2010 Recruitment

Day One

Banking Track
Case Study
Candidate Brief
The Case is dated 2005, please read all dates with 2005 as current date.

Introduction

For the purpose of this exercise you are to assume you are working as a Graduate Trainee with an
investment professional in a large bank’s named ABC Capital’s network. The precise nature of your
current role is not relevant, nor do you need any knowledge of the bank, its systems or procedures in
order to do this exercise.

This is not a test of your technical knowledge or skill and you will not be assessed on this. Rather, we
are looking to see how well you can analyse information under time pressure and how you construct
and communicate arguments. Naturally, if you feel it is relevant to your argument, feel free to bring in
any specific points from your general knowledge or experience.

The names of the organisations, characters and shares in this exercise are fictional. However, the
issues and nature of the problems are realistic and exemplify those you would face as a graduate
trainee at a ABC Capital.

Overview of the case study structure

The case study is in two parts:
1. Individual presentation preparation (get it prepared before an interview)
2. Meeting with the Managing Director (during the interview)

The first part of the case study requires you to read some information and then write a short
presentation based upon it. You may want to prepare your own notes to support the presentation.

Following this, you will meet with Joe Sakic, the Managing Director of your bank. This meeting will last
15 minutes during which you will present your advice (10 minutes) and respond to any questions (5
minutes). The role of Joe Sakic will be played by the guest lecturer.

Full instructions for each of the two parts of the case study are attached.

2
 Part One: Individual Preparation
ABC Capital is the global private equity business of ABC Bank and one of Europe's leading private
equity providers, with a main focus on mid-market (leveraged) buy-outs, expansion capital and public-
to private deals. It has EUR 2.3 bln of funds under management and typically invests in companies
with an enterprise value of at least EUR 300 mln. ABC Capital’s network consists of buy-out1 and
dedicated sector teams in various countries.

Todd Bertuzzi, a Director with ABC Capital has specifically requested your assistance in finalising the
investment decisions of the most recent fund ABC Capital IV. The majority of the capital has been
invested; however EUR 100 mln has not yet been allocated. Todd has informed you that there are two
areas that they have yet to invest in: Telecommunications and Healthcare.

Shortly, you will meet with Joe Sakic, the Managing Director of ABC Capital. This is the first time that
you have met. Joe had asked to see Todd to talk through ABC’s recommendations but unfortunately,
Todd had to fly to an important meeting at short-notice. As a result, Todd has asked that you meet
with Joe and present your recommendations for ABC Capital and answer any questions relating to
your recommendations.

Figure 1: ABC Capital IV current portfolio

Date of
Compa
acquisition
Source: ABC Bank

Detaile
Jan-05
You have been asked to target the Telecommunications and Healthcare industries in Eldorado and
identify how the remaining EUR 100 mln can best be invested for ABC Capital IV.

Resear
Due to the closing documents of the fund, there is a deadline on investment decisions and therefore
this is a pressing matter. You are to decide what will be the best course of action going forward. You
must decide the following:

1. In which industry an acquisition is to take place: the Telecommunications sector, Healthcare

sector, or neither.

1 The purchase of a (significant if not all of a) company or business

3
ACME
 2. Once you have determined which industry you want to invest in, you must decide which
company you want to invest in and what your buying strategy will be in terms of debt: equity
ratio. Your analysis should encompass:

 Strategic rationale for transaction – e.g. customer base, industry position of the target;
 Financial rationale. You may wish to consider the resultant financial position of the target;
 Issues relating to the companies’ stakeholders (e.g. shareholders, management, employees,
customers and creditors e.g. banks); and
 Any other issues that you believe that the ABC Capital ought to consider when appraising the
industries and companies;
 The criteria which you have used to analyse and compare the different industries and
companies.

3. The timeline on your investment is a 3-5 year time horizon, as with all smart Private Equity
firms, you are required to advise on a post acquisition strategy. Your strategy should
encompass within this period:

 Will you focus on a long term hold and grow the company from within?
 Is there a possible merger or acquisition that can occur?
 Could productivity increase with a divestiture of assets?
 Give your clear recommendation as to the course of action that should be taken.

