1. Liquidity ratios include the current ratio, quick ratio, cash ratio, and the defensive interval ratio.
2. Activity ratios include inventory turnover, receivables turnover, payables turnover, working capital turnover, fixed asset turnover, total asset turnover, and the cash conversion cycle.
3. Solvency ratios include debt-to-assets, debt-to-equity, financial leverage, and interest coverage.
4. Profitability ratios include gross profit margin, operating profit margin, EBITDA margin, net profit margin, return on assets, return on equity, and return on capital.
5. Market ratios include price-to-earnings, price-to-cash flow, price-to-sales, price-to-book, basic EPS, diluted EPS, cash flow per share, EBITDA per share, and dividends per share. Continue reading “Financial Ratio Analysis”
1. Start with a quick summary of the company’s business and recent performance in addition to any major conclusions from the analysis. Include an investment recommendation.
2. Provide a more detailed overview of the company and industry, including important products, key performance drivers, major competitors, financial ratios, and corporate governance.
3. Communicate the results of the valuation model to justify the target price and include all key assumptions.
4. Name any potential risks associated with the investment and disclose all conflicts of interest. Continue reading “Equity Research Report Template”
1. Determine threat of substitutes by looking at switching costs, price/performance of substitutes, and brand loyalty.
2. Determine bargaining power of customers by analyzing buyer concentration, customer knowledge, price sensitivity, product differentiation, and backward integration.
3. Determine bargaining power of suppliers by considering supplier concentration, switching costs, and forward integration.
4. Determine intensity of competition by focusing on industry concentration, capacity levels, industry life cycle, product differentiation, and storage costs.
5. Determine threat of new entrants by investigating technological advances, government regulation, economies of scale, initial investments, required expertise, patents, and supply and distribution channels. Continue reading “Porter’s Five Forces”
1. Estimate the value of equity by using the firm’s market capitalization.
2. Calculate the market value of debt by converting the book value of debt into a hypothetical coupon bond and solving for the present value.
3. Use the statutory corporate tax rate to determine the after-tax cost of debt.
4. If applicable, add preferred stock to the WACC calculation and value the equity and debt components of convertible securities separately. Continue reading “Weighted Average Cost of Capital”
1. Examine all companies filing with the SEC that share the same industrial classification code.
2. Review the firm’s annual report for specific competitors and industry publications for comparable companies. Continue reading “Identifying Peer Companies”
1. Calculate the geometric average return on 10-year treasury bonds
2. Calculate the geometric average return on the S&P 500 Total Return index
3. Estimate the historical equity risk premium as the excess returns of stocks over Treasury bonds. Calculate the standard error to check for reasonability. Continue reading “Equity Risk Premium (Historical)”
1. Calculate historical ROE by dividing net income from the current period by the average book value of equity.
2. Estimate future ROE by reviewing a firm’s marginal returns and the industry average.
3. Conduct a DuPont analysis of ROE. Continue reading “Return on Equity”