SMIF Fundamentals

SMIF FundamentalsSMIF

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SMIF Fundamentals (read-only)

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Three statements
Cash flows
Value measures
Trading multiples
Valuation methods
Ratios
Accounting traps
Australia-specific
Markets & macro
Pitching a stock

Section

Three statements

Notes

Income statement (performance over a period)

Revenue − COGS = Gross profit

Gross profit − operating expenses = EBITDA

EBITDA − D&A = EBIT

EBIT − net finance costs = Profit before tax (PBT)

PBT − income tax = NPAT

NPAT − NCI share = NPAT attributable to members → EPS

Accrual based: revenue is recognised when the performance obligation is met, not when cash arrives. Many ASX companies present expenses "by nature" (employee costs, occupancy, D&A as separate lines).

Balance sheet (position at a point in time)

Assets = Liabilities + Equity

Current assets: cash, receivables, inventory, prepayments
Non-current assets: PP&E, right-of-use assets, intangibles and goodwill, deferred tax assets, investments in associates
Current liabilities: payables, contract liabilities (customer deposits, deferred revenue), current borrowings, current lease liabilities, provisions
Non-current liabilities: borrowings, lease liabilities, deferred tax liabilities, long-term provisions
Equity: contributed equity + reserves + retained earnings (+ NCI)

Cash flow statement (actual cash over a period)

CFO: cash from trading (receipts from customers, payments to suppliers and staff, tax paid, often interest)
CFI: capex, acquisitions, asset sales, investments
CFF: debt drawn and repaid, lease principal, share issues and buybacks, dividends paid

Most ASX companies use the direct method for CFO and put the NPAT → CFO reconciliation in the notes. US companies mostly use the indirect method.

How they link

NPAT → retained earnings (less dividends) and → the start of the indirect CFO
Non-cash items (D&A, SBC, impairments) are added back in CFO
Working capital changes on the BS flow through CFO
Capex → PP&E on the BS and CFI on the CFS; D&A then reduces PP&E
Debt and equity raises → BS liabilities/equity and CFF
Closing cash on the CFS = cash on the BS

Where to look in an ASX annual report

Need	Go to
Headline numbers, KPIs, LFL sales, store counts	Investor presentation, Operating and Financial Review (OFR)
Statutory vs underlying reconciliation	OFR, Appendix 4E, presentation appendix
Segment revenue and EBIT	Segment note
Shares on issue, options, rights	Contributed equity and share-based payment notes
Debt facilities and maturities	Borrowings / financial risk note
Lease liabilities	Leases note
Goodwill impairment assumptions	Intangibles note
Exec pay and incentive hurdles	Remuneration report

The scenario drill (memorise this method)

For any event, go IS → CFS → BS and check the BS balances. With a 30% tax rate a $10 pre-tax expense costs $7 of NPAT.

Cards: tap a question to reveal the answer

Concept What does each of the three financial statements tell you?

Income statement: performance over a period, on an accrual basis (revenue → NPAT)
Balance sheet: financial position at a point in time; Assets = Liabilities + Equity
Cash flow statement: actual cash in and out over the period, split CFO / CFI / CFF; reconciles opening to closing cash

Interview How do the three statements link together?

NPAT from the IS flows to retained earnings on the BS (less dividends) and to the top of the indirect CFO
Non-cash expenses (D&A, SBC, impairments) are added back in CFO
Changes in BS working capital flow through CFO
Capex hits CFI and adds to PP&E; D&A then reduces PP&E
Debt and equity raised or repaid sit in CFF and on the BS
Closing cash on the CFS equals cash on the BS

Interview Walk me through a $10 increase in depreciation (30% tax rate).

IS: EBIT −10, tax −3, NPAT −7
CFS: NPAT −7, add back depreciation +10 → CFO +3 (the tax shield)
BS: PP&E −10, cash +3 → assets −7. Retained earnings −7 → balances

Interview A company buys $20 of inventory with cash and hasn't sold it yet. Walk it through.

IS: no change (COGS is recognised only when the stock is sold)
CFS: increase in inventory → CFO −20
BS: inventory +20, cash −20 → balances
When sold, COGS of 20 hits the IS and inventory falls.

Interview A company borrows $100 to buy PP&E (10-year life, 5% interest, 30% tax). Walk through the purchase and year 1.

At purchase: CFI −100 (capex), CFF +100 (debt) → cash unchanged. BS: PP&E +100, debt +100
Year 1 IS: depreciation −10, interest −5 → PBT −15, tax +4.5, NPAT −10.5
Year 1 CFS: NPAT −10.5 + depreciation 10 → CFO −0.5 (interest in CFO)
Year 1 BS: cash −0.5, PP&E 90 → assets +89.5 = debt +100, retained earnings −10.5

Interview Walk me through a $50 asset write-down (30% tax).

If tax-deductible: IS −50 pre-tax, NPAT −35. CFS: NPAT −35 + 50 non-cash add-back → CFO +15. BS: asset −50, cash +15, retained earnings −35.
Goodwill impairment (usually not deductible): NPAT −50, add back 50 → CFO 0. BS: goodwill −50, retained earnings −50.
Either way it is non-cash and usually excluded from underlying profit.

Concept What are the parts of shareholders' equity on the balance sheet?

Equity = Contributed equity + Reserves + Retained earnings (+ NCI)

Contributed equity: cash raised from issuing shares
Reserves: SBP reserve, FX translation, hedging, revaluation
Retained earnings: cumulative NPAT less dividends

Concept List the income statement lines from revenue to EPS.

Revenue − COGS = Gross profit

− Opex = EBITDA − D&A = EBIT

− Net finance costs = PBT − Tax = NPAT

− NCI = NPAT attributable to members ÷ weighted average shares = EPS

Concept Statutory vs underlying NPAT: what is the difference and what do you check?

Statutory: per accounting standards, audited.
Underlying: management-adjusted, removing items it calls one-off (restructuring, impairments, acquisition costs, sometimes AASB 16).
Check:

The reconciliation (OFR, Appendix 4E, presentation appendix)
Whether "one-offs" recur every year
Whether only costs are removed and gains kept
That consensus uses the same basis

Concept What do an Appendix 4D, Appendix 4E and annual report contain?

4D: half-year report, lodged within 2 months of the half-year end
4E: preliminary final report, within 2 months of year end; first release of full-year numbers
Annual report: directors' report, OFR, remuneration report, financial statements, notes, directors' declaration, auditor's report

KPIs and LFL numbers usually live in the investor presentation and OFR, not the statements.

Concept Direct vs indirect cash flow method: which do ASX companies use?

Direct: shows receipts from customers and payments to suppliers and employees. Most ASX companies use it, with an NPAT → CFO reconciliation in the notes
Indirect: starts from NPAT and adjusts for non-cash items and working capital. Standard in the US

Both give the same CFO.

Concept What goes through other comprehensive income (OCI) rather than NPAT?

FX translation of foreign operations
Cash flow hedge gains and losses
PP&E revaluations (revaluation model)
Fair value moves on FVOCI equity investments
Actuarial gains and losses on defined benefit plans

OCI builds up in reserves on the BS, not retained earnings.

Interview If you could only see one statement, which would you choose?

The cash flow statement: it shows whether the business actually generates cash, and is harder to dress up than accrual profit. You can partly rebuild the IS from CFO plus working capital.
A good answer adds: for a highly levered company the balance sheet tells you whether it survives.

Interview Can a company report positive NPAT and still go bust?

Yes. Profit is not cash:

Working capital can absorb cash (receivables and inventory building)
Heavy capex or acquisitions
Debt maturities it cannot refinance

Fast-growing companies often run out of cash while profitable.

Where? Where do you look first for capex?

Answer: Cash flow statement

Cash flow statement, CFI: "payments for property, plant and equipment" (and for intangibles/software).
The PP&E note shows additions by asset class.

Where? Where do you look first for dividends paid in cash?

Answer: Cash flow statement

Cash flow statement, CFF (IFRS allows CFO, but almost all ASX companies use CFF).
Dividends declared and per-share amounts are in the dividends note and the statement of changes in equity.

Where? Where do you look first for lease liabilities?

Answer: Balance sheet

Balance sheet: current and non-current lease liabilities.
The leases note gives the maturity profile, ROU asset movements and the interest expense on leases.