4. Finally, you must create a draft report in which you outline your recommendations. This will
be read by Joe Sakic, the Managing Director of ABC Capital, whom you will meet with after
you have completed this part of the case study.

An explanation of key financial ratios used in this document is included in the Glossary found at the
end of this document.

You have 90 minutes to read through the information and prepare your presentation.

Bank Financing
ABC Bank’s chief economist has forecast a low interest rate environment for the next five years;
making debt financing highly attractive for acquisitions. You have been advised by your credit
committee that since companies in the telecom sector have been able to traditionally generate a lot of
free-cash flow; they have historically been highly geared. In financing acquisitions of
telecommunications firms, banks are comfortable lending debt-capital to Private Equity houses of up to
90% of the total enterprise value of company (the remaining 10% being provided by equity from the
Private Equity house). The equivalent ratio for the healthcare industry is 80:20. You have been told
that these ratios have only been considered for the complete buy-out of companies.

4
ELDORADO – TELECOMMUNICATIONS SECTOR
ELDORADO’s mobile telecommunications market is one of the most attractive telecommunications
markets in Europe with a subscriber base of approximately 10.8 mln subscribers.

Key Attractions:

 third largest telecommunications market in Europe: telecom spending of EUR 3.0 bln
amounts to 3% of GDP - in line with EU averages.
 strong historical growth and high current penetration: the Eldorado mobile
telecommunications market has one of the highest mobile penetration rates in Europe (over
110% in 2005F). The sector enjoyed substantial growth during 2000 to 2005F at a growth rate
of 5.1% and is expected to continue growing at a rate of 3.8% until 2009.
 attractive mobile returns: even though Average Revenue Per User (“ARPU”) in Eldorado is
lower than the European average, the low handset subsidies have allowed operators to
generate highly attractive profit margins.
 significant growth prospects: with wireless broadband, 3G and other additional layered
services penetration currently at around 15%, Eldorado mobile telephony appears to offer
considerable room for growth in these products with projected growth higher than the European
average (6% vs 3% EU average).
 strong cash flow generation: the telecommunications market in general has strong cash flow
generating ability, making the sector an attractive one for buy-out firms who would be able to
pay down debt early.
 developed asset base: the developed network, is favoured by leveraged buy-out firms as it
means that less of the cash flow is diverted to finance capital expansion.

Competitive Landscape
There are currently four mobile network operators active in Eldorado:

 Telecom Freeze (“Freeze”) – 45% market share and an EV of EUR 2.3 bln, is the mobile arm
of Eldorado’s incumbent telecom operator Telecom Eldorado (“TICE”) with an EV of EUR 12
bln;
 Eldorado Cellular (“Cellular”) – 32.5% market share and an EV of EUR 1.7 bln, is the
Eldorado operation of Cellular plc with an EV of EUR 17bln; and
 Subzero – 17.5% market share and an EV of EUR 998mln;
 Slush 3G – 5% market share and an EV of EUR 462 mln, a 3G-only operator and wholly owned
subsidiary controlled by Asian-based conglomerate Slush Limited (“Slush”) with an EV of EUR
25 bln.

Having been the first to launch their mobile operations, Freeze and Cellular have maintained higher
market shares. However, since Subzero launched its operations, market shares of Freeze and
Cellular have been steadily declining as Subzero’s low margin offerings have proven to be very
attractive to new subscribers both in terms of price and services.

5
 Figure 2: Eldorado 2005F mobile telecommunications market size by
subscribers

Slush 3G
5.0%
Subzero
17.5%

Freeze
45.0%

Cellular
32.5% Total market size:
10.8m subscribers

Source: ABC

Anti Monopoly Laws

Any acquisition would be subject to scrutiny by the Competition Commission as consumers must be
given enough choice in all areas of Eldorado. Particular attention will be given to areas where there is
a combined market share greater than 50%.

