EBITDA coverage
Liquidity measures: Interest coverage
(Earnings before Interest, Taxes, Depreciation & Amortization) / Interest expense
- How much Operating Cash is available to cover meet interest payments?
- Stays within the income statement
- Management discretionary items are highest in the I/S
Gross Margin:
(Sales – COGS) / Revenue
PRODUCTS:
How profitable the products are
Rough economic measure of customer utility
**Margin: Divided by Revenue
Operating Margin:
Operating profit / Revenue
OPERATIONS:
How profitable are the company’s operations?
**Margin: Divided by Revenue
EBITDA Margin
EBITDA / Revenue
CASH FLOW:
- Rough measure of Cash Flow profitability
- Compares Income Statement to Income Statement
- EBITDA = Cash Flow
- *Margin: Divided by Revenue
Capex / Depreciation
Rough measure of business (asset) expansion
Time Interest Earned
EBIT / Interest Expense
EBIT = Earnings before Interest and Taxes
EBIT = OPERATING INCOME
- Ability to meet interest obligations with Operating Income
- Numerator and denominator from the I/S
- Management discretionary items are highest in the I/S
Cash Coverage
CFO / Interest expense
FCF / Interest expense
CASH = CASH FLOW
- Ability to meet interest obligations with Cash Flow
- Cash flow figures are too volatile to be compared to Income Statement in near term.
- Use a four-quarter period to remove seasonality or normalized figures.
Cash flow to Debt
CFO (or FCF) / Total debt
Ability of cash flow to pay down the company’s debt
Total debt = short-term debt + long-term debt
Net Cash
Cash - Debt
- Assumes most Operating Cash is financed with revolvers, etc.
Current Ratio
Current Assets / Current Liabilities
- Ability of Cash Flow to pay down the company’s debt (liabilities)
Quick Ratio
(Current Assets – Inventories…..)/ Current Liabilities
How quickly assets can be turned into cash
Cash conversion cycle
DIO+DSO-DPO
Measures cash’s path from the INITIAL INVESTMENT in product creation through to RECEIPT FROM CUSTOMERS
Use yearly days for yearly income statement figures
Match quarterly with quarterly
DIO
Days Inventory Outstanding
DIO = (Inventory/ COGS)* 365
or 90 for quarterly
Products: Inventory is related COGS
** Item outstanding is numerator
DSO
Days Sales (Receivables) Outstanding
DSO = (AR /Total Credit Sales)* 365
or 90 for quarterly
Sales: Accounts Receivable is related to Credit Sales
** Item outstanding is numerator
DPO
Days Payables Outstanding
DPO = (Accounts Payable/COGS)* 365
Payables: Payables are related to COGS (suppliers)
** Item outstanding is numerator
Debt to Equity
Total Debt / Shareholders’ Equity
- Typically calculated with Book Values
- B/S to B/S –> use average
Debt to Cap
Total Debt / Market capitalization
- Market value of Equity
- More effective if the FSA also uses the market value of debt
- B/S to B/S (use averages)
Enterprise value
EV = Market capitalization + Debt + Minority Interest + Preferred shares - Total Cash
MD MP - Cash
- Theoretic takeout value
Enterprise Value to EBITDA
EV / EBITDA
- How many times cash flow is the company worth?
EBITDA = Cash Flow
Cost of Debt (Kd)
DEBT = BONDS
Yield rate = Risk free rate + Risk premium (Company)
- Risk premium = default risk * loss given default
The credit rating can be a proxy for the company risk premium