Where? Where do you look first for interest expense?

Answer: Income statement

Income statement: "finance costs" (often split between borrowings and lease interest in the notes).
Interest paid in cash is on the cash flow statement (CFO or CFF by policy).

Where? Where do you look first for the number of shares on issue and options outstanding?

Answer: Notes / other

Notes: contributed equity note (shares on issue) and share-based payment note (options, rights, performance rights).
The EPS note gives weighted average basic and diluted shares. For the live count use the latest ASX Appendix 2A/3B or 3G announcements.

Where? Where do you look first for revenue and EBIT by division or region?

Answer: Notes / other

Notes: segment note (AASB 8 operating segments).
The investor presentation usually has more detail (e.g. by brand or country) than the note.

Where? Where do you look first for customer deposits / deferred revenue?

Answer: Balance sheet

Balance sheet, current liabilities: usually called "contract liabilities" (AASB 15).
For a retailer taking deposits (e.g. Nick Scali), growth in this line is cash received before revenue is booked.

Where? Where do you look first for income tax actually paid in cash?

Answer: Cash flow statement

Cash flow statement, CFO: "income taxes paid".
The IS shows tax expense (accrual), which differs because of timing and deferred tax.

Where? Where do you look first for share-based payment expense?

Answer: Notes / other

Notes: share-based payments note (and the expenses note).
It is non-cash, so it appears as an add-back in the NPAT → CFO reconciliation, and builds the SBP reserve in equity.

Where? Where do you look first for like-for-like (same-store) sales growth?

Answer: Notes / other

Not in the statutory statements: it's a management KPI.
Find it in the investor presentation, the OFR in the annual report, or trading updates at results and the AGM.

Where? Where do you look first for the assumptions behind a goodwill impairment test?

Answer: Notes / other

Notes: intangible assets / impairment note.
It lists cash-generating units, discount rates, terminal growth rates and sensitivity (how much headroom before impairment).

Section

Cash flows

Notes

The three buckets

	Typical items
CFO	Receipts from customers, payments to suppliers and staff, tax paid, interest (policy choice under IFRS)
CFI	Capex, acquisitions, proceeds from asset sales, investments
CFF	Borrowings drawn/repaid, lease principal, share issues, buybacks, dividends paid

IFRS/AASB vs US GAAP classification

Item	IFRS (AASB 107 today)	US GAAP
Interest paid	CFO or CFF	CFO
Interest received	CFO or CFI	CFO
Dividends received	CFO or CFI	CFO
Dividends paid	CFO or CFF	CFF
Lease principal (AASB 16)	CFF	Operating leases: CFO

AASB 18 (periods beginning on or after 1 Jan 2027) removes most of the choice for non-financial companies: interest and dividends paid → CFF, interest and dividends received → CFI.

Free cash flow formulas

FCFF = EBIT × (1 − t) + D&A − Capex − ΔNWC

FCFF = NPAT + D&A + Interest × (1 − t) − Capex − ΔNWC

FCFF = CFO + Interest paid × (1 − t) − Capex (if interest sits in CFO)

FCFF = EBITDA × (1 − t) + D&A × t − Capex − ΔNWC

FCFE = FCFF − Interest × (1 − t) + Net borrowing

FCFE = NPAT + D&A − Capex − ΔNWC + Net borrowing

"Simple" FCF = CFO − Capex (often also − lease principal)

Which value each flow gives you

Flow	Belongs to	Discount at	Gives
FCFF (unlevered)	Debt + equity	WACC	Enterprise value
FCFE (levered)	Equity only	Cost of equity	Equity value

Working capital signs

An increase in a working capital asset (receivables, inventory) uses cash. An increase in a working capital liability (payables, customer deposits) frees cash.

ΔNWC = Δ(Receivables + Inventory) − Δ(Payables + Contract liabilities)

Subtract an increase in NWC in FCF.

Cash conversion

Cash conversion = CFO ÷ EBITDA (or FCF ÷ NPAT)

Persistently below ~80–90% is a quality flag: receivables or inventory building, capitalised costs, provisions unwinding.

Cards: tap a question to reveal the answer

Concept What goes in CFO, CFI and CFF?

CFO: receipts from customers, payments to suppliers and staff, tax paid, interest (policy choice under IFRS)
CFI: capex, acquisitions, asset sales, investments
CFF: debt drawn and repaid, lease principal, share issues, buybacks, dividends paid

Concept How are interest and dividends classified under IFRS/AASB vs US GAAP?

Item	IFRS (AASB 107)	US GAAP
Interest paid	CFO or CFF	CFO
Interest received	CFO or CFI	CFO
Dividends received	CFO or CFI	CFO
Dividends paid	CFO or CFF	CFF

AASB 18 (from periods starting 1 Jan 2027) moves most non-financial companies to: paid → CFF, received → CFI.
So check the policy before comparing CFO across companies.

Concept Where do lease payments go in the cash flow statement under AASB 16?

Principal → CFF
Interest → CFO or CFF (same policy as other interest)
Short-term, low-value and variable lease payments → CFO

Result: post-AASB 16 CFO looks higher than pre-AASB 16 for the same business. Deduct lease principal to get a like-for-like FCF.

Formula FCFF starting from EBIT?

FCFF = EBIT × (1 − t) + D&A − Capex − ΔNWC

EBIT × (1 − t) is NOPAT: operating profit after tax, as if there were no debt.

Formula FCFF starting from NPAT?

FCFF = NPAT + D&A + Interest × (1 − t) − Capex − ΔNWC

Add back after-tax interest because FCFF is before payments to lenders. Also add other non-cash items (SBC, impairments) if you treat them as non-cash.

Formula FCFF starting from CFO?

FCFF = CFO + Interest paid × (1 − t) − Capex

Only add back interest if it is classified in CFO. If interest sits in CFF it was never deducted from CFO.

Formula FCFF starting from EBITDA?

FCFF = EBITDA × (1 − t) + D&A × t − Capex − ΔNWC

The D&A × t term adds back the tax shield from depreciation. Equivalent to: EBITDA − tax on EBIT − Capex − ΔNWC.

Formula How do you get from FCFF to FCFE?

FCFE = FCFF − Interest × (1 − t) + Net borrowing

Net borrowing = new debt drawn − debt repaid.

Formula FCFE starting from NPAT?

FCFE = NPAT + D&A − Capex − ΔNWC + Net borrowing

NPAT is already after interest, so there is no interest adjustment.

Concept What is "simple" free cash flow and how does it differ from FCFF and FCFE?

FCF = CFO − Capex (often also − lease principal)

Used in company reports and FCF yields. It is after interest if interest is in CFO, so it is closer to FCFE before debt flows. FCFF is strictly pre-financing. Always check which definition a broker or company uses.

Concept Unlevered vs levered free cash flow?

	Unlevered (FCFF)	Levered (FCFE)
Before/after debt	Before interest and debt flows	After interest and net borrowing
Belongs to	Debt + equity holders	Equity holders
Discount at	WACC	Cost of equity
Gives	Enterprise value	Equity value

Concept Why is EBITDA not the same as operating cash flow?

EBITDA ignores:

Tax paid
Interest paid (if in CFO)
Working capital movements
Cash spent on items expensed below EBITDA or provisions unwinding
Under AASB 16, the lease cost (now in D&A and interest, with principal in CFF)

It also excludes capex, so it is not free cash flow either.

Concept What is cash conversion and what is a red flag?

Cash conversion = CFO ÷ EBITDA (or FCF ÷ NPAT)

~90–100%+ is healthy for most businesses. Persistently low conversion suggests receivables or inventory building, aggressive revenue recognition or capitalised costs: profit that is not turning into cash.

Concept Maintenance vs growth capex: what's the difference and how do you estimate maintenance capex?

Maintenance: keeps existing capacity running (refurbishments, replacements)
Growth: expands capacity (new stores, new plants)

Estimating maintenance capex when it is not disclosed:

Use D&A as a proxy
Use capex in a year with no growth
Use management commentary (e.g. refurb capex per store)

Growth capex = Total capex − Maintenance capex.

Concept What is the cash effect of increases in receivables, inventory, payables and customer deposits?