Future Acquisition / Consolidation

A future acquisition or consolidation will create value for shareholders as increasing scale may enable
increased market share and provide cost savings through combining operations or provide the
opportunity for an Eldorado operator to expand internationally or an international operator to enter the
Eldorado market.

6
ELDORADO – HEALTHCARE SECTOR
Industry Background
The Eldorado private healthcare market has three dominant players, which are shown in the graph
below:

Figure 3: Eldorado healthcare sector

Others
18%

Apollo
Janus 42%
12%

Vesta
2005E Total m arket size:
28%
EUR 873mn

Source: ABC

Within the past 25 years, the government of Eldorado had decided to privatise the Healthcare industry.
Where all clinics and hospitals were originally owned and operated by the government, privatisation
has allowed for Private Equity firms and Institutional Investors to take ownership of numerous facilities.
This arrangement has been beneficial to the government as they no longer have to look after the day
to day operations of their clinics. The government continues to be involved, however, through annual
funding to the sector.

Healthcare services are one of the fastest growing sectors in Europe, with the Eldorado market
particularly attractive given the favourable regulatory and reimbursement environment. The
dominance of three firms within the private sector is attributable to high barriers of entry through new
entrant regulations, as well as increasing start up costs.

As evidenced by the number of private equity firms involved in recent auctions, the healthcare sector
has attracted keen interest from a diverse investor universe. This sector displays unique
characteristics that make its constituents appropriate businesses for leveraged buy-outs including:

 High growth characteristics with stable and growing cash flows

 Low volatility normally found only in non-cyclical sectors such as utilities
 Strong asset base allowing for an aggressive and return enhancing leverage structure

Healthcare
 Large addressable market

The total annual government funds spent on healthcare was EUR 2.1 bln in 2002/03 and is
conservatively estimated to grow to EUR 3.2 bln by 2007/08. These funds are paid out by the
government to help pay for medical costs of the people of Eldorado.

The government has recently addressed the issue that mental health deterioration is a social issue
and has committed to continue to support Healthcare services and treatments to patients. The
government is committed to improving mental health services and has allocated an additional EUR
750 mln to do so.

As part of the new funding that will be coming through government objectives, greater recognition has
been giving to mental healthcare and specialist education and care facilities in Eldorado.

7
 Figure 4: Types of treatments offered by private healthcare clinics

100%
80%
60%
40%
20%
0%
1990 1992 1994 1996 1998 2000 2002 2004

Mental health Alcohol Drugs Weight Other

Source: The Wellbeing Foundation

With a reported EUR 900 mln spent by corporations on specific mental illnesses of employees each
year, many professionals within the Healthcare environment have called this a modern day epidemic.
Favourable response has been given by the public for the government’s proactive move on this issue
by increasing spending.

High barriers to entry

The barriers for any group considering entry into healthcare sectors are extremely high; there are a
significant number of inter-related issues for a business to contend with before it can operate
successfully:

 Regulation

Regulation is stringent and continually evolving. All associated staff must meet the requirements of
numerous commissions including the Healthcare Commission, the Office for Standards in Education
and the Commission for Social Care Inspection, a process that can be extremely costly and time
consuming.

 Customer trust

Although customers are free to go to any clinic, they tend to gravitate towards a few more established
companies; this is more so especially after the numerous stories of practices offering inappropriate
treatment. Significant time is required to build up trust, and establish a brand name amongst
customers.

8
TELECOMMUNICATIONS COMPANY 1: SUBZERO
Background and company description

Subzero was launched in 1999 and is the third largest wireless operator with over 1.9 mln subscribers
and 17.5% market share. In 2005F, its subscriber base grew by around 20% year-on-year, mostly
through the introduction of new offers focussed on increasing on-net traffic and customer loyalty,
innovative services, enhanced distribution channels and a strong focus on churn reduction. The
Company’s financial position has steadily strengthened over the last five years, with sales and
reported EBITDA expected to reach EUR 587 mln and EUR 220mln respectively in 2005.

