The document discusses various financial analysis techniques used to value companies, including ratios, valuation methods, and the EDGE framework. It introduces key financial ratios like return, efficiency, growth, solvency, and cash flow ratios. Valuation methods covered include discounted cash flow analysis, relative valuation using multiples like P/E, EV/Revenue, EV/EBITDA, and dividend discount models. The document promotes the EDGE framework for fundamental analysis and quarterly review of investments.

1. VIVEK
BAJAJ
LEARN2INVEST
Know where to start and how to start!
PRESENTS
SESSION 9

2. INTRODUCING
THE
EDGE
FRAMEWORK
Key Agenda
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3. IMPORTANCE OF
FINANCIAL
RATIOS
Decision-Making
The ratios give us insights to make decisions that
are number based.
Comparison Metric
The ratios help compare performance to industry
standards.
Evaluate Company's Performance
The ratios help create a relationship between
financial statements to evaluate them.
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4. TYPES OF FINANCIAL RATIOS
GROWTH
CASH FLOW
EFFICIENCY
VALUATION
RETURN
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SOLVENCY

5. RETURN
RATIOS
The ability of the company to generate returns to
its shareholders is what is reflected by calculating
return ratios. It is also considered to be a
profitability ratio. Types of return ratios include:
-Return on Equity (ROE)
-Return on Capital Employed (ROCE)
-Return on Assets (ROA)
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6. EFFICIENCY
RATIOS
The effective utilisation of the company's assets
and liabilities to be able to generate revenue and
profit is what is reflected by calculating the
efficiency ratios. Types of efficiency ratios
include:
-Asset Turnover Ratio
-Inventory Turnover Ratio
-Days of Payables/Receivables
-Dividend Payout Ratio, etc.
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7. GROWTH
RATIOS
These ratios measure the rate of growth of the
company and help us identify the pace at which
the company is growing. These ratios include:
-Net Sales Growth
-EBITDA Growth
-Net Profit Growth
-EPS Growth
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8. SOLVENCY
RATIOS
Solvency Ratios measure the company's liquidity
and financial viability. The comparison is made
between debt levels of the company to its other
parameters such as assets, earnings, etc. These
ratios include:
-Total Debt to Equity Ratio
-Total Debt to Assets Ratio
-Interest Coverage Ratio
-Current Ratio
-Quick Ratio
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9. CASH FLOW
RATIOS
Cash flow ratios help determine the condition of
finances of the company. It compares the
company's cash flows to other parameters of the
company's financial statements. It also helps in
evaluating company liquidity. The ratios include:
-Cash Flow Per Share
-Free Cash Flow Per Share
-Sales To Cash Flow Ratio
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10. VALUATION
RATIOS
Valuation ratios are ratios that help in
establishing a relationship between the
company's market value and a financial statement
parameter to better understand the true value of
the company using comparisons with industry
standards. These ratios include:
-Price To Earnings Ratio (PE)
-Price to Book Ratio (PB)
-EV To EBITDA Ratio
-Market Cap To Sales Ratio, etc.
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11. WHY
VALUE A
COMPANY?
Figure the right entry/exit
This will help in creating the right amount of
wealth.
Figure over/under valuation
This will help figure the potential of an investment.
Understand Potential For Growth
This helps create informed financial goals.
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12. UNDERSTANDING
FINANCIALS
Financial statements form the
crux of valuing a company as
they give us information
necessary to join the dots. The
three primary statements that
help form the crux of valuation:
Cash Flow Statement
P/L Account
Balance Sheet
ELEMENT WEIGHTAGE IN
VALUATION
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CASH FLOW
40%
ASSUMPTIONS
30%
P/L ACCOUNT
20%
BALANCE SHEET
10%

13. RELATIVE
VALUATION
DCF
HOW TO VALUE A
COMPANY?
DIFFERENT
METHODS
OF
VALUATION
P/E
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EV/Revenue
EV/EBITDA
DIVIDEND
DISCOUNT

14. In this model, an investment is valued by
forecasting its cash flows for some years, and
discounting them to calculate a present value.
This model is based on the premise that an
investment’s value is created through the cash it
can generate, rather than just its supply and
demand. This method accounts for the concept of
time value of money with the usage of a relevant
discount rate. The calculation is very assumption
heavy and can lead to biased results at times.
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DCF
(DISCOUNTED CASH FLOW)

15. DIVIDEND
DISCOUNT
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The dividend discount method of valuation is an
approach that looks at the sum of the future
dividend payments that the company will make to
its shareholder which when discounted back to its
present value helps determine the fair value of
the stock price.
There are various types of dividend discount
model such as Zero Growth DDM, Constant
Growth DDM (also known as Gordon Growth
Model), Variable Growth DDM, etc.

16. RELATIVE
VALUATION
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The relative valuation approach is a comparative
analysis approach which uses ratio analysis,
multiples, etc. among others to compare
calculated results with those of industry stalwarts
or industry standards or companies in a similar
space. This ensures a fair valuation as a
comparable gives insight into what should be or
what could be. There are various techniques to be
applied under relative valuation which shall be
seen in the following slides.

17. EV/REVENUE
TECHNIQUE
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Enterprise Value** to Revenue technique equals a
company's EV divided by its revenue. It is a
valuation measure that prices the company in
terms of its sales. An under-valued company will
have a low enterprise multiple whereas a higher
enterprise multiple will reflect an over-valued
company. Also, this multiple is relatively better
than price to sales as it considers the debt load.
**EV= Market Cap + Debt + Minority Interest +
Preferred Share - Cash & Cash Equivalents

18. EV/EBITDA
TECHNIQUE
Enterprise Value** to EBITDA technique equals a
company's EV divided by earnings before interest,
tax, depreciation and amortisation. An under-
valued company will have a low enterprise
multiple whereas a higher enterprise multiple will
reflect an over-valued company. Also, this
multiple is often used in an acquisition or a
takeover case during valuation.
**EV= Market Cap + Debt + Minority Interest +
Preferred Share - Cash & Cash Equivalents
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19. The Price to Earnings Ratio (P/E) is the ratio of the
market price per share to earnings per share.
Market price is commonly available as public
information and earnings per share can be
calculated by dividing net annual earnings to total
number of shares. The general norm is to make a
comparative analysis between the industry
average P/E or a benchmark P/E and the potential
investment in question to identify whether it is
under/over valued.
P/E RATIO
TECHNIQUE
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20. HOW TO LOCATE
THESE VALUES?
P/E
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EV/Revenue
EV/EBITDA

21. EDGE FRAMEWORK ----> EDGE REPORT
QUALITY
FRAMEWORK
FINANCIAL
STATEMENTS
& RATIOS
VALUATION
TECHNIQUES
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22. EDGE FRAMEWORK ----> EDGE REPORT
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23. WHAT NEXT?
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Analyse & Assign
Weights
Align Investment
Thesis
Quarterly Reviews
& Adjustments

24. THANK
YOU!
TAKE A SIMPLE IDEA,
AND TAKE IT
SERIOUSLY.
CHARLIE MUNGER
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