Trading Comps Overview

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Questions on calculating items for multiples (9 questions)

Multiples 1. For P/E, you only use net income from continued operations and income to common shareholders (excluding minority interest), correct? 2. Do you need to take out the EBITDA from discontinued operation from EV/EBITDA? usually EBITDA isn’t broken out that way and I don’t know if t... Multiples
1. For P/E, you only use net income from continued operations and income to common shareholders (excluding minority interest), correct?

2. Do you need to take out the EBITDA from discontinued operation from EV/EBITDA? usually EBITDA isn’t broken out that way and I don’t know if there is usually any disclosure on EBITDA from discontinued vs continued operation. Is that why you usually do not adjust EBITDA for discontinued operation?

3. When you take forward or historical P/E or EV/EBITDA, EV/revenue etc multiples from capiq, Bloomberg etc, are these already adjusted for you? (taking out minority interest and discontinued operation) or do you have to recalculate one by one?

4. Are you including MI in total debt because you are including these in TEV calculation? You exclude MI from total debt when you are calculating solvency and liquidity ratios right?

5. Adjustments for non-recurring items: these should have been captured in the company disclosures of their reconciliation from GAAP non GAAP numbers right? So less need to read through the footnotes to look through item by item?

6. If you are calculating FCF ratios eg EV/FCFF, how do you adjust for these non recurring items?

Diluted share calculation
7. Diluted share outstanding number is from WACSO or from financials, what if the number has changed since the release of the latest financials? Say the company has issued additional share and the number from Bloomberg or capiq is the latest share count since the release of the financials? Which number do you use to calculate equity value and to calculate diluted share? Does this change the exercisable share number stated on the financials to use to calculate the diluted share as well?

8. How do you calculate diluted share outstanding if you have different class of stocks (class A, B, C etc)? Are these all usually common stocks?

9. Currently exercisable options on the financials are those that can be exercised per that date in the financials (hence outdated). Do you need to update this to include any other potentially exercisable options at the time of you spreading the comps? (just by comparing current share price and exercise price)

Thank you so much for taking the time to respond to my questions! :) You have been a big help! Read More

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by Elvina J.

added 6 years ago

Re: Questions on calculating items for multiples (9 questions)

1) Take Net Income from Continuing Operations AFTER Minority Interest, so INCLUDING the impact of MI. 2) No, EBITDA from Discontinued Operations is NOT in the "top half" of the Income Statement, it is lumped together in ONE line after NI. 3) In theory, the sell-side research analysts SHOULD be adj... Read More

by WST Expert 1.

added 6 years ago

Relationship between P/E and inverse of P/E (2 questions)

Hi! First, awesome videos! Follow up questions on multiples, esp for listed companies valuation when analysing a stock in a long short fund context: 1. Is inverse of P/E = earnings yield = cost of equity? I was looking through this link and it states that this statement is wrong ie inverse o... Read More

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by Elvina J.

added 6 years ago

Re: Relationship between P/E and inverse of P/E (2 questions)

1a) Inverse of PE is indeed Earnings Yield. It is NOT cost of equity because cost of equity is typically derived from CAPM whereas PE and Earnings Yield can be thought of as a "market-driven" or "market-demanded" cost of equity. Therefore it WOULD be appropriate to say that Earnings Yield is essenti... 1a) Inverse of PE is indeed Earnings Yield. It is NOT cost of equity because cost of equity is typically derived from CAPM whereas PE and Earnings Yield can be thought of as a "market-driven" or "market-demanded" cost of equity. Therefore it WOULD be appropriate to say that Earnings Yield is essentially the cost of equity that equity investors are demanding, but again, not the traditional CAPM cost of equity. As to which is more relevant or important - well it depends on context. For purposes of WACC, we are "supposed" to use CAPM, or rather, the convention is to use CAPM, but using Earnings Yield as an additional data point doesn't hurt.

1b) The perpetuity growth stuff you posted from KPMG we are honestly going to ignore. Don't use anything that is academic and theoretical.

2) If investors require a particular return, i.e. via CAPM (required return), then in essence that is the company's cost of equity. If your brother wants you to invest $100 in his new shoe business and you want a 10% return (that's required return) then in essence your brother has to get you a 10% return somehow otherwise you wouldn't invest - therefore, that is your brother's cost of acquiring equity capital, or your $100.