Strategy

 Low price products: Historically, Subzero’s strategy has been strongly focussed on growing its
subscriber base and on achieving critical mass in the Italian mobile market through an
aggressive price offering. Its tariffs are competitive in most segments of the pre-paid market and
present a significant competitive advantage versus other operators.
 Extensive product offerings: The company differentiates between products aimed at
consumer and business subscribers, providing current and potential subscribers with a wide
choice of tariff plans and the option to selectively add data and value added services based on
personal preferences.
 Strengthen its commercial attractiveness: It has increased market share by focusing on
increasing on-net traffic through the introduction on lower priced calls within the Subzero
network thus increasing the appeal for others to join the same network.
 Reduce churn and increase customer loyalty: Subzero has deployed a number of strategies
focussed at strongly reducing churn and enhancing customer loyalty:
– brand awareness,
– increased distribution and marketing channels,
– excellence in quality of service
– improved quality and breadth of handset offering
 During 2004 to 2005 Subzero has been able to reduce the churn in its customers by 10%.
 Fully developed network: The company’s mobile network is fully developed and compliant
with license requirements and the technological specifications needed to provide high quality
GSM/GPRS/EDGE and UMTS services throughout Eldorado.

Management and shareholders

Subzero was established in 1999, as a joint venture between D-Telecom, EPower and F-Telecom. In
2000, D-Telecom sold its stake in the company, with F-Telecom following suit and selling its
shareholding in 2003, leaving EPower with full ownership of Subzero. 40% of the company was floated
onto the ICE50 last year to raise cash for EPower’s infrastructure developments.

EPower is the largest electricity utility company in Eldorado supplying electricity to all parts of the
country and 1/3 owned by the state of Eldorado. It also owns gas distribution businesses, international
power assets as well as business interests in information technology, real estate and engineering and
construction services including Subzero.

9
 Figure 5: Subzero two-year price performance vs ICE 502

30

20
EUR

10

0
Nov-03 May-04 Nov-04 May-05 Nov-05

Subzero (EUR) ICE50

Source: Two-Trade To-NY

Figure 6: Subzero customer base

Current share p
Market capitalis
Evolution of Cus
Enterprise
Pre-paid valu
52 week
Post-paid high /
2 The ICE 50 index is an index of the top 50 companies on the Eldorado Stock Exchange and is a useful reference when
comparing the share price performance of a specific company against the share prices of the whole market

Total
10
Financial Summary

Figure 7: Extracts from Subzero financial statements

Key financials
Sales
growth
Figure 8: Subzero key ratios

Key ratios
EBITDA
EBITDA
margininterest co
P/E
EBITratio
Gearing
margin 11
TELECOMMUNICATIONS COMPANY 2: SLUSH 3G
Background and company description

Slush 3G Eldorado’s third generation mobile unit was awarded a 3G cellular license in 2000 and
launched its operations in March 2003. After facing considerable early challenges Slush 3G has
grown its operations over the last 2 years to become a leading 3G service provider with 0.5 mln
subscribers at the end of the third quarter 2005, representing a 5% market share. Slush 3G has
gained market share at the expense of Freeze and Cellular by aggressively targeting users with its
video multimedia service (initially), offering attractively priced large bundles of voice and data (more
recently) and offering heavy subsidies on handsets.

Strategy
 3G services provider: Slush 3G has based its business model on providing mobile telephony
services based entirely on 3G technology converging telecommunications, internet and
multimedia. Having opted out of mixed 3G and GSM infrastructures, Slush 3G is able to avoid
higher operational costs and limitations of mixed infrastructures.
 Providing high-added value services: Essentially 3G service providers focus on high-added
value services providing a wide range of media content with internet access and traditional
mobile telephony services. Slush 3G’s market base are customers who are up to speed with
the next generation technologies and require access to high-added value services as part of
their overall cellular package.
 Leading innovative technologies: The company is focused on maintaining its position as a
leader in innovation technologies by employing synergies of IT platforms / systems /
infrastructure, network equipment and mobile terminals and multimedia content from its parent
conglomerate Slush Limited.
 Strategic partnership with handset manufacturers: Slush 3G and its parent company, Slush
Limited, have developed strategic partnerships with handset providers to benefit from
customised technical specifications and lower handset prices.

