winter presentation,final(2)

Stock Analyst Program 2009

Farid Guindo Kaushik Sudharsanam

March 02, 2009

Agenda

MIC Portfolio

Research Report Composition

Macro-Economic Analysis

Valuation Methodology• DCF Valuation• Comparables Method• Precedent Transactions

Investment Styles

Appendix


MIC Portfolio

Asset Class CompositionCash & Cash Equivalents 17.52%Equities, Canadian 18.20%Equities, Other 64.28%

In the last 12 months our portfolio has fared better than the S&P TSX Composite Index by 10.61% and has lagged the DJIA by less than a percentage point

- Current holdings include MRK, CAT, XIU, BNI

Portfolio Overview

Performance Summary Asset Mix


Research Report Overview

Equity Analysis Techniques

Top Down Analysis Bottom Up Analysis

• Investor starts analysis with global economics by observing economic indicators

-GDP growth, Inflation, Interest Rates, Exchange Rates, Productivity and commodity prices

• Investor narrows search down to industry analysis- In this case sales, price levels, cyclical patterns, local/foreign competition, rates of return and earning per share

• Company analysis involves the use of valuation techniques

- DCF, Industry Comparables and precedents are used to value the company

• Investors analyze individual companies -Emphasis is on company specific or industry specific ratios- Undervalued stocks can be labelled as a strong buy regardless of general macro-trends

• Essentially putting together “story of company and its numbers”

-The story component is composed of company’s business plan, outlook and other qualitative aspects-The quantitative part involves a thorough look at company financials


Research Report Composition The key to writing a coherent SAP research report is understanding and articulating an investment time horizon

- Refer to previous reports on the MIC website: Resources > SAP References


Evaluation Criteria (1)

1. Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.

2. This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.

Research Report Evaluation

Industry Analysis 30% Presentation/Research Paper 10%Identification of key metrics and ratios /10% Organization /3.3%Identification of key trends /10% Flow /3.3%Choice and rationale for industry (1) /10% Content /3.3%

Stock Analysis 40% Technical Analysis 20%

Quality of valuation & depth of research (2) /20% Clear investment horizon /5%Investment rationale /20% Entry & exit strategies /15%

Total 100%


Macro-Economic Analysis

Macro-Economic Analysis (1)

Cyclical indicators are a useful tool for anticipating market movements as they help to predict economic activity

- Indicators are usually released monthly in the form of index numbers, quantities, or value

Cycle Significance and Composition The Indicators

• Cycles can be captured through four phases -Expansion, peak, recession, trough • These phases all vary in nature and duration

as they are met under dissimilar circumstances- Policy intervention measures and business responses may differ across the same phases

•There are several indicators that can help us detect and measure the current and subsequent cycles- Leading, lagging, coincident

1. Sourced to “Guide to Economic Indicators”, The Economist.2. Interest rates may also appear in many cases as a lagging indicator, if policy measures taken are reactionary rather than anticipatory.3. Time span (either maximum or minimum) by which the economic indicator usually reverses in trend in terms of total output.

Leading Indicators Peak/Trough Value recovery (2)

Interest rates (3)≈ 18 months

Business Confidence ≈ 8-16 monthsStock Market ≈ 8-16 monthsHousing Starts ≈ 8-16 monthsCompany Financial Surpluses ≈ 8-16 monthsConsumer Credit ≈ 6 monthsCar Sales ≈ 6 monthsManufacturing orders ≈ 6 monthsRetail Sales ≈ 2-3 months

Coincident Indicators

GDP ≈ 1-2 months

Lagging Indicators

Manufacturing capacity utilisation ≈ 1 monthJob vacancies ≈ 3 monthsEarnings growth ≈ 4 monthsProductivity & Unemployment ≈ 6 monthsInflation ≈ 6 months


Macro-Economic Analysis cont’d. An alternative approach to using economic indicators is to use them as directional devices in terms of specific industries in light of their broader macro-economic implications

Alternative Measures (1)

1. Sourced to “Guide to Economic Indicators”, the Economist.2. The producer price index may overstate cost pressures when above average discounts are offered during a recession, or understate cost pressures when inflation is

rapid.ly increasing

* *2 Gold Price Oil Prices Baltic Dry Index Producer & Wholesale prices (2)

Measures Market Price of gold Market Price of Crude OilDemand for shipping capacity versus supply of dry bulk carriers

Input prices of goods

SignificanceServes as both an input cost, and as a global store of value

Serves as both an input cost, ouput price, and measure of geo-political risk.