Increase in	Cash effect
Receivables	Uses cash (−)
Inventory	Uses cash (−)
Payables	Frees cash (+)
Customer deposits / deferred revenue	Frees cash (+)

ΔNWC = Δ(Receivables + Inventory) − Δ(Payables + Deposits); subtract an increase in FCF.

Interview Why do we add back depreciation in the cash flow statement?

Depreciation reduced NPAT but no cash left the business that year. The cash went out when the asset was bought, and that was recorded as capex in CFI. Adding it back avoids counting the cost twice.

Interview A company has negative working capital. Good or bad?

Usually good: customers or suppliers are funding the business (supermarkets, retailers that take deposits). Growth releases cash.
Risk: it reverses if sales slow. Deposits fall and payables shrink, causing a cash outflow just when trading is weak.

Concept How should you treat share-based compensation in free cash flow?

It is added back in CFO as non-cash, which flatters FCF. But it is a real cost to shareholders through dilution.
Either deduct SBC from FCF, or keep it added back and use a fully diluted share count. Never ignore it for tech or high-SBC companies.

Interview Why do most DCFs use FCFF rather than FCFE?

Capital structure neutral: you value the operations, then subtract net debt
More stable: FCFE swings with borrowing and repayments
Easier to compare with comps on EV multiples

Use FCFE (or a DDM) for banks and insurers, where debt is part of operations.

Where? Where do you look first for interest paid in cash?

Answer: Cash flow statement

Cash flow statement: in CFO or CFF depending on the company's policy (check the accounting policies note).
Interest expense (accrual) is in finance costs on the IS.

Section

Value measures

Notes

Definitions

Market cap = share price × basic shares on issue
Equity value = share price × diluted shares (options, rights, convertibles in the money)
Enterprise value = value of the operating business to all capital providers
Book value = shareholders' equity on the balance sheet (historical cost)

The EV bridge

EV = Equity value + Debt + Preference shares + NCI + Lease liabilities* + Unfunded pensions − Cash − Associates/JVs − Other non-operating assets

*Only include leases if the multiple uses post-AASB 16 EBITDA.

Item	Direction	Why
Debt	+	Another claim on operating cash flows
Cash	−	Non-operating; a buyer effectively gets it back
NCI (minorities)	+	EBITDA consolidates 100% of subsidiaries
Associates / JVs	−	Their earnings are not in EBITDA
Preference shares	+	Senior claim, debt-like

What changes EV?

Event	Equity value	Net debt	EV
Issue $100 shares for cash	+100	−100	0
Borrow $100	0	0	0
Pay a $50 dividend	−50	+50	0
Buy $100 of PP&E with cash	0	+100	+100 in theory (if it is worth what you paid, equity is unchanged)

Diluted shares

Treasury stock method: net new shares = Options × (1 − Strike ÷ Price) (only if Strike < Price)

Convertibles: if in the money, add the conversion shares and remove the debt (never both).

Matching rule

EV pairs with pre-interest metrics (Sales, EBITDA, EBIT, FCFF). Equity value pairs with post-interest metrics (NPAT, EPS, FCFE, dividends, book value).

Cards: tap a question to reveal the answer

Concept What is enterprise value?

The value of the operating business to all capital providers (debt, equity and other claims), net of cash and non-operating assets.
Roughly, what it would cost to buy the whole business and take on its debt, net of the cash you get with it.

Formula Write out the full EV bridge.

EV = Equity value + Debt + Preference shares + NCI + Lease liabilities* + Unfunded pensions − Cash − Associates/JVs − Non-operating assets

*Include leases only if pairing with post-AASB 16 EBITDA.

Concept Market cap vs equity value vs book value?

Market cap = Price × basic shares
Equity value = Price × diluted shares (adds in-the-money options, rights, convertibles)
Book value = shareholders' equity on the BS, at historical cost

Market value reflects expected future cash flows; book value reflects what was put in plus retained profits.

Interview Why do you subtract cash when calculating EV?

Cash is a non-operating asset. A buyer of the whole company gets the cash, which effectively reduces the price paid. EV measures only the operating business, and operating metrics like EBITDA exclude interest earned on cash.

Interview Why do you add non-controlling interests (minorities) to EV?

If a company owns 70% of a subsidiary it still consolidates 100% of the subsidiary's revenue and EBITDA. To keep the multiple consistent, EV must include the 30% claim of the minority holders.

Interview Why do you subtract investments in associates and JVs from EV?

Associates are equity-accounted: their profit appears as a single "share of profit" line, not in revenue or EBITDA. Since the denominator excludes them, remove their value from the numerator too.

Interview What happens to EV if a company issues $100 of shares, borrows $100, or pays a $50 dividend?

Event	Equity value	Net debt
Issue $100 shares	+100	−100 (cash up)
Borrow $100	0	0 (debt and cash both up)
Pay $50 dividend	−50	+50 (cash down)

Financing decisions do not change EV; only operating value does.

Interview Can enterprise value be negative?

Yes: if cash exceeds market cap plus debt. It happens with cash-rich companies the market thinks will burn the cash (e.g. some biotechs or distressed businesses), meaning the market values the operations below zero.

Interview Can equity value be higher than enterprise value?

Yes, whenever a company has net cash (cash > debt and other claims). Example: market cap 500, debt 50, cash 150 → EV = 400.

Concept How does the treasury stock method work?

Assume in-the-money options are exercised. The company receives Strike × Options in cash and uses it to buy back shares at the current price.

Net new shares = Options × (1 − Strike ÷ Price)

Ignore options with strike above the share price.

Concept How do you treat convertible notes in equity value and EV?

In the money (share price > conversion price): treat as equity. Add the conversion shares and do NOT also count the note as debt
Out of the money: treat as debt at face value

Never count it as both.

Concept How is net debt defined, and should leases be included?

Net debt = Borrowings (current + non-current) − Cash and equivalents

Leases: include lease liabilities only if your EBITDA is post-AASB 16 (rent excluded). Companies often report both "net debt" and "net debt incl. leases". Be consistent across comps.

Concept Which metrics pair with EV and which with equity value?

EV (all capital)	Equity value (shareholders)
Revenue	NPAT / EPS
EBITDA, EBITDAR	FCFE
EBIT	Dividends
FCFF	Book value

Test: is the metric before or after interest? Before → EV. After → equity value.

Interview Two companies are identical except one has much more debt. Which has the higher EV? Higher equity value?

In theory EV is roughly the same (Modigliani–Miller): the operations are identical. With tax, the levered company's EV is slightly higher from the interest tax shield, until distress costs kick in.
Equity value is lower for the levered company because more of the EV belongs to lenders.

Interview Why use the market value of equity rather than book value in EV and WACC?

Book value is historical cost and accumulated profits. Market value reflects what investors expect the business to earn in future and what they would pay today. Valuation is about the future.

Where? Where do you look first for total borrowings?

Answer: Balance sheet

Balance sheet: current and non-current borrowings (interest-bearing liabilities).
The borrowings / financial risk note gives facility limits, maturities, interest rates and covenants.

Interview In an acquisition, what is the difference between the offer price and transaction (enterprise) value?

Offer / equity value: what the acquirer pays shareholders (offer price × diluted shares)
Transaction value (EV): equity value + net debt assumed or refinanced (+ other claims)

Deal multiples (e.g. EV/EBITDA paid) use transaction value.

Section

Trading multiples

Notes

Core multiples

Multiple	Formula	Best for	Watch out
EV/Sales	EV ÷ Revenue	Loss-makers, early stage	Ignores margins entirely
EV/EBITDA	EV ÷ EBITDA	Most industrials; capital-structure neutral	Ignores capex; AASB 16 inflates EBITDA
EV/EBIT	EV ÷ EBIT	Capital-intensive; retail post-AASB 16	Acquisition amortisation
EV/EBITDAR	EV (+ capitalised rent) ÷ EBITDAR	Lessees vs owners (airlines, retail)	Mostly superseded by AASB 16
P/E	Price ÷ EPS	Profitable, steady companies	Leverage, tax and one-offs distort
PEG	P/E ÷ EPS growth %	Growth companies	Growth estimate is the whole answer
P/B	Price ÷ Book value per share	Banks, insurers	Book ≠ value for asset-light firms
P/TBV	Price ÷ Tangible book per share	Banks
Dividend yield	DPS ÷ Price	Income stocks; gross up for franking in AU	Payout may be unsustainable
FCF yield	FCF ÷ Market cap	Cash generation vs bond yields	Lumpy capex

Theory behind a multiple

Forward P/E = Payout ratio ÷ (Ke − g)

Justified P/B = (ROE − g) ÷ (Ke − g)

Higher growth, higher returns on capital and lower risk all justify a higher multiple.