Management and shareholders

Slush 3G is backed by strong and experienced shareholders; 80% owned by Slush Limited an Asian
based conglomerate that operates in ports and related services; telecommunications and e-
commerce; property and hotels; retail and manufacturing; and energy and infrastructure with a
turnover of ca EUR 20 bln. Slush Limited currently has the largest pure 3G foot print in Europe and is
expected to use the brand and new entrant expertise to become a leader in the next generation of
communications services.

12
Figure 9: Slush 3G two-year share price performance vs. ICE 50

50

40

30
EUR

20

10

0
Nov-03 May-04 Nov-04 May-05 Nov-05

Slush 3G (EUR) ICE50

Source: Two-Trade To-NY

Current share p
Figure 10: Slush 3G customer base

Market capitalis
Evolution of Cus
Enterprise
Pre-paid valu
52 week
Post-paid high /
Total
13
Figure 11: Extracts from Slush 3G key financial statements

Key financials
Sales
growth
Figure 12: Slush 3G key ratios

Key ratios
EBITDA
EBITDA
margininterest co
P/E
EBITratio
Gearing
margin 14
HEALTHCARE COMPANY 1: APOLLO HEALTHCARE SOLUTIONS
Background and company description
Apollo is currently the number 1 operator in the Eldorado healthcare market with an overall market
share of 42%. As one of the early entrants into the private Healthcare market 20 years ago, Apollo
capitalized on the early entrance into the market. With over 150 health centres throughout Eldorado,
Apollo are well known for treating common health issues.

Strategy

 Apollo has established 30 health centres throughout Eldorado that are multi room complexes for
patients requiring extended stays for treatments. Complimenting this are over 120 walk-in
clinics with very quick diagnosis and will refer to the health centres if required.
 Apollo has created a reputation for treating numerous illnesses with its accessible walk-in clinics
and friendly service. Often called the “fast food of Healthcare” these numerous service centres
have been noted for their efficient service.
 The company has a 20-year track record of revenues and profitability growth but believes that
its current options for organic growth are limited.
 Apollo is looking to continue with its strong brand name and dominance in the Healthcare
market. Enjoying such a large percentage of the Healthcare market has allowed Apollo to relax
on growth objectives and concentrate more on operations. This however has lead to a
decrease in growth figures recently.
 With the recent news of government spending on specialized health services increasing, Apollo
would like the opportunity to enter the market. Apollo views this new growing segment as a
great opportunity to add to their already dominant position.

Shareholders

 Apollo is owned by a small group of Private Equity Investors that have input into the governance
of the company. Their holdings in the firm are listed below:

Figure 3: Apollo key shareholders

Name
Artermis Capital
Management
 John Turner, the current chairman, has been with the company since they entered the market.
John, who was a pioneer in the industry, helped Apollo reach its current day dominance thanks
to the business strategy of offering aide to a large variety of illnesses. John realizes that
Apollo’s business strategy has worked to date, however he is concerned that he is not capturing
the market share in the growing mental-health segment. He feels that the firm may not be
dynamic enough to initiate internal change to meet this new sector.