Provides price of shipping materials by sea, seen as both a cost to commodity producers and price for carriers

Serves as a leading indicator for future cost pressures

Measurement $ per ounce $ per barrelPrice weighted of cost across various vessels

Monthly index numbers

Sources Bloomberg, Reuters Bloomberg, Reuters Bloomberg, Baltic Exchange Bloomberg, Reuters

Macro-Economic Implications

Increasing trends may lead to contractions, lowering trends, may point towards recovery

Increasing trends may be caused by supply cuts or demand increases, whereas decreasing trends may indicate demand reduction and stable geopolitical risk

Measures indirectly global demand and supply for commodities

Shows the restraints or expansion in terms of domestic production costs

Industry Specific Implications

Rise/Fall in revenue for gold producers

Rise/Fall in revenue for oil supply chain

Indicator of cost of operating a vesselUsually released in relation to a particular business segment


Date ET Release For Consensus Prior

2-Mar 08:30 a.m. Personal Income Jan -0.30% -0.20%

2-Mar 08:30 a.m. Personal Spending Jan 0.30% -1.00%

2-Mar 08:30 a.m. Core PCE Jan 0.10% 0.00%

2-Mar 10:00 a.m. Construction Spending Jan -1.50% -1.40%

2-Mar 10:00 a.m. ISM Index Feb 34 35.6

3-Mar 10:00 a.m. Pending Home Sales Jan -3.00% 6.30%

3-Mar 02:00 p.m. Auto Sales Feb NA NA

3-Mar 02:00 p.m. Truck Sales Feb NA NA

4-Mar 08:15 a.m. ADP Employment Change Feb -613K -522K

4-Mar 10:00 a.m. ISM Services Feb 41.3 42.9

4-Mar 10:30 a.m. Crude Inventories 27-Feb NA 717K

4-Mar 02:00 p.m. Fed Beige Book NA

5-Mar 08:30 a.m. Productivity-Rev. Q4 1.60% 3.20%

5-Mar 08:30 a.m. Unit Labor Costs Q4 3.40% 1.80%

5-Mar 08:30 a.m. Initial Claims 28-Feb NA NA

5-Mar 10:00 a.m. Factory Orders Jan -2.10% -3.90%

6-Mar 08:30 a.m. Average Workweek Feb 33.3 33.3

6-Mar 08:30 a.m. Hourly Earnings Feb 0.30% 0.30%

6-Mar 08:30 a.m. Nonfarm Payrolls Feb -615K -598K

6-Mar 08:30 a.m. Unemployment Rate Feb 7.90% 7.60%

6-Mar 02:00 p.m. Consumer Credit Jan -$4.0B -6.6B

10-Mar 10:00 a.m. Wholesale Inventories Jan NA -1.40%

11-Mar 10:30 a.m. Crude Inventories 6-Mar NA NA

11-Mar 02:00 p.m. Treasury Budget Feb NA NA

12-Mar 08:30 a.m. Initial Claims 7-Mar NA NA

12-Mar 08:30 a.m. Retail Sales Feb NA 1.00%

12-Mar 08:30 a.m. Retail Sales ex-auto Feb NA 0.90%

12-Mar 10:00 a.m. Business Inventories Jan NA -1.30%

13-Mar 08:30 a.m. Export Prices ex-ag. Feb NA NA

13-Mar 08:30 a.m. Import Prices ex-oil Feb NA NA

13-Mar 08:30 a.m. Trade Balance Jan NA -$39.9B

13-Mar 10:00 a.m. Mich Sentiment-Prel Mar NA NA

16-Mar 09:15 a.m. Capacity Utilization Feb NA NA

16-Mar 09:15 a.m. Industrial Production Feb NA NA

Date ET Release For Consensus Prior

17-Mar 08:30 a.m. Building Permits Feb NA NA

17-Mar 08:30 a.m. Core PPI Feb NA NA

17-Mar 08:30 a.m. Housing Starts Feb NA NA

17-Mar 08:30 a.m. PPI Feb NA NA

18-Mar 08:30 a.m. Core CPI Feb NA NA