Sector multiples

Sector	Multiples
Banks	P/B, P/E, dividend yield, ROE
REITs	P/NTA, FFO/AFFO yield, distribution yield, gearing
Miners	EV/EBITDA at spot vs consensus prices, P/NAV, EV/resource
Software	EV/ARR, EV/Revenue, Rule of 40
Retail	EV/EBIT, P/E, sales per sqm, LFL growth

Rules

Numerator and denominator must belong to the same claimholders: never EV/NPAT or P/EBITDA
LTM = last 12 months actual; NTM = next 12 months consensus. Use the same basis across comps
Calendarise June year-ends to compare with December peers: CY26 = 0.5 × FY26 + 0.5 × FY27
For cyclicals use mid-cycle earnings: P/E looks lowest at the peak of the cycle

Cards: tap a question to reveal the answer

Concept EV/EBITDA: what does it tell you, and what are its flaws?

How many years of pre-D&A operating profit the whole business costs. Capital-structure neutral, so useful across companies with different debt.
Flaws:

Ignores capex intensity (two firms with the same EBITDA can have very different FCF)
Ignores tax
AASB 16 inflates EBITDA for lessees

Concept When is EV/EBIT better than EV/EBITDA?

When capital intensity differs between companies: D&A approximates the cost of maintaining assets, so EBIT is closer to sustainable profit. Preferred for retailers post-AASB 16 and for capital-heavy industrials.
Watch for acquisition amortisation, which depresses EBIT without being an operating cost. Use EBITA if material.

Concept When do you use EV/Sales?

For loss-making or early-stage companies where earnings are negative or meaningless (software, biotech with product revenue, turnarounds).
Weakness: it ignores profitability. Always pair it with the margin you think the company can reach.

Concept P/E: what does it tell you and what distorts it?

P/E = Share price ÷ EPS = Market cap ÷ NPAT

Years of current earnings an investor pays for. Equity-level, so affected by:

Leverage (more debt → more volatile EPS)
Tax rates and one-off items (use underlying EPS)
Accounting choices (D&A lives, capitalisation)

Use forward (NTM) P/E for pitching.

Formula What is the PEG ratio and how do you read it?

PEG = P/E ÷ EPS growth (%, as a whole number)

P/E of 20 with 20% growth → PEG 1.0. Below 1 suggests growth is cheap; above 2 is expensive.
Weakness: depends entirely on the growth forecast and ignores risk and payout.

Concept When do you use P/B, and what justifies a high P/B?

P/B = Price ÷ Book value per share

Used for banks, insurers and asset-heavy businesses where book value approximates the value of assets.

Justified P/B = (ROE − g) ÷ (Ke − g)

P/B above 1 is justified only if ROE exceeds the cost of equity.

Concept What is P/TBV and why use it?

P/TBV = Price ÷ (Book value − Goodwill − Intangibles) per share

Strips out acquisition goodwill and intangibles, which cannot absorb losses. Standard for banks and for comparing acquisitive vs organic companies.

Concept Dividend yield: formula and Australian twist?

Dividend yield = DPS ÷ Share price

In Australia brokers often quote the grossed-up yield including franking credits:

Grossed-up yield = DPS × (1 + Franking % × 0.3 ÷ 0.7) ÷ Price

A 5% fully franked yield ≈ 7.1% grossed up.

Concept What is FCF yield and how does it differ from an unlevered FCF yield?

Equity FCF yield = FCF (after interest) ÷ Market cap = 1 ÷ (P/FCF)

Unlevered FCF yield = FCFF ÷ EV

Compare with bond yields and cost of capital. An FCF yield above the cost of equity with some growth suggests value.

Concept What is the earnings yield and how is it used?

Earnings yield = EPS ÷ Price = 1 ÷ (P/E)

A P/E of 20 is a 5% earnings yield. Used to compare equities with bond yields (a rough gauge of the equity risk premium being priced).

Concept What is EV/EBITDAR and is it still relevant post-AASB 16?

EBITDAR = EBITDA before rent. EV is adjusted by adding capitalised leases (rent × ~8, or lease liabilities). It compared companies that lease vs own assets (airlines, retailers, hotels).
Post-AASB 16, most rent is already out of EBITDA and lease liabilities can go into EV, so it is mostly superseded. It is still used where variable or short-term rent remains material.

Concept Why is EV/NPAT or P/EBITDA wrong?

The numerator and denominator must belong to the same claimholders.

EBITDA is available to debt and equity → pair with EV
NPAT is after interest, so it belongs to equity only → pair with equity value

Mixing them makes leverage distort the multiple.

Concept LTM vs NTM multiples, and how do you calendarise?

LTM (trailing): last 12 months of actual results. Reliable but backward-looking
NTM (forward): next 12 months of consensus. Standard for growing companies and pitches

Calendarise June year-ends to compare with December peers:

CY26 = 0.5 × FY26 + 0.5 × FY27

Concept What makes one company deserve a higher multiple than another?

Growth: faster sustainable growth
Returns: higher ROIC relative to WACC (growth only adds value if ROIC > WACC)
Risk: lower cost of equity (stable earnings, low leverage, low beta)
Quality: predictability, competitive moat, management, cash conversion

Formula What is the justified (Gordon) P/E?

Forward P/E = Payout ratio ÷ (Ke − g)

Trailing P/E = Payout ratio × (1 + g) ÷ (Ke − g)

Example: payout 60%, Ke 9%, g 3% → forward P/E = 0.6 ÷ 0.06 = 10x.

Concept Why don't you use EV/EBITDA for banks? What do you use?

For banks, debt (deposits and wholesale funding) is the raw material and interest is an operating cost, so EV and EBITDA are meaningless.
Use P/B or P/TBV (linked to ROE), P/E and dividend yield. Value with DDM or residual income.

Concept How are REITs valued?

P/NTA: price vs net tangible assets (property valuations) per unit; premium or discount to NTA
FFO / AFFO yield: funds from operations (profit excluding revaluations and D&A); AFFO also deducts maintenance capex and incentives
Distribution yield and gearing (debt ÷ total assets)

Concept How are miners valued?

P/NAV: price vs NPV of the mine plan (the core method)
EV/EBITDA at spot and at consensus commodity prices
EV/resource or reserve (per tonne or ounce) for developers and explorers

Key sensitivities: commodity price, AUD/USD, costs, reserve life.

Concept How are software / SaaS companies valued?

EV/Revenue or EV/ARR (annual recurring revenue)
Rule of 40: revenue growth % + EBITDA (or FCF) margin % ≥ 40
Net revenue retention, gross margin, CAC payback

DCFs need long horizons because profits are back-ended.

Concept Which multiples and KPIs matter for an ASX retailer?

EV/EBIT and P/E (EV/EBITDA is distorted by AASB 16)
LFL / same-store sales growth, gross margin, CODB (cost of doing business) % of sales
Sales per store or per sqm, store rollout and payback
Inventory days, customer deposits, AUD/USD for importers

Interview How would you value a pre-revenue biotech?

Multiples don't work (no sales or earnings). Use:

Risk-adjusted NPV (rNPV): forecast cash flows per drug, weighted by probability of approval at each trial phase
Compare EV with cash (often a large share of market cap)
Cash runway and funding needs (dilution risk)

Interview Why might a stock on 30x P/E be cheaper than one on 10x?

Growth: on PEG the 30x stock may be cheaper if earnings grow much faster
Cyclicality: cyclicals look cheapest on P/E at peak earnings, just before earnings fall
One-offs: depressed or inflated current earnings
Balance sheet: the 10x company may carry heavy debt (check EV multiples)
Quality: returns on capital and durability

Interview Why might a company look cheap on P/E but expensive on EV/EBITDA?

High debt: P/E only prices the equity slice; EV adds the debt back, so an indebted company can look cheap on P/E but not on EV/EBITDA
Low D&A or tax: e.g. tax losses lift NPAT
Associates or non-operating income boosting NPAT but not EBITDA

The reverse happens for net-cash or capital-intensive companies.