Shrub Fund
Costo' Capital 15
Figure 4: Apollo two-year share price performance vs ICE50

60

50

40
EUR

30

20

10

0
Nov-03 May-04 Nov-04 May-05 Nov-05

Apollo (EUR) ICE50

Source: Eldorado Exchange

Current share p
Figure 5: Apollo benchmark statistics

KeyMarket capitalis
Metrics
Enterprise
Walk in health valu
cen
52 week high
Multi-room comple /
Other 16
Figure 6: Extracts from Apollo financial statements

Key financials
Sales
growth
Figure 7: Apollo key ratios

Key ratios
EBITDA
EBITDA
margin interest co
P/E
EBITratio
Gearing
margin 17
HEALTHCARE COMPANY 2: VESTA LIFE STYLES
Background and company description
Vesta is currently the number two operator in the Eldorado Healthcare market with an overall market
share of 28%. Vesta entered the market 15 years ago, 5 years after Apollo had entered the market.
Realising that they would not be able to capitalise on a new market, Vesta set out early to differentiate
from Apollo. One of Vesta’s early moves was to open clinics in geographical areas where Apollo had
yet to enter. With over 100 health centres throughout Eldorado, Vesta is considered as a decent
alternative to Apollo.

Strategy

 Vesta has sought to be the alternative to Apollo. Vesta was the first firm to initiate a
membership program with its patients where an annual fee is paid - this acts as a discount for
walk in clinics and treatments.
 Vesta has always had respectable revenues and profit margins; initially the firm’s revenues
increased at the beginning due to the membership scheme; however that tailed off within two
years. Vesta has been unable to take a larger market share from Apollo.
 Vesta also had created its business plan around a limited number of core health centres and
numerous walk in centres throughout the country. Positioning themselves in areas where
Apollo had not yet entered, they were able to capture some early markets, but never had the
financial resources to enter markets that Apollo was already present in.
 Five years ago, Vesta initiated Project Salud, a heavy investment program for staff training and
equipment to treat specific illnesses, however there was never emphasis on mental illness. The
resulting capital expenditure placed Vesta at high gearing levels and in financial peril in recent
years. Analysts have assessed that the capital invested could not be expanded to incorporate
mental health treatments without significant additional expenditures.

Shareholders
 Apollo is owned by a small group of Private Equity Investors that have input into the governance
of the company. Their holdings in the firm are listed below:

Figure 8: Vesta key shareholders

Name
ADA Capital
Management
 Vesta’s chairman is Gary Jewels. He recently assumed the position due to the sudden
departure of the former chairman and CEO David Johnson. Mr. Johnson was responsible for
Project Salud, and the Project’s subsequent budget over-spend, it was decided by the Private
Equity Investors that he should leave. Mr. Jewels in now taking over a company that has
always been second best in the market, however has not been showing the profits expected
from a company in this position

Projecto Cascad
18
Figure 9: Vesta two-year share price performance vs ICE50

50

40

30
EUR

20

10

0
Nov-03 May-04 Nov-04 May-05 Nov-05

Vesta (EUR) ICE50

Source: Eldorado Exchange

Current share p
Figure 10: Vesta benchmark statistics

KeyMarket capitalis
Metrics
Enterprise valu
Walk in health cen
52 weekcomple
Multi-room high /
Other 19
Figure 11: Extracts from Vesta financial statements

Key financials
Sales
growth
Figure 12: Vesta key ratios

Key ratios
EBITDA
EBITDA
margin interest co
P/E
EBITratio
Gearing
margin 20
HEALTHCARE COMPANY 3: JANUS WELL-BEING
Background and company description
Janus is currently the number three operator in the Eldorado Healthcare market with an overall market
share of 12%. Janus entered the market 8 years ago specialising in treating specific illnesses. Janus
was created by a group of medical students that sought to create a unique healthcare firm serving
specific needs. With financial backing from one Private Equity firm, they were able to open up 30
healthcare clinics and have since been looking for expansion opportunities.

Strategy
 Janus realized the need for specific mental illness treatments and began its operations
focussing on this segment of the market. Quoting numerous research data, claiming that
employees of corporations would often be diagnosed with mental illnesses too late, Janus
began lobbying the government for increased funding to serve mental illness, and that they
could dramatically cut down the associated healthcare costs.
 Janus’ business plan called for strictly opening up “wellness centres” - multi room complexes
located throughout the city. The centres are considered world class in treatment and facilities.
Patients arriving can expect a peaceful stay in a quiet isolated environment.
 Janus was never concerned with the location of centres in relation to competition since they
considered they were offering different service. The result was that they initially were losing
market share due to the larger firms also in the sector. However, with the specialised service
offered and peaceful facilities they are slowly creating a brand-name for themselves.
 Janus is currently at crossroads. They have the beneficial news that the government is looking
to increase specific spending for their services offered, however the high costs of maintaining
their facilities is starting to catch up with them and a capital injection is needed.