18-Mar 08:30 a.m. CPI Feb NA NA



19-Mar 10:00 a.m. Leading Indicators Feb NA NA

19-Mar 10:00 a.m. Philadelphia Fed Mar NA NA

23-Mar 10:00 a.m. Existing Home Sales Feb NA NA

24-Mar 08:30 a.m. Durable Orders Feb NA NA

25-Mar 10:00 a.m. New Home Sales Feb NA NA



27-Mar 08:30 a.m. Personal Income Feb NA NA

27-Mar 08:30 a.m. Personal Spending Feb NA NA

27-Mar 09:55 a.m. Mich Sentiment-Rev Mar NA NA

31-Mar 09:00 a.m. Consumer Confidence Mar NA NA

31-Mar 09:45 a.m. Chicago PMI Mar NA NA

1-Apr 10:00 a.m. Construction Spending Feb NA NA

1-Apr 10:00 a.m. ISM Index Mar NA NA

1-Apr 10:35 a.m. Crude Inventories 27-Mar NA NA

1-Apr 02:00 p.m. Auto Sales Mar NA NA

1-Apr 02:00 p.m. Truck Sales Mar NA NA

2-Apr 08:30 a.m. Initial Claims 28-Mar NA NA

2-Apr 10:00 a.m. Factory Orders Feb NA NA

3-Apr 08:30 a.m. Average Workweek Mar NA NA

3-Apr 08:30 a.m. Hourly Earnings Mar NA NA

3-Apr 08:30 a.m. Nonfarm Payrolls Mar NA NA

3-Apr 08:30 a.m. Unemployment Rate Mar NA NA

3-Apr 10:00 a.m. ISM Services Mar NA NA

1. Sourced to Wall Street Journal’s market data center.

Economic Calendar Stock Analyst Program 2008

Stock Valuation Methodology


Valuation methodologies are not mutually exclusive and in fact are more effective when used to validate one another

• Sector coverage is important in determining which methodology to use and what to take into account

Overview

Valuation Methodology

• Determine the stream of revenue being generated• Derive weighted average cost of capital (WACC) for firm or rate of return specific to asset• Risk cash flows according to WACC

-Assumes time value of money -General assumptions on terminal value are used

Discounted Cash Flow (DCF) Precedent Transactions

• Determine from past transactions similarities i.e. industry composition, level of risk, size of the transaction• Filtering through the assumptions being used for the precedent transaction allows transparency in your own valuation• The more transactions the better

-Relevant private transactions may or may not be available for use

• Develop case studies for the most relevant transactions to determine an appropriate range to use

- Put more weight on transactions with similar assumptions

• Determine the relevant industry classification •Use of industry based ratios •If specific industry does not exist, work backwards

• Relative comparisons are key; company vs. company & company vs. industry average • Gives a brief idea of where company lies and who key competitors are

- Allows us to determine best/worst of breed

Comparable Transactions


DCF- Methodology

• First determine WACC = D/V * Rd (1-T) + E/V * Re

- Use target (optimal) D/E ratio- Beta CAPM- Rd (1-T) discuss importance of tax shield

• Mechanics of FCFF FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC

- Explain that CAPEX and NWC are all cash sources/uses that don’t affect EBIT, therefore we must adjust.

