Understanding Financial Statements

Introduction to Comparable
Valuation
 Introduction to Comparable Valuation, Understanding the 3 Financial Statements, Key
Valuation Multiples

Introduction to Comparable Valuation Understanding the 3 Financial

This concept entails evaluating a company's Statements
value based on the market valuations of A robust comprehension of the income
similar companies, offering a realistic statement, balance sheet, and cash flow
benchmark as opposed to theoretical models. statement is essential, as these documents
reveal a company’s financial health and
operational efficiency.

Key Valuation Multiples Course/Class: Investment Banking

Valuation multiples serve as essential tools This slide sets the stage for understanding
that simplify analysis by providing quick how comparable valuation techniques are
references that compare a company’s value fundamental to investment banking, guiding
against its financial performance. effective decision-making in finance.
The Agenda
Roadmap for Today’s Discussion
• Purpose of Financial Statements: Understanding why financial
statements exist is crucial; they communicate a company's economic
performance and position to investors and stakeholders.

• Income Statement Basics: An exploration of the income statement

gives insights into revenue generation and cost management, which
are fundamental to profitability analysis.
• Balance Sheet Basics: Grasping the balance sheet's structure aids in
quickly assessing a company’s resources and obligations, revealing its
liquidity stance.
• Cash Flow Statement Basics: The cash flow statement elucidates
how effectively a company manages its cash flow, an essential aspect
for operational robustness.
The Agenda
Roadmap for Today’s Discussion
• From Financials to Valuation: Connecting the dots between
comprehensive financials and valuation underscores the integral role of
financial analysis in investment decisions.
• Key Multiples (P/E, EV/EBIT, EV/EBITDA): We'll dissect critical
multiples that reveal different dimensions of a firm's valuation, informing
investment strategies and comparisons.
• Practical Example: Real-world application of concepts through a
practical example to illustrate the valuation process in action.
• Common Pitfalls: Identifying common mistakes in valuation approaches
will ensure more nuanced and accurate analysis, avoiding oversights in
decision-making.
• Q&A and Next Steps: An interactive segment to engage with your
 Purpose of Financial Statements
Foundational Role in Finance

Income Statement Balance Sheet

Primarily gauges the profitability of a Presents a snapshot of a company’s
company over a specific period, financial standing at a particular point in
reflecting revenues, expenses, and time, summarizing assets, liabilities, and
ultimately, net income or losses. shareholders’ equity.
Cash Flow Statement Key Figures for Valuation
Analyzes the cash inflows and outflows Components such as revenue, net
from operating, investing, and financing income, and net debt are critical to
activities, revealing a business's liquidity assess before arriving at a company’s
and overall cash management strategy. valuation, involving multiple financial
ratios.
Income Statement Basics (Part 1)
Essential Components Unveiled
• Revenue: Represents the total sales generated from operations without
deductions, laying the groundwork for profitability evaluation.

• COGS: Refers to the direct costs associated with producing goods sold during a
period, which is necessary for calculating gross profit.
• Gross Profit: The margin calculated as revenue minus COGS, signifying the
efficiency of production and the core profitability of operations.
• Operating Expenses: Encapsulates overheads and administrative costs
necessary to run the business, excluding direct production costs, vital for
understanding cost control.
• Operating Income (EBIT): Essentially the revenue left after paying direct and
indirect expenses, providing insights into core profitability excluding any
financing or tax considerations.
Income Statement Basics (Part 2)
Further Insights into Profit Measurement

• Interest Expense/Income:
Represents the cost of borrowing or
income from investments,
influencing net profitability and
offering insights into a company's
leverage and finance management.

• Taxes: Indicates the income taxes

imposed on the profits generated,
which directly affects the net income
Photo by Olga DeLawrence on Unsplash
calculation and overall profitability
assessment.
Income Statement Basics (Part 2)
Further Insights into Profit Measurement

• Net Income: The ultimate profit resultant

from an enterprise after all expenses, taxes,
and costs have been deducted, providing
the bottom line which is pivotal for P/E
calculations.
• Valuation Relevance: This ties together
the critical importance of net income in P/E
valuations and EBIT within EV/EBIT
calculations, shaping investor perceptions.