Shareholders
 Janus is owned by a small group of Private Equity Investors that have input into the governance
of the company. Their holdings in the firm are listed below:

Figure 13: Janus key shareholders

Name
Management

Janus Partners
Janus Well-Being is still controlled by James Richardson, CEO, Davide D’Amici, CFO, and George
Karling COO, all three friends that graduated together from Eldorado University, specialising in Biology
and Psychology. Their initial business plan was met with enthusiasm by Goldlever Capital which
opted to invest in these unproven entrepreneurs. However, after 8 years of building the business
capital is beginning to run thin. Things are looking very positive for Janus, with the government
committing more funding, however, a capital injection is needed to continue. James and his
associates have stressed that they are having difficulty with the business side, and would be willing to

Goldlever Capita
give up some control for long term stability with the company.

21
Share price performance vs ICE50

Figure 14: Janus two-year share price performance vs ICE50

15

10

EUR
5

0
Nov-03 May-04 Nov-04 May-05 Nov-05

Janus (EUR) ICE50

Source: Eldorado Exchange

Current share p
Figure 15: Janus benchmark statistics

KeyMarket capitalis
Metrics
Enterprise
Walk in health valu
cen
52 week high
Multi-room comple /
Other 22
Figure 16: Extracts from Janus financial statements

Key financials
Sales
growth
Figure 17: Janus key ratios

Key ratios
EBITDA
EBITDA
margin interest co
P/E
EBITratio
Gearing
margin 23
Glossary of Financial Terms
AVERAGE IN is calculated as a weighted average of the price at which a shareholder originally
PRICE bought their shares

EARNINGS is equal to operating profit after deducting charges for interest and taxation

EBITDA is the operating profit before depreciation and amortisation

ENTERPRISE is calculated as Market capitalisation plus net debt. Enterprise value is a

VALUE measure of the total value of operations of a company, which is shared between
all stakeholders (equity shareholders and debt lenders)

GEARING is calculated as net debt divided by net assets. Gearing measures the relative
quantity of debt with a company has taken on. A company with high gearing
(highly geared or highly leveraged) is a riskier investment than a company with
low gearing as it is subject to more demanding interest payments, but is also
capable of generating higher returns

Net debt
Gearing =
Net assets
INTEREST is the ratio of operating profit to interest payment on debt. Interest cover
COVERAGE indicates how many times interest charges have been earned by the corporation
on a pre-tax basis (i.e. the margin of safety). The amount of safety desirable
depends on the stability of a company’s earnings. A low interest coverage
means that the company is at risk from a fluctuation in earnings that may render
it unable to meet its interest charge and that the level of debt in the company
may be excessive

Operating profit
Interest cover =
Interest expense
INTEREST is the interest charged by the providers of debt finance (e.g. bank loans) to a
EXPENSE company

NET ASSETS is the net total of all the assets and liabilities of a company

NET DEBT Is the bank loans of a company offset by the amount of cash in the company

Net debt = Interest bearing loans - Cash

NET INCOME Is the earnings of a company attributable to common shareholders

OPERATING Is the profit realised on sales after deducting all operating costs but before
PROFIT deducting charges for interest and taxation (EBIT).

PRICE/EARNINGS is the market capitalisation of a company divided by its earnings expressed as a

RATIO (P/E) multiple (e.g. 20 times or 20x). The higher the P/E, the more investors are
valuing a company’s earnings. The higher a company’s P/E ratio compared to
that of its peer, the higher the earnings growth the market is expecting

Price = Total market = Share price per share

capitalisation

24
Earnings Total earnings Earnings per share

25