• Analyze historical performance to come up with future set of assumptions (COGS, SG&A, R&D, “DEP”, “CAPEX”, “NWC” as a % sales)

- Therefore, we need to use revenue as a driver, and determine its growth from year to year during our explicit forecast period (5-10 yrs)

Discounted Cash Flow Method


DCF- Methodology

• Determine FCFF’s each year using assumptions driven off of revenue

• Determine TV at last year of forecast period1) Growing perpetuity

- Assumes constant growth rate (2-3%) – not really used2) Terminal multiple

- Assumes an exit multiple of an operating metric like EBITDA or FCFF, to determine a value for the enterprise at that point in time

• Bring everything back to present value at WACC

• Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest)

Discounted Cash Flow Method


Precedent Transactions, Basic Steps

1. Find historical take-overs in industry - Again, look for similar size if possible, and most recent first

2. Try to cover at least on economic cycle in terms of precedent transactions, as some take-over premiums might reflect a take-over boom in an industry

3. Multiply relevant multiple (P/E, EV/EBITDA, EV/Sales, etc.) by company’s figure to obtain firm’s value in event of a take-over

Precedent Transactions Method


Relative Valuation, Basic Steps

1. Determine the target company’s EPS, EBITDA, or Sales for current year and possibly forward year (using analyst estimates)

- Always use recurring income

2. Determine the set of comparable companies (comp universe) and their trading multiples (based on recurring figures!)

- Similar companies based on industry, size, business model, risk, capital structure – anything you can control for

3. Multiply average industry multiple by current or forward performance to determine the relative value of the firm

Relative Method


Investment Styles

Summary

•Based on the stock’s intrinsic value- Low PE, P/BV, P/CF multiples- Long term time horizon

Value Investing Growth Investing

Contrarian InvestingGARP Investing

Personal risk preference, time horizon, and skill set determine the best investment style to employ

•Seeking future growth potential and earnings strength

• A hybrid combination of growth and value strategies

-Brought to main stream use by Peter Lynch- Emphasis on the PEG ratio

• Goes against conventional market wisdom- Crowd behaviour creates mispricings


Value Investing: A Closer look

Time Horizon

Risk Level

Effort

Benjamin Graham Warren Buffet

- Low risk at deep value - Relatively low risk investments

- High initial effort for - Highly selective in fundamental analysis valuation and screening

- Low effort on a continuing basis

- Long term investment - Lifetime ownershipstrategy i.e. (buy & hold) Buy, hold & hold some more

- Diversification is key

Both Graham and Buffet are fundamental value investors who use long term strategies to benefit from relatively cheap companies

1. Sourced to John Reese, Todd Glassman; “Market Gurus.”


Ratios and Techniques; Value Investing

Benjamin Graham Warren Buffet

Price-Earnings (PE) Company Sales 1. > 15 Fail 1. < $340 mm Fail 2. ≤ 15 Pass 2. ≥ $340 mm Pass

Price-Book Ratio (PB) Current Ratio1. > 1.5 Fail 1. < 2 Fail 2. ≤ 1.5 Pass 2. ≥ 2 Pass

Dividends LTD vs Current Assets1. 20 year history Pass 1. LTD > Net Current Assets Fail 2. Interrupted history Fail 2. LTD ≤ Net Current Assets Pass

Debt-Equity Ratio 10Y EPS Growth 1. > 100% Fail 1. < 30% Fail 2. ≤ 100% Pass 2. ≥ 30% Pass


Earnings Predictability Long term Debt1. Y1>Y2>Y3>Y4…Yn Pass 1. >2 times earnings Pass2. Irregular Earnings Fail 2. ≤ 2 times earnings Fail

10 Yr Average ROE Free Cash Flow 1. <15% Fail 1. ≤ 0 Fail 2. ≥15% Pass 2. > 0 Pass

Retained Earnings Use IRR Analysis 1. <12% Fail 1. < LT Bond yield Fail 2. ≥12% Pass 2. ≥ LT Bond yield Pass


Buffett’s Due Diligence

First Stage Analysis• Take a look at the nature of the company’s business

-A viable company will have the size, depth, and breadth of brand recognition

• Inflation sustainability and ability to pass on costs-Look for ability to increase cost of main product relative to inflation

