• 019 08/03/2014

    It's always helpful to see new vocabularly in different context. And even more so if it's interesting... Below you will find mention of the p/e ratio as it relates to valuation in international markets and corrupt government practice.

    The Economist reports:

    Russian stocks trade on a huge discount to much of the rest of the world, with an average price-earnings ratio (p/e) of just 5.2. At present, the Russian market has a total value of $735 billion. If it traded on the same p/e as the average emerging market (12.5), it would be worth around $1.77 trillion.


    At the global level, investors have learned to shrug off geopolitical risk. Ever since the first Gulf war of 1991, when markets rallied as soon as the fighting started, the pattern has been the same. Markets may wobble for a few days over wars, or rumours of wars. But no recent crisis has resulted in anything more than a regional conflict, nor has any resulted in the kind of economic disruption that occurred in the 1970s, when soaring oil prices fostered stagflation. Indeed, investors seem to have great faith that most problems can be solved by central banks, either in the form of near-zero interest rates or bond-buying programmes.

    Yet the same is not true at the level of individual countries, where political risk still clearly applies. Several other countries show evidence of what might be dubbed the “DOG factor”: a discount for obnoxious governments. Iran, like Russia a target of Western sanctions, trades on a p/e of just 5.6 and has a total stockmarket value of $131 billion; were it to be rated on a par with the average emerging market, its market value would be $292 billion, so its DOG factor is $161 billion or 55%.

    Argentina’s government has manipulated its inflation rate, defaulted on its debt back in 2001 and, thanks to the legal battle that ensued, may do so again in a few days’ time. Its stockmarket trades on a price-earnings ratio of 6.1. As a result, its total value is $56 billion, rather than the $115 billion it might have commanded (a DOG factor of 51%). After its hyperinflationary episode last decade, Zimbabwe’s rating has recovered a bit, although it still lags the emerging-market average.

    For the full article click the image on the right or HERE.


  • 018 08/01/2014

    The cash flow statement doesn't always get the attention it deserves. If you think about valuation metrics most frequently cited in the press or analyst reports, most pull from the income statement: price-earnings ratio (P/E ratio), earnings per share (EPS), multiples of EBITDA, multiples of revenue, etc. This might encourage anyone new to valuation or financial modeling to spend a disproportionate amount of time examining the income statement.

    For this reason I wanted to provide the passage that follows. It is taken from a PwC report emphasizing the importance of the cash flow statement:

    The statement of cash flows is regarded by many users of the financial statements in a number of industries as the most important financial statement. When combined with other financial information, the statement of cash flows can be a useful tool to analyze key relationships in the financial statements, evaluate past performance, and predict future performance. Further, because the income statement uses the accrual method, the statement of cash flows is needed to show cash generated and spent.

    The statement of cash flows can reveal circumstances in which earnings growth does not correlate with operating cash flow growth. This may alert users to the need to look closely at the drivers of earnings or may be an indicator of other lifecycle considerations for emerging or declining businesses. The statement also facilitates a user’s assessment of a company’s ability to generate cash from core business activities, which is often a key variable when valuing a business and assessing its ability to repay debt, make capital expenditures, and pay dividends.

    Credit rating agencies, investors, and analysts utilize cash flow information when developing valuation models. The transparency of historical cash flow information, including cash inflows and outflows from operating activities, can promote a better understanding of a company’s relative performance and enhance the predictive value of its cash flow results.

    For the PDF file please click the logo on the right or follow this LINK.


  • 017 07/23/2014 Where to Learn Financial Modeling

    While I hope that ASimpleModel.com becomes an integral part of anyone's learning process, I believe that learning this skill set requires exposure to multiple sources. For that reason I am posting a list of resources. These resources have been picked using the collective findings of many internet searches, and commentary on sites like Reddit and Quora. For the time being I am including three categories: Free Resources, Books and Paid Programs. 

    Sources have been organized in alphabetical order by topic. It is entirely a coincidence that ASimpleModel is listed at the top...


    ASimpleModel.com - In my highly biased opinion this is an incredible resource that should be used by every human all the time. More realistically... ASimpleModel was built for the novice modeler. It is a starting point from which many great options exist for continued learning. The comment that I was most pleased to find while searching online is that it is "on par with the summer intern training at a bulge bracket investment bank." 

    Macabacus.com - Macabacus is an incredible resource. The site provides excel templates with a lot of detail. Many are so granular that you are not likely to encounter them in a professional environment. Regardless, the material provides an excellent example. You will also find explanations for topics such as Asset and Stock Deals and Purchase Price Allocation. Compared against ASimpleModel I would say that the material is more advanced.

    NYU Stern Prof. Aswath Damodaran - Professor Aswath Damodaran is legend when it comes to valuation. You will not get far searching the internet for information on valuation or financial models without coming across his name. Compared against ASimpleModel I would say that the material is more academic in nature (as well as more advanced). He is a professor at heart, and a great one. As an example please see his gracious response to Bill Gurley (partner at Benchmark, a VC firm) detailing two contradictory valuations of Uber


    Financial Modeling - I would highly recommend this text to those interested in financial modeling that desire, or require, a deeper understanding of financial topics. The text also covers portfolio analysis and therefore statistical analysis, as well as options pricing models.

    Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions - As the title suggests, this book is oriented towards those interested in an entry-level position in investment banking. In addition to covering the various aspects of valuation and modeling, the text also covers the process of moving through a transaction and describes the documents required. If you want to work in IB, this book is for you.


    The entities listed below are the most commonly referenced paid programs. Unfortunately I cannot offer much insight here. From what I read it appears that all three are well liked, and that most recommend the program they attended. The biggest advantage of these programs (in my opinion) is live instruction. 

    Breaking Into Wall Street

    Training the Street

    Wall Street Prep

    This is a curated list (not comprehensive). Certainly more than eight resources exist, but I believe this combination of resources provides all material required in enough formats to match most learning styles.

    Please email me (peter@ASimpleModel.com) if you believe anything has been omitted. 



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.