Photo by Olga DeLawrence on Unsplash

 Balance Sheet Basics

An Overview of Financial Position

Assets Liabilities
Categorized into current and long-term, Differentiated into current and long-
assets indicate what the company owns term, liabilities represent the company's
and its potential to generate future obligations and the extent of financial
economic benefits. leverage it has undertaken.

Shareholders’ Equity Key Focus: Net Debt

Comprising common stock and retained Net debt is a vital financial metric
earnings, equity denotes the net value derived from subtracting cash and cash
attributable to owners after liabilities are equivalents from total debt, crucial for
settled, an essential measure in determining enterprise value and
valuation. financial health.
Cash Flow Statement Basics
Cash Management Insights
• Operating Activities: This section outlines cash
generated from a company’s core business
operations, pivotal for understanding sustainable
cash flow generation.

• Investing Activities: Tracks cash transactions

related to investments in long-term assets,
revealing the organization's investment strategy
and potential growth outlook.
• Financing Activities: Covers cash flows related
to raising capital and returning value to
shareholders, crucial for understanding funding Photo by Isaac Smith on Unsplash

mechanisms and capital structure.

• Importance: Reveals True Cash Position: By
segregating these activities, the cash flow
Connecting the Three Statements
Integrated Financial Analysis

• Income Statement to Cash Flow: The net

income from the income statement serves as
the starting point to adjust for non-cash items
and calculate operating cash flow,
demonstrating profit transformation into
liquidity.

• Cash Flow to Balance Sheet: The ending

cash balance resulting from cash flow
activities directly updates the balance sheet,
enhancing the liquidity position reported there.
Photo by Hanna Morris on Unsplash
• Balance Sheet: Retained Earnings
Impacted by Net Income: Net income also
affects the retained earnings section of the
balance sheet, reinforcing the link between
Connecting the Three Statements
Integrated Financial Analysis

• Valuation Link: Net Income, EBIT, EBITDA:

Ultimately, understanding how these
statements interrelate helps illuminate key
valuation metrics essential for investment
analysis.

Photo by Hanna Morris on Unsplash

Case Study – Ratio Analysis
Let’s consider XYZ Corp. and its Income Statement snapshot:

13
Case Study – Ratio Analysis
Let’s consider XYZ Corp Balance Sheet (Simplified)

(in $ millions)
Current Assets 500
Long-Term Assets 1,500
---------------------------------
Total Assets 2,000

Current Liabilities 300

Long-Term Debt 600
Common Equity 1,100
---------------------------------
Total Liab. & Eq. 2,000
Takeaway: Notice how total assets
match total liabilities + equity. 14
XYZ Corp.
Statement of Cash Flows (Simplified)
(in $ millions for the year ended December 31)

Cash Flows from Operating Activities:

Net Income .........................................
Depreciation & Amortization ........................
126
30
Operating Activities generated $151M,
Changes in Working Capital .......................... (5) largely from net income and non-cash
------------------------------------------------------------
Net Cash Provided by Operating Activities (CFO) .. 151 charges like depreciation.
Cash Flows from Investing Activities:
Capital Expenditures (CapEx) ....................... (50) Investing Activities used $45M, mainly
Proceeds from Sale of Equipment ..................... 5
------------------------------------------------------------
for capital expenditures.
Net Cash Used in Investing Activities (CFI) ......... . (45)

Cash Flows from Financing Activities: Financing Activities used $20M overall,
Issuance of Long-Term Debt ................... ......
Repayment of Debt ..................................
20
(10)
reflecting a combination of new debt
Dividends Paid ..................................... (30) issuance, debt repayment, and dividends.
------------------------------------------------------------
Net Cash Used in Financing Activities (CFF) ........ (20)

Net Increase (Decrease) in Cash ...................... 86

The result is an $86M increase in cash
Cash Balance at Beginning of Period .................. 100 compared to the previous year’s $100M
------------------------------------------------------------
Cash Balance at End of Period ........................ 186 balance, ending at $186M.
15
● Interpretation of the Cash Flow Statement

1. Operating Activities (CFO):

1. Net Income ($126M) plus non-cash expenses like
Depreciation ($30M).
2. Small negative change in Working Capital (–$5M) might
reflect increased Accounts Receivable or reduced Accounts
Payable.
3. Result: $151M in cash flows from core operations.
2. Investing Activities (CFI):
1.(–$50M) for new capital expenditures (e.g., buying new
equipment).
2.+$5M from selling an old asset.
16
3. Net: (–$45M) means the company spent more on long-
● Interpretation of the Cash Flow Statement