Concept Walk me through building a trading comps table.

Pick peers: industry, business model, size, growth, geography
Pull financials and consensus; adjust for one-offs and AASB 16 consistency
Calendarise to a common year-end
Calculate EV and equity value (diluted) and the multiples
Take median and interquartile range
Apply to the target's metrics and adjust for differences in growth and quality

Concept How do you value a cyclical company with multiples?

Use normalised (mid-cycle) earnings, not current earnings. At the peak, P/E looks low because earnings are temporarily high; at the trough P/E looks high or negative.
Classic rule: buy cyclicals when the P/E is high, sell when it is low.

Section

Valuation methods

Notes

DCF in six steps

Forecast FCFF for 5–10 years
Estimate WACC
Calculate terminal value (Gordon growth or exit multiple)
Discount the FCFF and TV to today → enterprise value
EV − net debt − NCI − prefs + associates → equity value
÷ diluted shares → value per share; run sensitivities (WACC × g)

Discount rate

Ke = rf + β × ERP

WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1 − t)

Unlever: βu = βL ÷ [1 + (1 − t) × D/E]

Relever: βL = βu × [1 + (1 − t) × D/E]

Use market values and the target capital structure.

Terminal value

Gordon: TV = FCF(n) × (1 + g) ÷ (WACC − g)

Exit multiple: TV = EBITDA(n) × multiple

Implied g from an exit multiple: g = (TV × WACC − FCF) ÷ (TV + FCF)

TV is usually 60–80% of EV. Keep g at or below long-run nominal GDP (~2–3% for Australia).

Other methods

Method	Use	Note
Trading comps	Relative value today	Pick peers on industry, size, growth
Precedent transactions	M&A pricing	Includes a 20–40% control premium
DDM	Banks, utilities	P = D1 ÷ (Ke − g)
Residual income	Banks	Value = BV + PV of (ROE − Ke) × BV
Sum of the parts	Conglomerates	Subtract capitalised corporate costs
Reverse DCF	What is priced in?	Solve for the growth or margin the price implies
LBO	Floor value for PE buyers	Returns from growth, multiple and deleveraging

Deal maths (IB)

All-stock deal is accretive if acquirer P/E > P/E paid for the target
Cash deal is accretive if target earnings yield (at the price paid) > after-tax cost of debt

IRR ≈ MOIC^(1/years) − 1 (2x in 3y ≈ 26%, 2x in 5y ≈ 15%, 3x in 5y ≈ 25%)

Cards: tap a question to reveal the answer

Interview Walk me through a DCF.

Forecast unlevered free cash flow (FCFF) for 5–10 years from revenue, margins, tax, capex and working capital
Calculate WACC from the cost of equity (CAPM) and after-tax cost of debt at target weights
Calculate terminal value with Gordon growth or an exit multiple
Discount FCFF and TV to today and sum → enterprise value
Subtract net debt (and NCI, prefs; add associates) → equity value
Divide by diluted shares → value per share; sensitise WACC and g

Formula WACC formula?

WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1 − t)

Use market values and the target (long-run) capital structure. Kd × (1 − t) because interest is tax-deductible.

Formula CAPM: cost of equity?

Ke = rf + β × ERP

rf: long-term government bond yield (10-year ACGB in Australia)
β: sensitivity of the stock to the market
ERP: market return above rf (~6% in Australian practice)

Some add size or specific-risk premiums.

Formula How do you unlever and relever beta?

βu = βL ÷ [1 + (1 − t) × D/E]

βL = βu × [1 + (1 − t) × D/E]

(Hamada; assumes debt beta of zero.)

Concept Why do you unlever and relever betas from comparables?

Each comparable's observed (levered) beta reflects both business risk and its own leverage. Unlevering strips out leverage to get asset (business-risk) beta. Average the peers' asset betas, then relever at the target's capital structure.

Formula Gordon growth terminal value formula?

TV = FCF(n) × (1 + g) ÷ (WACC − g)

The TV sits at the end of year n, so discount it by (1 + WACC)^n. Requires WACC > g; small changes in either move TV a lot.

Formula Exit multiple terminal value method?

TV = EBITDA(n) × EV/EBITDA multiple

Use a multiple from current comps or precedents, then discount by (1 + WACC)^n.
Weakness: it imports today's market pricing into an intrinsic valuation.

Concept How do you sanity-check a terminal value?

TV share of EV: typically 60–80%; much higher means most value is beyond the forecast
Gordon g ≤ long-run nominal GDP (~2–3% in Australia)
Cross-check: implied exit multiple from Gordon (TV ÷ EBITDA(n)) vs comps
Implied g from an exit multiple:

g = (TV × WACC − FCF) ÷ (TV + FCF)

Concept What is the mid-year convention?

Cash flows arrive through the year, not all at year end, so discount each year's FCF at t − 0.5 instead of t. This lifts value by about (1 + WACC)^0.5.
A Gordon TV is often discounted with the final year's factor; an exit-multiple TV is usually discounted at full year n (it is a point-in-time sale).

Concept What are the key levers in a DCF and how do you present sensitivity?

Levers: revenue growth, EBIT margin, capex and working capital intensity, tax, WACC, terminal growth or exit multiple.
Show two-way tables: WACC × terminal g (or × exit multiple) and an operating one (e.g. growth × margin). WACC and g matter most because they drive TV.

Concept What is a reverse DCF and when is it useful?

Instead of forecasting and solving for value, fix the value at today's share price and solve for the growth, margin or terminal assumption that justifies it.
It answers "what is the market pricing in?". Useful when arguing a variant view: show the implied assumptions are too pessimistic (BUY) or too optimistic (SELL).

Concept What is the dividend discount model and when is it used?

P = D1 ÷ (Ke − g)

Value equals the present value of future dividends, discounted at the cost of equity. Multi-stage versions handle high growth first.
Used for banks, insurers and utilities with stable payouts.

Concept What is the residual income model?

Value = Book value + PV of [(ROE − Ke) × Book value]

Value above book comes only from earning more than the cost of equity. Common for banks; it is consistent with justified P/B = (ROE − g) ÷ (Ke − g).

Concept What is a sum-of-the-parts valuation?

Value each segment separately with the method and multiple suited to it, add them, subtract capitalised corporate costs (corporate cost × multiple) and net debt.
Used for conglomerates (e.g. Wesfarmers). Markets often apply a conglomerate discount.

Concept Precedent transactions: what are they and why are they usually higher than trading comps?

Multiples paid in past acquisitions of similar companies. They include a control premium (typically 20–40%) for control and synergies, so they sit above trading multiples.
Weaknesses: deals can be old, market conditions differ, and disclosure is limited.

Concept On a football-field chart, how do the methods usually rank?

Precedent transactions: usually highest (control premium)
DCF: widest range, depends on assumptions
Trading comps: middle
52-week trading range: reference point
LBO: often the floor (what a financial buyer can pay)

Interview When would you use an FCFE (levered) DCF instead of FCFF?

For banks and other financials, where debt is an operating input and interest is a cost of goods sold, so EV is not meaningful. Also when the capital structure is fixed and well known.
Otherwise use FCFF: it is cleaner and not distorted by borrowing.

Interview Why is the cost of equity higher than the cost of debt?

Equity is the residual claim, paid after lenders, so it carries more risk
Debt has contractual interest and security
Interest is tax-deductible, lowering the after-tax cost of debt further

Interview Does adding debt always lower WACC?

No. Initially yes: debt is cheaper and creates a tax shield. But as leverage rises, both Ke and Kd rise with financial risk, and distress costs mount. WACC is U-shaped, with an optimal capital structure in between.

Formula Present value formula and discount factor?

PV = CF ÷ (1 + r)^n

Discount factor = 1 ÷ (1 + r)^n

Example: $100 in 3 years at 10% → 100 ÷ 1.331 = $75.13.

Concept How does an LBO work and what drives returns?

A financial sponsor buys a company using mostly debt (often 40–60%), uses the company's FCF to pay down debt, and exits after 3–7 years.
Returns come from:

EBITDA growth
Multiple expansion (exit multiple > entry)
Debt paydown (equity's share of EV rises)

Targets: 20–25% IRR, 2–3x MOIC.

