, investors and analysts use P/E ratios to estimate the relative value of a company's shares. It can also be used to compare a company's past performance to its own, as well as aggregate markets to one another or over time. PE Ratio = Market value of per share/Earnings Per share 5) EV/EBITDAX EBITDAX is a financial performance metric that is used by oil and mineral exploration companies when reporting earnings. Earnings Before Interest, Taxes, Depreciation (or Depletion), Amortization, and Exploration Expense" EBITDAX is a valuation indicator for oil and gas firms that assesses a company's capacity to generate revenue from operations while also servicing debt. By eliminating exploration expenses from EBITDA, EBITDAX increases. When new oil and gas deposits are discovered, firms use EBITDAX to capitalise on exploration expenditures. EBITDTAX= Earnings before interest, depreciation, amortization, and exploration 6) EV/EBITDAR It mostly used in industries like hotel and transport sectors; computed as the proportion of Enterprise Value to Earnings before Interest, Tax, Depreciation & Amortization, and Rental Costs EBITDAR is a profitability metric similar to EBIT or EBITDA, but it is more appropriate for casinos, restaurants, and other businesses with non-recurring or highly variable rent or restructuring costs. EBITDAR provides analysts with a picture of a company's core operational performance, excluding non-operating expenses including taxes, rent, restructuring charges, and non-cash expenses. By reducing unique characteristics that aren't directly related to operations, EBITDAR makes it easier to compare one company to another. EBITDAR=EBITDA + Restructuring/Rental Costs 7) EV/2P Ratio The EV/2P ratio is a relative valuation multiple that is most commonly used in the oil and gas industry. The ratio is derived by multiplying the enterprise value (EV), which represents a company's overall value, by the sum of proven and probable (2P) reserves, which represents the amount of room for expansion. A higher EV/2P ratio than peers indicates that the market values the company higher, whereas a lower ratio indicates a lower valuation. Other factors could justify the overvaluation or undervaluation. EV/2P= Enterprise Value/2P Reserves Where:- 2P Reserves=Total proven and probable reserves Enterprise Value=MC+Total Debt−TC MC=Market capitalization TC=Total cash and cash equivalents 8) Enterprise Value/Daily Production: EV/BOEPD Many oil and gas analysts use this metric, which is also known as price per flowing barrel. This is calculated by dividing the enterprise value (market capitalization + debt – cash) by the number of barrels of oil equivalent per day (BOE/D). BOE is used by all oil and gas businesses to report production. It is trading at a premium if the multiple is high compared to its peers, and it is trading at a discount if the multiple is low compared to its peers. However, as useful as this metric is, it ignores the potential production from undeveloped fields. To gain a better picture of an oil company's financial health, investors should calculate the cost of developing additional areas. 9) Price to Net Asset Value (P/NAV) P/NAV is the most important mining valuation metric, period. The net present value (NPV) or discounted cash flow (DCF) value of all future cash flows of the mining asset less any debt plus any cash is referred to as "net asset value." Because the technical reports provide a very complete Life of Mine plan, the model may be forecasted to the end of the mine life and discounted back to now (LOM). The following is the formula: P/NAV = Market Capitalization / [NPV of all Mining Assets – Net Debt] NAV is a sum-of-the-parts method of valuation, in which each mining asset is valued independently and then added together. Corporate adjustments, such as head office overhead or debt, are made at the end. 10) EV/Resource The EV/Resource ratio divides the business's enterprise value by the total resources available on the ground. This metric is most commonly used in early-stage development projects where there isn't a lot of information available (not enough to do a DCF analysis). The ratio is quite simple, because it ignores both the capital and operating costs of constructing the mine and extracting the metal. EV/Resource = Enterprise Value / Total Ounces or Pounds of Metal Resource
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127
Analyst Interview
Sep 04, 2021
In General Discussion
Forecasting Income Statement Revenue- In most 3-statement models, the revenue forecasting is likely the most essential forecast. There are two primary methods for estimating revenue mechanically: 1. Grow revenues by inputting an aggregate growth rate. 2. Segment level detail and a price x volume approach. 1. Grow revenues by inputting an aggregate growth rate- Grow revenues by inputting an aggregate growth rate is straightforward. Let’s take an example of ABC company revenue growth last year was 10%. The analyst expected that growth rate to continue throughout the forecast period, revenue would simply be grown at that rate. 2) Segment level detail and a price x volume approach- A more extensive forecast technique is required if the analyst has a view on price and volume variations across segment. In this situation, the analyst would establish specific volume and pricing assumptions for each section. Rather than forecasting a consolidated growth rate explicitly, the consolidated growth rate is an output of the model based on the price/volume segment buildup in this case. Cost of goods sold (Cogs) Make an assumption for a percentage gross profit margin (gross profit/revenue) or a percentage COGS margin (COGS/revenue) and convert it to dollars. Historical margins serve as a baseline against which the analyst can either straight-line into the projected period or reflect a thesis that derives from a specific point of view (which the analyst develops on their own estimate). Revenue – Gross Profit = COGS Operating Expenses (OPEX) Selling costs, general and administrative expenditures, and research and development costs are all included in operating expenses. All of these costs are driven by either sales growth or an explicit anticipation of margin changes. For example, if last year's SG&A margin was 15%, an SG&A projection for next year would simply be to straight-line the prior year's 15% margin. If we expect modifications, we'll normally make a note of it in the margin assumptions. Depreciation and Amortization (D&A) - Expenses for depreciation and amortization are normally not included separately on the income statement. Rather, they are embedded within other operating expense categories. However, in order to arrive at an EBITDA forecast estimate, you normally need to forecast D&A. D&A expenses are predicted as part of the balance sheet buildup and linked back into the income statement after the buildup is complete since they are a result of historical and expected future capital expenditures and purchases of intangible assets. Stock-Based Compensation (SBC)- Like D&A, stock-based compensation is embedded within other operating expense categories, but the historical amounts can be explicitly found on the cash flow statement. Stock-based pay is often calculated as a proportion of revenue. Interest Expense- Interest expense forecasting, like depreciation and amortization, is done as part of the balance sheet buildup in a debt schedule and is based on projected debt levels and interest rates. Interest expense is determined by the company's debt balances, whereas interest revenue is determined by the cash holdings. Analysts use one of two approaches to calculate interest in financial models. 