3. Financing Activities (CFF):

1. Issued new debt (+$20M).
2. Paid down some old debt (–$10M).
3. Paid dividends to shareholders (–$30M).
4. Net: (–$20M) overall outflow, indicating more cash went
out for debt repayment and dividends than came in from
new financing.
4. Net Cash Change:
5. Adding $151M (CFO), (–$45M) (CFI), and (–$20M) (CFF)
yields a +$86M net increase in cash for the year.
6. Ending Cash Balance = Beginning Cash ($100M) + Net
17
Increase ($86M) = $186M.
XYZ Corp.

Free Cash Flow (FCF) Calculation (in $ millions)

1. EBIT (Earnings Before Interest & Taxes) .......... 200

(From Income Statement: Revenue - COGS - Other Exp.)

2. Tax Rate ......................................... 30%

3. NOPAT (Net Operating Profit After Taxes) ......... 140

= EBIT × (1 – Tax Rate) = 200 × (1 – 0.30)

4. Plus: Depreciation & Amortization ................ 30

(Non-cash charge added back)

5. Less: Capital Expenditures (CapEx) ............... (50)

6. Less: Increase in Net Operating Working Capital .. (5)

(Additional cash tied up in receivables/inventory)

---------------------------------------------------------
Free Cash Flow (FCF) ................................. 115
18
Why Is FCF Different from Cash Flow from Operations
(CFO)?

• Cash Flow from Operations (CFO) = $151 million in the Statement of Cash
Flows.
• This starts with Net Income (which already subtracts interest expense)
plus non-cash items (like Depreciation) and the effect of changes in
working capital.

• Free Cash Flow (FCF) = $115 million using the EBIT-based approach.

• FCF uses EBIT (unlevered operating profit) rather than Net Income. It
then adjusts for taxes, depreciation, CapEx, and changes in operating
working capital.
• FCF represents the cash flow available to all capital providers (both
shareholders and debtholders), assuming the company is financed
with no debt.
• CFO, on the other hand, is the actual cash flow the firm generated from
operations after interest expense (because Net Income is after interest).
.
19
Why Is FCF Different from Cash Flow from Operations
(CFO)?

• CFO (from the Cash Flow Statement) includes actual interest payments and is tied to Net
Income.

• FCF is an unlevered measure used to value a firm’s operations, ignoring the current capital
structure.

Both are useful:

• CFO shows the real operating cash inflows/outflows in a given period.

• FCF helps determine the company’s intrinsic value and how much cash is truly “free” for
distribution to all investors once the firm has covered necessary investments in operations.

20
● How This Relates to the Other Statements

• The Income Statement shows the company’s profitability (Net

Income = $126M).

• The Balance Sheet shows the financial position at year-end

(including the final cash balance of $186M).

• The Statement of Cash Flows explains how and why cash

changed from the beginning to the end of the period—emphasizing
real cash inflows and outflows rather than just accounting profits.

21
Case Study – Ratio Analysis

Selected Ratios

• Profit Margin = Net Income / Sales = 126 / 1000 = 12.6%

• Current Ratio = Current Assets / Current Liabilities = 500 / 300 = 1.67

• Debt Ratio = Total Debt / Total Assets = (300 + 600) / 2000 = 0.45 or 45%

Interpretation

• A 12.6% profit margin suggests decent profitability.

• A current ratio above 1 indicates short-term liquidity is reasonable.
• A 45% debt ratio means nearly half of assets are financed by debt—moderate
leverage. 22
Introduction to Enterprise Value EV and Market Cap

• What is Market Cap?

• Market Cap = Share Price × Shares Outstanding.
• Represents the total value of a company’s equity.

• What is Enterprise Value (EV)?

• EV = Market Cap + Total Debt - Cash and Cash Equivalents.
• Represents the total value of a company, including debt.

• Why Are They Important?

• Used extensively in M&A, IPOs, and investment analysis.

23
Introduction to EV and Market Cap

• Calculating Market Cap

• Formula: Market Cap = Share Price × Shares Outstanding.