Concept What makes a good LBO candidate?

Stable, predictable cash flows
Low capex needs and working capital
Strong market position
Low existing debt and assets to borrow against
Cost-cutting or operational upside
A clear exit path (trade sale, IPO)

Concept Quick rules for whether an acquisition is EPS accretive?

All-stock: accretive if the acquirer's P/E > the P/E paid for the target
All-cash (debt): accretive if the target's earnings yield at the price paid (NPAT ÷ price) > the after-tax cost of debt
Cash on hand: compare with the after-tax interest forgone

Synergies make deals more accretive; EPS accretion does not mean value creation.

Concept How do you think about synergies in M&A?

Cost synergies: overlapping costs, procurement, sites. More credible
Revenue synergies: cross-selling, pricing. Less reliable

Value = PV of after-tax synergies, less integration costs, phased in. Paying a premium above the synergy value destroys value for the acquirer.

Concept From DCF enterprise value, how do you get to value per share?

Equity value = EV − Debt − Lease liabilities* − NCI − Preference shares + Cash + Associates/non-operating assets

Value per share = Equity value ÷ Diluted shares

*If leases are treated as debt in the FCFF (post-AASB 16 cash flows).

Section

Ratios

Notes

Profitability and returns

Margin = Profit line ÷ Revenue (gross, EBITDA, EBIT, NPAT)

ROE = NPAT ÷ Average equity

DuPont: ROE = (NPAT ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity)

ROA = NPAT ÷ Average total assets

ROIC = EBIT × (1 − t) ÷ Invested capital (IC = NWC + net PP&E + intangibles ≈ Debt + Equity − Cash)

ROCE = EBIT ÷ (Total assets − Current liabilities)

Value is created only when ROIC > WACC.

Working capital

DSO = Receivables ÷ Revenue × 365

DIO = Inventory ÷ COGS × 365

DPO = Payables ÷ COGS × 365

Cash conversion cycle = DSO + DIO − DPO

Leverage and liquidity

Net debt ÷ EBITDA (above ~3x is high for most industrials)

Gearing = Net debt ÷ (Net debt + Equity)

Interest cover = EBIT ÷ Net interest (below ~3x is a concern)

Current ratio = Current assets ÷ Current liabilities

Quick ratio = (Current assets − Inventory) ÷ Current liabilities

Growth

Like-for-like (same-store) sales strip out new stores; total growth = LFL + new space
Organic growth strips out acquisitions and FX (constant currency)

Sustainable growth = ROE × (1 − Payout ratio)

Degree of operating leverage = %Δ EBIT ÷ %Δ Revenue

Cards: tap a question to reveal the answer

Formula Define gross, EBITDA, EBIT and NPAT margin.

Margin = Profit line ÷ Revenue

Gross: (Revenue − COGS) ÷ Revenue; pricing power and sourcing
EBITDA: operating profit before D&A
EBIT: operating profit after D&A
NPAT: after interest and tax

Formula ROE and its DuPont breakdown?

ROE = NPAT ÷ Average equity

ROE = (NPAT ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity)

ROE = Margin × Asset turnover × Equity multiplier (leverage)

Shows whether ROE comes from profitability, efficiency or debt.

Formula ROA formula?

ROA = NPAT ÷ Average total assets

Some use EBIT × (1 − t) to keep it independent of financing. Useful for banks (ROA ~1%) and asset-heavy firms.

Formula ROIC formula and why it matters?

ROIC = NOPAT ÷ Invested capital = EBIT × (1 − t) ÷ IC

IC = NWC + Net PP&E + Intangibles ≈ Debt + Equity − Cash

Growth creates value only when ROIC > WACC. Best single measure of business quality.

Formula ROCE formula?

ROCE = EBIT ÷ (Total assets − Current liabilities)

Pre-tax and common in Australian and UK reporting and remuneration hurdles. Similar to ROIC but before tax and with a balance-sheet definition of capital.

Formula DSO, DIO, DPO and the cash conversion cycle?

DSO = Receivables ÷ Revenue × 365

DIO = Inventory ÷ COGS × 365

DPO = Payables ÷ COGS × 365

CCC = DSO + DIO − DPO

Days between paying suppliers and collecting from customers. Lower (or negative) is better.

Formula Current ratio vs quick ratio?

Current ratio = Current assets ÷ Current liabilities

Quick ratio = (Current assets − Inventory) ÷ Current liabilities

Quick ratio excludes inventory because it may be slow to convert to cash. Retailers often run below 1 comfortably.

Formula Net debt/EBITDA and gearing: definitions and comfort levels?

Leverage = Net debt ÷ EBITDA

Gearing = Net debt ÷ (Net debt + Equity)

Below ~1.5x is conservative; above ~3x is high for most industrials; banking covenants often sit around 3–3.5x. Infrastructure and REITs run higher.

Formula Interest cover?

Interest cover = EBIT ÷ Net interest expense (or EBITDA ÷ interest)

Below ~3x is a concern; a common lender covenant.

Concept Like-for-like (same-store) sales vs total sales growth?

LFL: growth from stores open in both periods (usually 12+ months). Shows underlying demand
Total growth = LFL + new space − closures

A retailer can show strong total growth from rollout while LFL is negative, which is a warning sign.

Concept Organic growth vs reported growth?

Organic growth strips out acquisitions, divestments and FX movements (constant currency). Reported growth can be flattered by acquisitions; organic shows how the existing business is doing.

Concept What is operating leverage?

When a large share of costs is fixed, EBIT grows faster than revenue in good times and falls faster in bad times.

DOL = %Δ EBIT ÷ %Δ Revenue

Retailers with fixed rent and staff costs have high operating leverage to LFL sales.

Interview When can a high ROE be a bad sign?

Driven by high leverage rather than margins or turnover (check DuPont)
Equity shrunk by buybacks, write-downs or accumulated losses
Negative or tiny equity making the ratio meaningless
A one-off gain inflating NPAT

Interview A company's inventory days have jumped. What might it mean?

Sales slowing faster than buying (bad: markdown risk ahead)
Obsolete or slow-moving stock
Deliberate stock build ahead of a season, supply chain issues, or price rises

Check gross margin trends and the commentary. Rising inventory with falling margin is a red flag.

Formula Payout ratio and sustainable growth rate?

Payout ratio = DPS ÷ EPS

Retention ratio = 1 − Payout ratio

Sustainable growth g = ROE × Retention ratio

Growth that can be funded from retained earnings without new equity or more leverage.

Section

Accounting traps

Notes

AASB 16 leases (lessee)

Line	Pre-AASB 16	Post-AASB 16
Rent	Opex, above EBITDA	Gone
Depreciation	–	ROU asset depreciation
Interest	–	Interest on lease liability
EBITDA	Lower	Higher
NPAT (early years)	Higher	Lower (interest is front-loaded)
CFO	Lower	Higher (principal moves to CFF)
Net debt	Excludes leases	Includes lease liabilities if you choose

Rule: post-AASB 16 EBITDA pairs with EV including lease liabilities; pre-AASB 16 EBITDA (rent deducted) pairs with EV excluding leases. Many ASX retailers report "pre-AASB 16" underlying numbers.

Other traps

Topic	What to know
Share-based payments	Non-cash expense at grant-date fair value over vesting; a real cost through dilution
Deferred tax	DTL when accounting profit > taxable profit (e.g. accelerated tax depreciation); DTA from tax losses and provisions
Goodwill	Price paid − fair value of net identifiable assets; not amortised; annual impairment test
Capitalised costs	Boost EBITDA now; watch software/development capitalisation trends
Revenue (AASB 15)	Five steps; customer deposits sit as contract liabilities until delivery
Consolidation	>50% consolidate with NCI; 20–50% equity-account; <20% fair value
Inventory	FIFO or weighted average; LIFO banned under IFRS; lower of cost and NRV

Earnings quality red flags

CFO persistently below NPAT
Receivable or inventory days rising faster than sales
"One-off" significant items every year
Rising capitalisation of costs, lengthening useful lives
Auditor changes, qualified opinions, related-party dealings

Cards: tap a question to reveal the answer

Concept What does AASB 16 do to a lessee's financial statements?

