Calculate fully diluted shares outstading = basic shares outstanding + in-the money options and warrants

+ in the money convertible securities

in-the money options and warrats

option gives the right to buy a share at a particular strike price. in the money if strike price < market
price

Treasury stock method: assumption is that company uses money from the options to purchase
outstanding shares from the market at current market price. since strike price < mkt price, the # of
shares bought is less that the number of shares given to the options holders. hence dilutive.

proceed from options: strike price X # of options

# of shares bought back from mkt: proceeds from options / current mkt price

dilution = # of options - # of shares bought back

in the money convertible securities

cash-pay convertible bonds: Bond + embedded equity call option (converts amount outstanding is
converted into equity at a strike price. in the money if strike price < mkt price).

in the money cash-pay convertibles - converted into equity in either of 2 methods:

if-converted method
additional shares = coverts outstanding amount / strike price
convert is then excluded from companys debt
companys net income should be adjusted upwards to account for interest expense payments foregone
with the coupon on the convert

net share settlement

the par value can be settled in cash. only the amount represented by excess of the current share price
over the conversion price is assumed to be settled with the issuance of shares. Eg. if the total
outstanding amount = 150m, then converting all into share at conversion price gives 150m/15 = 10m
shares with mkt value of 10m X 20$ = 200m. So while 150m face value can be paid off with cash, shares
are issued for the (200m - 150m) = 50m giving rise to 50m/15 shares
Enterprise value
enterprise value = equity value i.e common stock (fully dilutive) +Preferred stock (chracteristic of both
debt and equity) + total debt + noncontrolling interest - cash and cash equivalent

enterprise value is independent of a companys capital structure (capital structure is how a firm finances
its overall operations and growth by using different sources of funds). This is because when any change
in debt or equity is offset by subtracting cash or cancelled by each other. So similar companies will have
comparable enterprise value multiples despite differences in capital structure.

Key Financial date

Size:
1.
2.
3.
4.
5.

Sales
Gross Profit (=sales cogs). Gross profit margin: gross profit/sales
Ebit (=operating profit = gross profit sg&a). Ebit margin = ebit/sales
Ebitda (proxy for operating cash flow). Ebitda margin = ebitda / sales
Net income: earning available to equity holders once all of companys obligations have been
satisfied. Hence EPS = Net income / # of shares is imp. Net income margin = net income / sales

Groth rates:
1. Historical growth rates for sales, ebitda, eps
2. Estimates are through consensus - analyst predictions
3. Compound annual growth rates (for multiple years): (end value/begin value)^(1/end year-begin
yr) 1

Return on Investment:
1. Return on invested capital (ROIC) return on all capital invested
a. Numrator: before interest. So use either EBIT or tax affected Ebit( ebiat)
b. Denominator: debt + equity
c. Roic = ebit or ebiat / (ag total debt + equity)
2. Return on equity (ROE)- return to shareholders
a. Roe = net income / ang shareholder equity
3. Return on Assets (ROA) = net income / avg total assets
4. dividend yield = annual dividend or 4 X quarterly dividend / current share price

Leverage Ratios:
1. debt to ebitda: ebitda is proxy for cash flow. So this ratio shows how many years it will take to
pay off debt
2. debt to total capitalization: Debt / (debt + common stock + preferred stock + non controlling
interests)
Coverage Ratios: ability of company to cover its interest payments
Ebitda or (ebitda capex) or ebit / interest expense

Credit ratings: s&P, moodys, fitch

Process for normalizing data:
1. Calculation of Last twelve month (LTM) fin data
2. Calendarization of financial data: in case the company fiscal year end is not 31 dec.
a. Next year calendar sales = (month #) * (fiscal year actual sales) / 12 + (12-month#)*(next
year sales)/12
3. Adjustments for non-recurring items
a. Add back or elimination of 1 time charges or gaines respectively
i. Restructuring events
ii. Losses/gain on asset sales
iii. Litigation settlements
iv. Inventory write-offs
v. Good will impairment
b. Usually described in MD&A section
c. Important to consider tax when adjusting ebit, ebitda or net income
4. Adjustment for recent events
a. M&a transactions, financing activities, stcl splits, share repurchasing etc

b. Check company sec filings (eg. 8K,prospectus)

Trading Multiples: market valuation / financial performance

1. Equity value multiples
a. Price to Earnings(EPS) / equity value to net income:
2. Enterprise value multiples:
a. EV/EBITDA
b. EV/EBIT
c. EV/Sales
Sales
COGS
_____________________
Gross Profit

SG&A
____________________
Operating Profit or EBIT

Interest
Taxes
__________________
Net Income or Bottom Line

Depreciation and Amortization

_____________________
EBITDA (it is a good proxy for operating cash flow)

(Gross) profit margin = (Sale price - COGS) / Sales price

Net income is the equity available to shareholders. It is viewed on a per share basis (EPS)
EBIT and EBITA Margin: measure of a companys oerating profitability (ebit or ebita / sales)
Net income margine: measure of companys overall profitability. But afftected by capital structure and
taxes (net income/sales)
Groth profile:
Comp annual growth rate (CAGR): (ending value/beginning value)^(1/(engine year-beginning year)) - 1