• Example:
• Share Price = $50.
• Shares Outstanding = 100 million.
• Market Cap = $50 × 100,000,000 = $5 billion.

• Why is Market Cap Useful?

• Gives investors a quick snapshot of a company's size.

24
Introduction to EV and Market Cap

• Calculating Enterprise Value (EV)

• Formula: EV = Market Cap + Total Debt - Cash and Cash Equivalents.

• Example: Market Cap = $5 billion.

• Total Debt = $2 billion.

• Cash = $500 million.
• EV = $5B + $2B - $0.5B = $6.5 billion.

• Interpretation: EV includes both equity and debt, making it a

comprehensive metric.
25
Introduction to EV and Market Cap

• Comparison Between EV and Market Cap

• Market Cap: Only includes the equity value of the company.

• EV: Includes debt and subtracts cash, showing the "true cost" of acquisition.

• Practical Insight:
• A company with high debt will have a much higher EV than Market Cap.

• Example:
• Company A: Market Cap = $3 billion, Debt = $1 billion, Cash = $500M.
• EV = $3B + $1B - $0.5B = $3.5B.
26
Introduction to EV and Market Cap

• Real-World Scenarios for Market Cap and EV

• Retail Company Example:

• Share Price = $40, Shares Outstanding = 50 million, Debt = $1 billion,
Cash = $200 million.
• Market Cap = $40 × 50M = $2 billion.
• EV = $2B + $1B - $0.2B = $2.8 billion.

• SaaS Company Example:

• Share Price = $100, Shares Outstanding = 10 million, Debt = $0, Cash
= $50 million.
• Market Cap = $1 billion, EV = $1 billion - $50M = $950 million.
27
Introduction to EV and Market Cap

• Class Exercise: Calculate Market Cap and EV

• Scenario:
• Company Data: Share Price = $75, Shares Outstanding = 20M, Debt =
$2B, Cash = $300M.

• Tasks:
• Calculate Market Cap.
• Calculate Enterprise Value.

28
Introduction to EV and Market Cap

• Class Exercise: Calculate Market Cap and EV

• Scenario:
• Company Data: Share Price = $75, Shares Outstanding = 20M, Debt =
$2B, Cash = $300M.

• Tasks:
• Calculate Market Cap.
• Calculate Enterprise Value.

• Answers:
• Market Cap = $75 × 20M = $1.5 billion.
• EV = $1.5B + $2B - $0.3B = $3.2 billion.
29
From Financials to Valuation
Fundamentals of Valuation Metrics

• Market Capitalization: Defined as the product

of stock price and shares outstanding, market cap
serves as a primary valuation measure reflecting
a company's perceived value in the equity
markets.

• Enterprise Value: Calculating enterprise value

incorporates market cap plus net debt, creating a
more holistic snapshot of a company’s total value
as it accounts for both equity and debt holders.
Photo by Luke Chesser on Unsplash

• Net Income, EBIT, EBITDA: These metrics are

extracted from the income statement and serve
as key input variables for various valuation
methodologies, directly tying financial
Key Multiples Overview
Valuation through Ratios
• Price-to-Earnings (P/E): A widely-used ratio that
indicates how much investors are willing to pay
for one dollar of earnings, providing insights into
market expectations and growth potential.

• EV/EBIT: Highlights how the market values

operational profits before tax and interest effects,
reflecting a comprehensive operational
perspective.
• EV/EBITDA: Focuses on the valuation related to
operational cash flows, obstructing non-cash
expenses and providing a clearer operational Photo by Jason Briscoe on Unsplash

insight for valuation.

• Different Multiples Capture Different
Financial Aspects: Utilizing various ratios
 P/E Multiple
Understanding the Price-to-Earnings Ratio

Formula: P/E = Price per Share / Earnings Interpretation: Investor Payment for Net
per Share Earnings
This formula simple yet powerful, Indicates the market's willingness to pay for
transforming earnings into an investor's every dollar of net earnings, encapsulating
valuation metric, easily communicated and investor sentiment and expectations
understood in market spaces. regarding growth and risk.