Leases go on balance sheet: a right-of-use asset and a lease liability.

Rent expense disappears; replaced by ROU depreciation + lease interest
EBITDA up a lot, EBIT up slightly
NPAT down in early years (interest is front-loaded)
CFO up, CFF down (principal in CFF); total cash unchanged
Net debt up if leases are included

Interview How do you compare EV/EBITDA across companies when leases are involved?

Be consistent:

Post-AASB 16: EBITDA (rent excluded) with EV including lease liabilities
Pre-AASB 16: EBITDA after deducting rent with EV excluding leases

Never mix. Many ASX retailers report "pre-AASB 16" underlying numbers; EV/EBIT is less distorted.

Concept How is share-based payment expense accounted for?

Measured at grant-date fair value (option pricing model) and expensed over the vesting period, with a credit to the SBP reserve in equity.
Non-cash, so added back in CFO, but it costs shareholders through dilution. Many companies exclude it from "adjusted" earnings; be sceptical.

Concept What creates deferred tax liabilities and assets?

Timing differences between accounting and tax:

DTL: accounting profit > taxable profit now, e.g. tax depreciation faster than accounting depreciation. Tax is deferred
DTA: taxable profit > accounting profit now, e.g. provisions not yet deductible, tax losses carried forward

A large DTA from losses has value only if future profits are likely.

Concept How does goodwill work under IFRS/AASB?

Goodwill = Price paid − Fair value of net identifiable assets acquired

Not amortised. Tested for impairment at least annually by comparing carrying amount with recoverable amount (value in use or fair value less costs to sell).
Impairments are non-cash, usually not tax-deductible, and signal the acquisition underdelivered.

Concept Why watch capitalised costs (software, development)?

Capitalising moves spending from opex (hits EBITDA now) to an intangible asset (amortised later, below EBITDA). It inflates EBITDA and EBIT in the short term.
Red flags: capitalised amount rising faster than revenue, capitalised ÷ total spend rising, short amortisation lives being lengthened.

Concept AASB 15 revenue recognition: the five steps?

Identify the contract
Identify performance obligations
Determine the transaction price
Allocate the price to the obligations
Recognise revenue when (or as) each obligation is satisfied

Deposits received before delivery are contract liabilities, not revenue (e.g. furniture retailers recognise revenue on delivery).

Concept Subsidiary vs associate vs investment: how is each accounted for?

Ownership	Treatment
>50% (control)	Consolidate 100%; show NCI in equity and profit
20–50% (significant influence)	Equity accounting: one line for share of profit, one asset line
<20%	Financial asset at fair value

Concept How should you treat "one-off" significant items that appear every year?

As operating costs. If restructuring, impairments or "transformation" costs recur, they are part of running the business. Add them back into underlying earnings, or at least average them, before applying a multiple.

Concept How is inventory measured under AASB/IFRS?

At the lower of cost and net realisable value. Cost uses FIFO or weighted average; LIFO is banned under IFRS (allowed under US GAAP).
Write-downs to NRV hit COGS and gross margin.

Concept What are provisions and how can they be used to manage earnings?

Liabilities of uncertain timing or amount (warranties, restructuring, make-good, employee leave, legal). Booking one expenses it now; using it later is non-cash.
Risk: over-providing in a bad year ("big bath") and releasing it later to boost profit ("cookie jar"). Watch provision movements in the notes.

Concept What should you check when a company reports "adjusted EBITDA"?

What is excluded: SBC, restructuring, acquisition costs, AASB 16 effects
Whether exclusions recur
Whether it reconciles to statutory numbers
Whether it matches the definition used by consensus and peers

The more adjustments, the more scepticism.

Concept What effect do longer useful lives for depreciation have?

Lower annual depreciation → higher EBIT and NPAT, with no change in cash. Compare D&A ÷ capex and D&A ÷ PP&E over time and with peers; a falling ratio may mean lives are being stretched.

Concept List common earnings quality red flags.

CFO persistently below NPAT
Receivable or inventory days rising faster than sales
Recurring "one-off" items
Rising capitalisation of costs or lengthening useful lives
Big provision releases
Auditor changes, qualified opinions, related-party transactions

Interview A company extends the useful life of its assets. Walk through the effect on the statements.

IS: depreciation down → EBIT and PBT up; tax expense up; NPAT up.
Cash: no change, because tax depreciation follows tax rules, not accounting lives. The higher tax expense is deferred (DTL up).
BS: PP&E higher than otherwise; retained earnings up; DTL up.
Profit up, cash unchanged: a lower-quality earnings boost.

Section

Australia-specific

Notes

Franking credits

Company tax already paid (30%, or 25% for base-rate entities) is attached to dividends as franking credits. Resident shareholders include the grossed-up dividend in income and get a tax offset for the credit.

Franking credit = Cash dividend × Franking % × t ÷ (1 − t)

Grossed-up dividend = Cash dividend + Franking credit

A fully franked 70c dividend carries a 30c credit → 100c grossed up.

ASX reporting

Document	What	Deadline
Appendix 4D	Half-year report	Within 2 months of half-year end
Appendix 4E	Preliminary final report	Within 2 months of year end
Annual report	Full statutory accounts	Within 3 months of year end
Quarterly (4C / 5B)	Cash flow reports for some entities and explorers	1 month after quarter

June year-end companies report in February (half) and August (full): "reporting season".
Continuous disclosure (LR 3.1): price-sensitive information must be released immediately.

Typical Australian DCF inputs

rf: 10-year Australian Government bond (ACGB) yield
ERP: about 6% is common practice
Beta: vs the S&P/ASX 200; adjusted beta = 0.67 × raw + 0.33
Corporate tax: 30%

Capital raisings

Type	Who	Notes
Placement	Institutions	15% capacity under LR 7.1 (+10% under 7.1A for eligible small/mid caps); usually a 5–10% discount
SPP	Retail holders	Up to $30,000 per holder in 12 months
Entitlement offer	All holders pro rata	Renounceable or not; accelerated (ANREO/AREO)

TERP = (Old shares × Price + New shares × Offer price) ÷ (Old shares + New shares)

Cards: tap a question to reveal the answer

Concept How do franking credits work?

Australia's imputation system: tax a company has paid (30%, or 25% for base-rate entities) is passed to shareholders as franking credits attached to dividends.
Resident shareholders declare the grossed-up dividend and receive the credit as a tax offset (refundable for low-tax investors like super funds in pension phase). Foreign investors generally can't use them.

Formula Franking credit and grossed-up dividend formulas?

Franking credit = Dividend × Franking % × t ÷ (1 − t)

Grossed-up dividend = Dividend + Franking credit

Fully franked 70c → credit 70 × 0.3 ÷ 0.7 = 30c → grossed up 100c.

Concept What does the ASX reporting calendar look like?

Most companies have June year-ends: half-year results in February, full year in August (reporting season)
December year-ends report full year in February and half year in August
Appendix 4D / 4E within 2 months of period end; annual report within 3 months
Many also give AGM trading updates (Oct–Nov), a common time for guidance changes

Concept What is continuous disclosure (ASX Listing Rule 3.1)?

Listed entities must immediately disclose information a reasonable person would expect to have a material effect on the share price (unless an exception applies). This drives trading halts and unscheduled earnings upgrades or downgrades between results.

Concept What inputs would you typically use for an Australian company's WACC?

rf: 10-year ACGB yield (check the current yield)
ERP: about 6% (common practice; some use 6–7%)
β: regressed against the S&P/ASX 200; adjusted β = 0.67 × raw + 0.33
Kd: current borrowing cost (base rate + margin), after 30% tax
Weights: target or peer-average net debt ÷ EV

Concept What are the main ways ASX companies raise equity?

Placement: to institutions, quick; 15% annual capacity under LR 7.1 (plus 10% under 7.1A for eligible small/mid caps); usually priced at a 5–10% discount
SPP: lets retail holders buy up to $30,000 at the placement price
Entitlement offer: pro-rata to all holders; renounceable (rights tradeable) or not; often accelerated (ANREO/AREO)

Formula Theoretical ex-rights price (TERP)?

TERP = (Old shares × Pre-offer price + New shares × Offer price) ÷ (Old shares + New shares)

The discount to TERP (not to the last price) is the true discount offered in an entitlement offer.

