Monthly Archives: December 2011

EBITDA vs cash flows from operations vs free cash flows

Constant Contact's EBITDA

EBITDA is often used as a proxy for cash flows, but many investment banking analysts and associates struggle with fully grasping how the differences between EBITDA, cash from operations, free cash flows, and other profitability metrics impact when they should be used in valuation.  In this blog post I will try to address some of these topics.

Cash from operations (CFO) as a measure of profitability
First, let’s look at cash from operations (CFO). The main advantage of CFO is that tells you exactly how much cash a company generated from operating activities during a period. Starting with net income, it adds back noncash items like D&A and captures changes from working capital. Here is Wal Mart’s CFO.

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Happy holidays from everyone at WSP!

We wanted to wish all our blog readers happy holidays! Here are some pics from our holiday lunch/gift swap extravaganza…David, Jeff, Anna, and Brad, you guys were missed!

Matan, Neal, and Ziv opening presents

Scott, Matt, Adam, and Paulina barely containing their excitement

Steph watching dutifully over the beer stash

Jefferies bankers that quit have to pay back their bonuses

Jeffries Bonus Memo 2011

Jefferies, the investment bank that has been faced with concerns about its financial health, is mixing things up. In an internal Jefferies memo that was obtained by Charles Gasparino at FOX, year-end bonuses in 2011 will have to be repaid by bankers who voluntarily leave in 2012. According to Jefferies, this will better align the incentives of employees.

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Investment Banking Interview Topic: Net Income vs Cash Flow

The technical side of the investment banking interview is often comprised of valuation questions, capital markets questions, and accounting questions. When it comes to accounting, a favorite interview topic is the relationship between cash flows and net income. It is almost inevitable that a candidate will encounter questions like these (answers at end of article):

  • “if cash flows from operations are consistently lower than net income, what could this be an indication of?” *
  • “can a company showing increasing operating cash flows relative to net income be in financial distress?” **
  • “can a company showing negative cash flows be in great financial health?” ***

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Teenage angst has paid off well, now I trade currencies

Rolling in his grave

As a teenager in the 90s, I  grew up on a steady dose of Nirvana, Pearl Jam, RHCP, Soundgarden, Metallica, and Jane’s Addiction.  Cutting my hair, graduating college, getting a job, and wearing a suit always felt like a bit of a betrayal of my grunge-inspired ethos against all things “corporate.”  Well that self-imposed guilt trip has officially come to an end:

Metallica’s longtime manager, Cliff Burnstein, is accelerating the band’s tour plans to avoid getting sucked into Europe’s debt troubles. With the gloom among investors spreading to richer countries such as France, Mr. Burnstein is worried that the euro will tank, making it harder for concert promoters in the 17 countries that use the currency to pay Metallica’s fees. Continue reading

Zynga valuation – is it really worth 9x revenue?

Zynga founder Mark Pincus will only get a $9b valuation. Solution? Claw back employees' stock options!

Zynga will be going public soon, and according to its prospectus filed this morning, it believes its’ business is now worth $9 billion, despite a $14b third-party valuation just two weeks ago. This of course, comes on the heels of lower valuations for peers like Groupon in recent weeks.

As part of the IPO, Zynga will issue 100m shares at an anticipated per share price of $8.50 to $10, raising approximately $850m-$1b in gross proceeds. With 700m shares outstanding (900m fully diluted) after the IPO, the implied market cap is $9b.** Continue reading

Salary and unemployment rate, by college major

Georgetown’s recent survey provides insight into the salary and unemployment prospects by college major.  Here’s what we learned: if you major in nursing you will definitely find a job (2.2% unemployment).  Also, the study basically confirms what we already know; business, engineering, and computer related majors enjoy the highest wages.  Below are the top twenty five.  For a complete list, click here. Continue reading