Pros: Simple, Widely Used Cons: Affected by leverage and non-cash

Its straightforward nature makes it a popular items
choice among analysts; it provides an An over-reliance can misrepresent a
immediate sense of valuation for comparative company’s true valuation due to external
analysis across companies. financing impacts or peculiar accounting
adjustments, necessitating cautious
interpretation.
 EV/EBIT Multiple

Assessing Market Value of Operating Profit

Interpretation: Market Value of

Formula: EV/EBIT Operating Profit
This ratio measures the relationship Captures insights into the valuation of a
between enterprise value and operating company's operational efficiency while
income, providing a perspective on how filtering out capital structure effects,
the market values a company’s giving unclouded profitability data.
operational profit.

Pros: Less Affected by Capital Cons: Non-Cash Depreciation

Structure Complicates Comparisons
By focusing directly on operational Depreciation schedules can vary, leading
performance devoid of financial leverage to mismatches in comparative analysis
configuration, this metric aids in despite consistent operational
standardizing comparisons across performance; hence, interpretation must
 EV/EBITDA Multiple
Examining Operational Cash Flow Valuation

Formula: EV/EBITDA Interpretation: Market Payment for

This metric focuses on enterprise value Operational Cash Flow
relative to operational cash earnings, offering Highlights what investors are willing to pay for
insights into unconditional cash generating a company's operational cash generation
capacity free from non-cash expenses. capability, emphasizing the importance of
cash flows in valuation.

Pros: Removes Non-Cash Charges Cons: Ignores CapEx and Working Capital
Excludes complexities of non-cash related Changes
charges, presenting an unblemished view of The ratio can overlook necessary capital
cash productivity inherent in operations, thus expenditures and working capital
simplifying analysis. adjustments, potentially leading to
misinterpretations of sustainable cash flow
Practical Example
Applying Valuation Techniques
• Scenario: Stock Price, Shares, Market Cap: By outlining a
hypothetical stock price and shares outstanding, we can
efficiently derive the market capitalization for subsequent
valuation techniques.

• Debt and Cash for Net Debt: Calculating net debt requires
evaluating the company's total debt minus available cash,
further clarifying the financial structure necessary for enterprise
value assessments.
• EBIT, D&A, EBITDA, Net Income: Taking relevant operational
metrics enables valuation calculations; clear definitions of
earnings before interest, taxes, depreciation, and amortization Photo by Sigmund on Unsplash

are vital for evaluation.

• Calculate P/E, EV/EBIT, EV/EBITDA: Applying our earlier
discussions, we can implement our knowledge to compute these
 Common Pitfalls
Navigating Valuation Challenges

Mixing Equity vs. Enterprise Value Ignoring Cash Flow Statement

Confusing these two distinct concepts may Overlooking the cash flow statement can lead
lead to inaccurate conclusions regarding to a skewed perception of a company’s
valuation and risk assessment; they must be financial health, as it’s critical for assessing
clearly understood and differentiated. liquidity and operational viability.

Non-Recurring Items Comparing Non-Comparable Companies

Failing to adjust for one-time gains and losses Drawing parallels between companies with
can obscure a clear understanding of fundamentally different operating
sustainable earnings potential necessary for environments or market conditions
accurate valuations. misrepresents valuation metrics reliability and
relevance.
Incorrect Use of Multiples
Using Enterprise Value (EV) with equity-based metrics like Net
Income or P/E Ratio.
● A company’s Net Income (an equity value) is $100 million.
● You mistakenly divide EV ($1 billion) by Net Income instead
of using Market Cap.
● Calculation:
● EV/Net Income = 1,000,000,000/100,000,000=10x
● This ratio is meaningless because EV includes debt and
excludes equity-specific earnings.

● Correct Approach: Use Market Cap for P/E ratio or EV with

EBITDA.
3
7
 Incorrect Use of Multiples
Overvaluing or Undervaluing a Company
• Comparing companies using mismatched metrics leads to flawed conclusions.
• Example:
• Company A:
• Market Cap = $500M, EV = $800M, EBITDA = $80M.
• EV/EBITDA = $800M ÷ $80M = 10x.
• Company B:
• Market Cap = $400M, Total Debt = $200M, Cash = $50M., EBITDA= $70 M
• EV = $400M + $200M - $50M = $550M.
• EV/EBITDA = $550M ÷ $70M = 7.86x.
• If you incorrectly use Market Cap/EBITDA for Company B:
• Market Cap/EBITDA=400,000,000/70,000,000=5.71x
• Misinterpretation: You’d mistakenly conclude Company B is much cheaper
than Company A when in reality, EV-based multiples show otherwise.
38
 Incorrect Use of Multiples
Overvaluing or Undervaluing a Company
• Using Market Cap instead of EV when estimating the cost to acquire a
company.
• :Target Company:
• Market Cap = $1 billion.
• Debt = $500 million.
• Cash = $200 million.
• You assume the acquisition cost is $1 billion (Market Cap).
• Actual Cost:
• EV=1B+500M−200M=1.3B