Concept What is a DRP and what does it do to per-share numbers?

Dividend reinvestment plan: holders take new shares instead of cash, often at a small discount. The company keeps the cash, but the share count rises, diluting EPS and DPS for holders who don't participate. An underwritten DRP is effectively an equity raise.

Section

Markets & macro

Notes

Bonds

Price and yield move inversely: fixed coupons are worth less when new bonds pay more

% price change ≈ − Modified duration × Δ yield

Credit spread = corporate yield − government yield; spreads widen in stress

Yield curve

Shape	Usually signals
Normal (upward)	Expected growth, term premium
Flat	Transition, tightening late in a cycle
Inverted	Markets expect rate cuts; a recession signal

RBA

The Monetary Policy Board sets the cash rate at 8 meetings a year, targeting 2–3% CPI inflation (aiming for the midpoint).

Rates and equity valuations

Higher rates → higher rf → higher WACC → lower PV
Long-duration equities (growth, cash flows far out) fall most
Bond proxies (REITs, utilities, infrastructure) are rate-sensitive
Banks can benefit from higher rates through net interest margin, up to a point

FX and commodities

Driver	Winners	Losers
Weaker AUD	Exporters, USD earners (miners, CSL, JHX)	Importers paying USD (furniture, apparel retailers)
Higher iron ore	BHP, RIO, FMG, federal budget	Steelmakers
Higher oil	Energy producers	Airlines, transport

Fisher: (1 + nominal) = (1 + real) × (1 + inflation)

Cards: tap a question to reveal the answer

Concept Why do bond prices fall when yields rise?

A bond's coupons are fixed. When market yields rise, new bonds pay more, so existing bonds must fall in price until their yield to maturity matches the market. Price is the PV of fixed cash flows; a higher discount rate means a lower PV.

Formula What does modified duration tell you?

% price change ≈ − Modified duration × Δ yield

Duration 7, yields up 0.5% → price ≈ −3.5%. Longer maturity and lower coupon → higher duration. Convexity makes the true move slightly better than the estimate.

Concept What do different yield curve shapes signal?

Normal (upward sloping): investors want a term premium; growth expected
Flat: transition, often late in a tightening cycle
Inverted: short rates above long rates; markets expect cuts; historically a recession signal

Steepening and flattening trades position for these shifts.

Concept How does the RBA set monetary policy?

The Monetary Policy Board sets the cash rate target at 8 meetings a year. The mandate: CPI inflation of 2–3% (aiming for the midpoint) and full employment.
The cash rate feeds into bank funding costs, mortgage rates, the AUD and asset valuations.

Concept How do rising interest rates affect equity valuations?

Higher rf → higher cost of equity and WACC → lower PV of future cash flows
Long-duration stocks (growth, cash flows far in the future) fall most
Bond proxies (REITs, utilities, infrastructure) fall as yields compete
Higher interest costs hit levered companies; consumer spending slows
Banks may benefit from wider net interest margins, until bad debts rise

Concept Which companies do better and worse under high inflation?

Better: pricing power, real assets with indexed revenue (toll roads, some REITs), low capital intensity, commodity producers.
Worse: input-cost heavy with weak pricing power, fixed-price contracts, long-duration growth stocks (via higher rates), consumer discretionary as real incomes fall.

Concept How does a weaker AUD affect ASX companies?

Winners: exporters and USD earners (miners, CSL, James Hardie, Aristocrat), whose foreign earnings are worth more in AUD
Losers: importers paying in USD (furniture and apparel retailers like Nick Scali, unless hedged), and companies with USD costs

Check hedging policies: they delay the effect.

Concept Which commodity prices matter most for the ASX?

Iron ore: BHP, Rio Tinto, Fortescue, and the federal budget
Oil and LNG: Woodside, Santos; higher oil hurts airlines (Qantas) and transport
Gold: Northern Star, Newmont, Evolution
Copper, lithium: growth and battery-metal names

Concept Growth vs value stocks: why do they react differently to rates?

Growth stocks' value sits in cash flows far in the future (high equity duration), so a higher discount rate cuts their PV more. Value stocks earn more of their value now (low duration).
So rising rates tend to favour value; falling rates favour growth.

Formula Real vs nominal rates: the Fisher equation?

(1 + nominal) = (1 + real) × (1 + inflation)

≈ nominal − inflation for small numbers. Breakeven inflation = nominal bond yield − inflation-linked bond yield. Keep DCFs consistent: nominal cash flows with nominal WACC.

Concept What is a credit spread and what does widening signal?

Credit spread = Corporate bond yield − Government bond yield of same maturity

Compensation for default and liquidity risk. Widening signals rising perceived risk or stress (often ahead of equity weakness); tightening signals risk appetite.

Section

Pitching a stock

Notes

Two-minute pitch structure

One line: what the company does and why it matters now
Call: BUY/HOLD/SELL, price target, upside (TSR incl. dividends)
Thesis: 2–3 points where you differ from consensus, each with evidence
Valuation: method and what is priced in
Catalysts: dated events that will show you are right
Risks: what would prove you wrong, and how you would know

A good catalyst is

Specific and dated (results date, AGM, regulatory decision, contract award)
Observable, and able to move consensus estimates
Not "the market will eventually realise"

Follow-up questions to prepare

What is priced in? Who is on the other side of the trade?
What is the bear case? What would make you sell?
Why now? What does consensus get wrong?
What is your biggest risk, and how would you size the position?

Ratings (typical bands)

Rating	Expected 12-month TSR
BUY	Above ~15%
HOLD	~0–15%
SELL	Negative

Cards: tap a question to reveal the answer

Interview What's the structure of a strong two-minute stock pitch?

One line: what the company does
Call: BUY/HOLD/SELL, price target, expected TSR
Thesis: 2–3 points where you differ from consensus, with evidence
Valuation: method and what is priced in
Catalysts: dated events that will prove you right
Risks: what would prove you wrong, and how you'd know

Concept What is a variant view, and why does it matter?

Where your view differs from consensus, and why you're right. If you agree with the market, there is no reason for the price to move.
Show it with evidence (channel checks, data, a different read of the numbers) and quantify it: "consensus has X; I have Y because...". A reverse DCF shows what the market is assuming.

Concept What makes a good catalyst?

Specific and dated (results, investor day, regulatory decision, contract award, capital management)
Observable: you will know if it happened
Able to move consensus estimates or the multiple

"The market will realise it's undervalued" is not a catalyst.

Concept How should you present risks in a pitch?

Separate thesis-breaking risks from noise
Quantify (e.g. "each 1% of LFL is ~3% of EBIT")
State what would prove you wrong (a falsification test) and what you'd watch
Give mitigants, but don't dismiss risks

Concept How do you set and express a price target?

Usually a 12-month target from a blend of DCF and multiples (e.g. forward P/E or EV/EBIT on next year's earnings).

Expected TSR = (Price target ÷ Price − 1) + Dividend yield

State the method, the key assumption, and the upside.

Interview How do you defend a HOLD rating in an interview or committee?

Rating bands: e.g. BUY above ~15% TSR, HOLD ~0–15%
Explain why the business is good but the price is fair, or why the risks balance the upside
State what would move you to BUY (price level, catalyst, data point)
For a held position, HOLD can mean "retain": the thesis is intact, just less upside

Interview What follow-up questions should you prepare for after a pitch?

What is priced in? What does consensus assume?
What's the bear case, and what's your downside?
Why now?
Who is on the other side of the trade?
What would make you sell?
How would you size it, and what's the liquidity?
How good is management, and how are they paid?

Interview How do you answer "why now?"

Point to timing:

A near-term catalyst (results, cycle turn, new product)
A valuation dislocation (sold off on a temporary issue)
Sentiment or positioning extremes
An inflection in a key driver showing up in data

Interview How would you structure a short pitch?

Same structure, flipped: why consensus is too optimistic, the catalyst that will show it, valuation downside.
Add short-specific points: borrow availability and cost, short interest (crowding), squeeze risk, and a stop-loss. Unlimited downside means tighter risk management.

Concept What makes an investment thesis good?

Few drivers (2–3), each quantified
Differs from consensus (a variant view)
Falsifiable: clear signs you're wrong
Backed by evidence, not narrative
Linked to valuation: if you're right, the stock re-rates by X