• Products are understandable and business lines are comprehendible

• Company is able to have predictability in terms of earnings -Earnings growth or expansion is also a requirement - A short dip in earnings growth is acceptable given certain circumstances

• Consideration given to companies with conservative finances-This includes low levels of debt relative to net income

• Close scrutiny towards managements use of retained earnings towards shareholder wealth-ROE over the past 10 years should be greater than 15% on average

• High free cash flow and low capital expenditures- Capital expenditures should not be excessive



Second Stage Analysis

• Determine if the company is priced appropriately

Step 1. Calculate IRR- Determine through EPS/Market Price

Step 2. Compare calculation made in step 1 to the long term bond yield- Exceptions can be made if company’s expected yield growth is high

Step 3. Calculate Future EPS: First calculate 10 year average ROE from balance sheet figures, then calculate average dividend payout ratio in order to find the

average retained earnings- Since % ROE retained = (Avg ROE/ 100) ×(1- (Avg payout/100),- Multiply ROE retained by 100 and use as interest rate to solve for FV

(equity per share) given PV as current equity per share - Take FV (equity per share) multiply by 10 year average ROE to get

future EPSStep 4. Use the above future EPS and multiply by average PE (last 10 years) to get projected future stock price

- Include dividend pool to stock price by taking company’s estimated EPS for current year adjusted for growth rate in dividends to give you a projected EPS

Buffett’s Due Diligence cont’d



Second Stage Analysis

Buffett’s Due Diligence cont’d

Step 4 cont’d. - Use the projected EPS in each year, multiply by (average dividend

payout/100) . - Use the sum of the above value and add back to the stock price

calculated aboveStep 5. Use the above calculations to determine expected return using the ROE methodPV- Current StockFV- Future stock price adjusted for dividends from step 4.N- number of periods (in this case 10)i- Solve

Refer to ratio criteria to determine expected return threshold Step 6. Determine the expected return using the EPS growth (average)

- First take the average EPS growth for last 10 years- Project the 10 year EPS figure by using this growth rate and current

EPS- Determine Future stock price by multiplying by 10 year PE (average)

Step 7. Calculate expected return as per step 5, using the EPS growth methodStep 8. Compare the results using the average of the expected returns from both the ROE and EPS method1. Sourced to John Reese, Todd Glassman; “Market Gurus.”


Growth Investing

Time Horizon

Risk Level

Effort

William O'Neil

- High level of risk

- High effort and high level of discipline

- Short term horizon- Cut losses at 7-8%

“Buy High, Sell even Higher!”, according to O’Neil the best of breed companies are supposed to be expensive

- His strategy involves continuously monitoring your investments



Growth Investing cont’d

William O’Neal

In addition to his “growth metrics” O’Neal also looks for potential catalysts within the company’s industry or within the company as a driver for growth

Current Quarterly Earnings Growth (Q1- Q5) Relative Strength 1. < 18% Fail 1. < 80 Fail 2. ≥ 18% Pass 2. ≥ 80 Pass

Annual Compounded EPS Growth Rate Relative Strength of peer1. < 18% Fail 1. < 80 Fail 2. ≥ 18% Pass 2. ≥ 80 Pass

Earnings Consistency Industry Relative Strength 1. No dips in earnings Pass 1. < 70 Fail 2. > 1 dip Fail 2. ≥ 70 Pass

Return on Equity1. Price within (+, -) 15% of 52- Week High Pass 1. < 17% Fail 2. Price within other range of 52- Week High Fail 2. ≥ 17% Pass



Value versus Growth

1. Sourced to Bloomberg Financial. Both Value and Growth index are from BARRA.

Relative Price Performance

Until recently the Value Index has outperformed the Growth Index


Value versus Growth

Time Horizon

Risk Level

Effort

Lynch combines growth and value strategies in his investment thesis-Emphasize on what you already know -Known for PEG ratio: determines if stock is fairly priced relative to growth

Peter Lynch

- Moderate level of risk

- Moderate effort level

- Allows for both long term and shorter term investment



Against Conventional Wisdom

Time Horizon

Risk Level

Effort

Dreman goes after out of favour companies whose stock have taken a serious beating