• Impact: The acquirer underestimates the deal value by $300 million,

which could lead to financial strain or deal failure.
39
 Incorrect Use of Multiples
Incorrect Peer Comparisons
• Comparing one company’s EV-based metric to another company’s equity-based
metric.
• Company A:
• EV = $10B, EBITDA = $2B, Net Income = $1B.
• Company B:
• Market Cap = $12B, EBITDA = $2.5B, Net Income = $1.2B.

• Mistake: Comparing EV/EBITDA of Company A with P/E of Company B:

• EV/EBITDA for A:
• EV/EBITDA=10B/2B=5x
• P/E for B:
• Market Cap/Net Income=12B/1.2B=10x

• Misinterpretation: Concluding Company A is “cheaper” when the

metrics being compared are unrelated.
40
 Incorrect Use of Multiples
Misleading Debt and Cash Implications

• Two companies have the same Market Cap of $1 billion but different
debt levels

• Company A: Debt = $500M, Cash $200M.

• EV=1B+500M−200M=1.3B
• Company B: Debt = $200M, Cash = $50M.
• EV=1B+200M−50M=1.15B

• Misinterpretation: If you only look at Market Cap, you’d assume both

companies have similar valuations. EV shows that Company A is more
expensive.
41
Incorrect Use of Multiples
Errors in EV/Revenue or P/E Comparisons
Mixing metrics leads to faulty relative valuations.
• Company A:
• EV = $1.5B, Revenue = $500M, Net Income = $100M.
• EV/Revenue = 3x, P/E = 15x.
• Company B:
• Market Cap = $1B, Revenue = $400M, Net Income = $80M.
• EV = $1B (no debt or cash).
• EV/Revenue = 2.5x, P/E = 12.5x.

• Mistake: Comparing EV/Revenue of A with P/E of B leads to the

wrong conclusion about which company is undervalued.
42
 Incorrect Use of Multiples
Errors in EV/Revenue or P/E Comparisons
Correct Approach
● To accurately decide which company is cheaper:
1. Compare EV/Revenue for both companies:
1. Company A: 3x
2. Company B: 2.5x
3.Conclusion: Company B is cheaper operationally based on
revenue.
2. Compare P/E for both companies:
1. Company A: 15x
2. Company B: 12.5x
3.Conclusion: Company B is cheaper based on net income 43
 Incorrect Use of Multiples

● Key Lessons:

1. Always match the value metric (EV or Market Cap) with

the performance metric (EBITDA, Net Income, etc.).
2. Use Enterprise Value when comparing operational
performance across companies (e.g., EV/EBITDA or EV/Revenue).
3. Use Market Cap for equity-based valuations (e.g., P/E ratio or
Price-to-Book).

44
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● Revenue-Based Metrics
● EV/Revenue
• Definition: Compares Enterprise Value to a company's revenue.
• Formula: EV/Revenue=Enterprise Value/Revenue
• Use Case:
• Commonly used for high-growth industries (e.g., SaaS) where profits
may be low or negative.
• Example:
• If EV = $1 billion and Revenue = $200 million:
EV/Revenue=1,000,000,000/200,000,000=5x

45
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● Profitability-Based Metrics
● EV/EBITDA
• Definition: Measures the value of a company relative to its operating
profit (EBITDA = Earnings Before Interest, Taxes, Depreciation, and
Amortization).
• Formula:
• EV/EBITDA=Enterprise Value/EBITDA
• Use Case:
• Popular for comparing companies' operational performance
regardless of capital structure.
• Example:
• If EV = $800 million and EBITDA = $100 million:
• EV/EBITDA=800,000,000/100,000,000=8x 46
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

P/E Ratio (Price-to-Earnings)