ROE is a separate concept - Net Income divided by Book Value. Since no one dividends out all their Net Income (that would be a 100% dividend payout rate, only REITs come close at 90% but different concept), you don't actually receive the entire Net Income. Therefore ROE is a metric to compare and see how much money (Net Income) was generated for the ENTIRE equity base (Book Value), and not necessarily to calculate valuation. Usually of course there is a positive correlation between high ROE and high PE stocks. ROE specifically does NOT use market value of equity. If it did, then it would be Earnings Yield which is Net Income divided by Equity Value (market value of equity). Remember that if you take Equity Value / Net Income and divide both numerator and denominator by Shares Outstanding, you get PE. Read More

by WST Expert 1.

added 6 years ago

Adjustments for non-recurring items to calculate adjusted EV/FCFF or other cashflow ratios

i. Does this mean you have to adjust for cashflow statement and balance sheets? Can you give an example for such adjustments for items that affects both cashflow statements and balance sheets? e.g. deferred tax impairments etc

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by Elvina J.

added 6 years ago

Complex Trading Comps Analysis

Hi,

For Costco Corporation, there is a tax benefit of $13,895 associated with lower state tax in the fourth quarter and it has mentioned a few times in the 10K. Why don't we need to make any adjustment on the EPS? Thanks.

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by Guest 1.

added 10 years ago

Re: Complex Trading Comps Analysis

Here is part of the note to consolidated financial statements from income tax section: "The effective income tax rate on earnings was 31.4% in fiscal 2005, 37% in fiscal 2004, and 37.8% in fiscal 2003. The decrease in the effective income tax rate in fiscal 2005 from fiscal 2004 is primarily... Read More

by Guest 1.

added 10 years ago

Tr Comps overview questions

Hi there, A couple of doubts here on this module: (1). Why do we generally adjust the financials with the marginal tax rate? Any special reason / rationale to use marginal tax rate instead of effective tax rate for these adjustments? (2). Should we consider Preferred Stock within the "Total... Read More

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by Guest 1.

added 10 years ago

RE: Tr Comps overview questions

1) We use marginal tax rate b/c any additional new income is taxed at that (usually) higher rate rather than effective rate. If there is a progressive tax system in place or other tax credits that reduce (or increase) the tax rate, you don't want that distortion in there. 2) It depends on what co... Read More

by WST Expert 1.

added 10 years ago

trading comps for private placements, vcs, IPOs?

Is there such a thing as private placement comps (I believe usually the equity injection/investment is provided, but not TEV or debt involved)? What would the valuation methods for an IPO be?

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by Guest 1.

added 10 years ago

Trading Comps overview class

Hi,
So pratically speaking, when should we adjust for the impairment of assets? Because some companies here had this charge in the IS and we didn't adjust for them. So, what are the circumstances where an adjustment is required?

Cheers.

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by Guest 1.

added 10 years ago

Complex Trading Comps Analysis Treatment of gross profit

Haven't we overstated TGT's gross profit by including the net credit card revenues in our revenue line but excluding the "Credit card expenses" amount from our gross profit?

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by Guest 1.

added 10 years ago

RE: Complex Trading Comps Analysis Treatment of gross profit

No we have not incorrectly stated TGT's Gross Profit. The traditional accounting definition of Gross Profit is Total Revenue less COGS. But forgetting about accounting definition for a second, intuitively, COGS is a raw material. The raw materials for Credit Card Revenues is Interest Expense; hence,... Read More

by WST Expert 1.

added 10 years ago

Complex Trading Comps Analysis: Fair Value of Debt

Is it not more appropriate to use the fair Value of Debt (given in footnote 5 in F-15) versus the Book Value of Debt less Capital Leases Obligations as shown in the Video?

Thanks.

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by Guest 1.

added 10 years ago

Complex Trading Comps: Stock comp transition under 123(R)

Why didn't we include an adjustment for the stock comp charge upon transition to FAS 123(R)? F-28 states that compensation cost for 2005 includes $32 million ($20 million after tax) of costs related to the changes required by the adoption of 123(R). If we aren't adjusting for general non-cash st... Read More

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by Guest 1.

added 10 years ago

Complex Trading Comps Analysis: Weighs question

I ahve one question which may sound really silly and i would like your help. In the complex trading comps analysis we estimated the appropriate weighs in cells I21:I23 by using hard inputs in cells H21:H24. Could you please tell me how we reached to the numbers in the H column? (i.e 20, 100 and 1... Read More

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by Guest 1.

added 10 years ago