1. Interest rate x average period debt For example, if your model is forecasting a $100m debt balance in the end of 2016 and $200m at the end of 2017, at an assumed interest rate of 5%, the interest expense would be calculated as $150m (average balance) x 5% = $7.5m. 2. Interest rate x beginning period debt Under this approach, you would calculate interest off the beginning of period balance (which is last year's end of period balance) of $100m x 5% = $5m. Interest Income While revolver debt is often used to plug a deficit, cash is used to plug a surplus, therefore any excess cash flows predicted by the model will naturally result in larger cash levels on the balance sheet. As a result, we're dealing with the identical circularity difficulties we're dealing with when forecasting interest income. The expected cash balances and the projected interest rate earned on idle cash determine interest income. We won't be able to forecast it until both the balance sheet and the cash flow statement are completed. Analysts can calculate interest using either the beginning- or average-period approach, just like interest expense. If you anticipate interest income based on average cash balances, it will be similar to interest expense. Other non-operating items In addition to interest income and interest expense, organizations may have other non-operating income and expenses that are not explicitly mentioned on the income statement. Straight-line forecasting is usually the best method for predicting those goods (as opposed to operating expenses, which are usually tied to revenue growth). Taxes In most cases, simply straight-lining the tax rate from the previous year is enough. However, there are times where tax rates historically are not indicative of what a company can reasonably expect to face in the future. Difference between Effective Tax Rate and Marginal Tax Rate? The effective tax rate is calculated by dividing the actual taxes due (as determined by the tax statements) by the company's pre-tax reported income. The effective tax rate can differ from the marginal tax rate because there is a difference between pre-tax income on the financial statements and taxable income on the tax return. The marginal tax rate is the rate that is applied on the last dollar of a company's taxable income, based on the relevant jurisdiction's statutory tax rate, which is partly determined by which tax bracket the company falls into (for US corporations, the federal corporate tax rate would be 35 percent ). The reason it's called marginal tax rate is because as you move up in tax brackets, your "marginal" income is what is taxed at the next highest bracket.
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Analyst Interview
Aug 13, 2021
In General Discussion
What Is DCF? A DCF model is a specific type of financial modeling tool and technique used to value a business or company. DCF stands for Discounted Cash Flow. DCF model is simply a forecast of a company unlevered free cash flow discounted back to present value which is used to evaluate the potential for investment, which is called the Net Present Value (NPV).DCF Valuation estimates the intrinsic value of an asset/business based upon its fundamentals. How To Calculate DCF? - First model out the future earnings of the company, ideally with the help of management estimates, broker estimates, maybe some third party figures, and our own judgments. - After the forecast find the Free Cash Flow to Firm (FCFF) in each year: + EBIT - Tax on EBIT - Capex + Depreciation + Amortization - Increase in WC assets + Increase in WC liabilities + Any other cash or non-cash adjustments that are company specific = FCFF - For the terminal value, at the end of the forecast period: (1) The Gordon Growth Model: (Final Year FCFF * (1 + Perpetual Growth Rate) ) / (WACC - Perpetual Growth Rate) (2) Exit Multiple, which could be based on the entry multiple, or the long term average multiple for the industry, depending on the situation - Then discount the FCFFs to the present value Terminal Value with the annual free cash flow in the final forecast year o FCFF in a particular year / (1+ WACC) ^ number of years in the future that particular cash flow occurs - This would give you the Enterprise Value o To get the equity value: + Enterprise Value - Minority Interests - Net Debt - Unfunded Pension Liabilities - Preferred Shares + Associates / JVs = equity value What Are The Pros and Cons Of DCF? Pros- In theory, it is the most sound method of valuing a company because It uses specific numbers that include important assumptions about a business, including cash flow projections, growth rate, and other measures to arrive at a value. Less influenced by market conditions because It does not require market value comparisons to similar companies. It shows the intrinsic valuation of company based on the company model and operations. DCF allows to consider long terms value because it assess earnings of a project or investment over its entire economic life and considers the time value of money. DCF analysis is suitable for analyzing mergers and acquisitions because it helps company judge whether a company should merge with or acquire another company. Cons- Discounted cash flow analysis requires a significant amount of financial data, including projections for cash flow and capital expenditure over several years. Some investors might find it is difficult to gather the needed data and even simple processes take some time. DCF can be easily manipulated by growth rates and discount rates. No one can accurately predict future Free Cash Flow in DCF. Does not work with all companies like tech startups early in the business cycle. DCF is not subject to market fluctuation it is depend on analyst assumption. DCF often produces the most variable output since it is dependent on future assumptions.
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Analyst Interview
Aug 06, 2021
In General Discussion
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Analyst Interview
Aug 06, 2021
In General Discussion
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