• Definition: Measures how much investors are willing to pay for $1 of
earnings.
• Formula:
• P/E Ratio=Share Price/Earnings Per Share (EPS)​
• Or:
• P/E Ratio=Market Cap/Net Income
• Use Case:
• Widely used for equity valuations in mature industries.
• Example:
• If Market Cap = $1 billion and Net Income = $100 million:
• P/E=1,000,000,000/100,000,000=10x
47
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

Asset-Based Metrics
Price-to-Book Ratio (P/B Ratio)
• Definition: Compares a company’s Market Cap to its book value (equity
on the balance sheet).
• Formula: P/B Ratio=Market Cap/Book Value of Equity​
• Use Case:
• Common in industries with significant tangible assets, such as
banking and real estate.
• Example:
• If Market Cap = $500 million and Book Value = $250 million:
P/B=500,000,000/250,000,000=2x

48
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● Cash Flow-Based Metrics

● Price-to-Cash Flow (P/CF)
• Definition: Evaluates a company's Market Cap relative to its operating
cash flow.
• Formula: P/CF=Market Cap/Operating Cash Flow
• Use Case:
• Useful for companies with volatile earnings but strong cash flows.
• Example:
• If Market Cap = $1 billion and Operating Cash Flow = $200 million
P/CF=1,000,000,000/200,000,000=5x

49
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● EV/FCFF (Free Cash Flow to the Firm)

• Definition: Compares EV to free cash flow available to all
stakeholders (debt and equity).
• Formula:
• EV/FCFF=Enterprise Value/FCFF
• Use Case:
• Preferred for DCF (Discounted Cash Flow) valuation and M&A
analysis.

50
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● Growth-Based Metrics
● PEG Ratio (Price-to-Earnings-to-Growth)
• Definition: Adjusts the P/E ratio by accounting for a company’s
growth rate.
• Formula: PEG Ratio=P/E Ratio/Earnings Growth Rate
• Use Case:
• Popular for high-growth companies where P/E alone may seem
inflated.
• Example:
• P/E Ratio = 20, Growth Rate = 10%:
• PEG=20/10=2.
51
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

Leverage-Based Metrics
● Debt-to-Equity Ratio
• Definition: Measures a company’s leverage by comparing its
total debt to its equity.
• Formula:
• Debt-to-Equity Ratio=Total Debt/Total Equity
• Example:
• Total Debt = $500 million, Total Equity = $1 billion:
• Debt-to Equity=500,000,000/1,000,000,000=0.5

52
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

Leverage-Based Metrics
● Net Debt/EBITDA
• Definition: Evaluates a company’s ability to pay its debt from
operating income.
• Formula:
• Net Debt/EBITDA=Total Debt−Cash/EBITD
• Example:
• Total Debt = $1 billion, Cash = $200 million, EBITDA = $250
million:
• Net Debt/
EBITDA=1,000,000,000−200,000,000/250,000,000=3.2x
53
 Other valuation metrics and methods used in investment banking,
finance, and corporate valuation.

● Final Thoughts:
● Each metric serves a unique purpose depending on
the context:
1.Revenue-Based Metrics: High-growth industries.
2.Profitability Metrics: Mature, profitable companies.
3.Asset-Based Metrics: Capital-intensive sectors like
banking or real estate.
4.Cash Flow Metrics: Companies with volatile
earnings.
54
 Class Discussion / Q&A

Engaging Insights and Perspectives

Which Multiple is Cash Flow Real-World

Best? Statement Examples
Discussions on the Relevance Sharing experiences or
contexts where Exploring the inherent case studies related to
different multiples importance of cash valuation practices
shine and situations flow, prompting fosters collective
where they may inquiries into why it is learning and
misrepresent crucial and what understanding of
valuation, promoting influences investor practical implications
critical thinking around perceptions and in the investment
valuation practices. confidence. arena.
 Next Steps
Path Forward for Continuous Learning

Homework: Preview Next Class: Resources for

Calculate Multiples Comparable Further Study
Assignment designed Company Analysis Sharing supplementary
to reinforce learning by Prepare for future resources offers
prompting practical sessions that will build avenues for self-
calculations of on these concepts and directed learning,
valuation multiples demonstrate their ensuring participants
based on provided application in more are equipped to delve
data sets, solidifying complex analysis deeper into the
understanding of their scenarios, enhancing valuation domain as
applications. analytical skills. they wish.