David Dreman

- Subject to wide risk fluctuations

- Relatively small

- 2 to 8 years



Against Conventional Wisdom cont’d

David Dreman

PE Ratio1. IF PE< Bottom 20% of peers: Pass

Price -Cash flow Ratio1. If PCF< Bootom 20% PCF of Peers: Pass

Price- book ratio1. If PB< Bottom 20% PB: Pass

Price Dividend Ratio1. If PD ratio < Bottom 20% PD: Pass



Appendix

Important Ratios

Activity Ratios Liquidity Ratios

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝑑𝑎𝑦𝑠 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 365𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑= 365𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜= 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑞𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜= 𝐶𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+ 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑐𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜= 𝑐𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑑𝑒𝑓𝑒𝑛𝑠𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 = 𝑐𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐.+𝑟𝑒𝑐.𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠

𝑐𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒= ሺ𝑑𝑎𝑦𝑠 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡.ሻ + ሺ𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑ሻ

− (# 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠)

1. Sourced to CFA institute, Financial Statement Analysis.


Important Ratios

Solvency Ratios Profitability Ratios

𝑑𝑒𝑏𝑡− 𝑡𝑜− 𝑒𝑞𝑢𝑖𝑡𝑦= 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦

𝑑𝑒𝑏𝑡− 𝑡𝑜− 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡+ 𝑡𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦

𝑑𝑒𝑏𝑡 𝑡𝑜 𝑎𝑠𝑠𝑒𝑡𝑠= 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒= 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝑓𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐸𝐵𝐼𝑇 & 𝑙𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠+ 𝑙𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐸𝐵𝐼𝑇𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑝𝑟𝑒𝑡𝑎𝑥 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐸𝐵𝐼𝑇𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑅𝑂𝐴= 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠= 𝐸𝐵𝐼𝑇𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦= 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦



Important Ratios

Performance Ratios Coverage Ratios

𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑟𝑒𝑣𝑒𝑛𝑢𝑒= 𝐶𝐹𝑂𝑛𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑎𝑠ℎ 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠= 𝐶𝐹𝑂𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐶𝑎𝑠ℎ 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦= 𝐶𝐹𝑂𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

𝐶𝑎𝑠ℎ 𝑡𝑜 𝑖𝑛𝑐𝑜𝑚𝑒= 𝐶𝐹𝑂𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒= 𝐶𝐹𝑂− 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 # 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠

𝐷𝑒𝑏𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐶𝐹𝑂𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐶𝐹𝑂+ 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑+ 𝑡𝑎𝑥𝑒𝑠 𝑝𝑎𝑖𝑑𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝐶𝐹𝑂𝑐𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡= 𝐶𝐹𝑂𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑎𝑖𝑑

𝐼𝑛𝑣.& 𝑓𝑖𝑛.= 𝐶𝐹𝑂𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑓𝑟𝑜𝑚 𝐼𝑛𝑣 & 𝐹𝑖𝑛 𝑎𝑐𝑡𝑖𝑣.



Resources

b Resource WebsiteBMO InvestorlineInteractive Brokers www.interactivebrokers.ca/en/main.phpQuestrade www.questrade.com/

Discount Brokers TradeFreedom www.tradefreedom.com/en/home/E-trade www.etrade.caBMO Investorline www.bmoinvestorline.comTD -Greenline www.tdwaterhouse.ca/discountbrokerage/index.jsp

b Resource Book/PublicationFed Stats www.fedstats.govCommerce Department, US Census Bureau www.economicindicators.gov, www.bea.gov

Macro-economic Analysis Treasury www.ustreas.govFederal Reserve www.federalreserve.govWSJ Market Data http://online.wsj.com/mdc/page/marketsdata.html

b Resource Web-Site

Bloomberg Financial www.bloomberg.com The Wall Street Journal www.wsj.com

News sources The Economist www.economist.com/financeCNBC www.cnbc.comCNN www.edition.cnn.com/businessThe Motley Fool www.fool.com/Reuters Financial www.reuters.com/finance
