Top 4 Must Know Investment Banking Charts With Templates

Investment Banking Charts – Football Field & PE Band Charts

I think the greatest gift of Dan Bricklin (“father” of the electronic spreadsheet) and Bill Gates to investment banking humanity is the Excel spreadsheet software. It allows the analyst to create rock star financial and valuation models and help present their analysis in some awesome pictorial format (graphs).

With this, I thought, why not a tutorial on the most popular investment banking, graphs vs. charts?Graphs Vs. ChartsGraphs are mostly a numerical representation of data which shows the relation of change in numbers to how one number is affecting or changing another. However, charts are the visual representation of categories that may or may not be related to each other.read more. In this article, I will discuss the following set of graphs –

PE ChartPE Band ChartFootball Field GraphScenario Graph (my favorite)

Download the spreadsheet templates for all the graphs here

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Top 4 Must-Know Investment Banking Charts (Free Download Template included) (wallstreetmojo.com)

# 1 – PE Chart

This PE ratioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more is, in essence, a payback calculation. It states how many years’ earnings it will take for the investor to recover the price paid for the shares. PE (price to earnings) charts help us understand the multiple values over time. Other things being equal, when comparing the price of two stocks in the same sector, the investor should prefer the one with the lowest PE. If you are new to PE ratiosPE RatiosThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, you may refer to this valuation primer article on relative valuations.

PE chart helps the investors visualize the trading valuation multiple of stock or index over time. For example, the below PE graph of Foodland Farsi is depicted for March 2002 until March 2007.

Historically, Foodland Farsi has traded an average PE multiple of 8.6x.The standard deviation of the PE multiple signifies the volatility of the PE multiple.We note that Foodland Farsi has traded within the range formed by the Upper (defined as Average PE + 1 Std Dev = 12.2x) and the Lower (Average PE – 1 Std Dev = 4.9x).We note that the PE multiple for the period after June 2006 has crossed the upper standard deviation line signifying a higher valuation multiple.
This chart is fairly useful because this provides the historical valuation details quickly and easily.

You may take not more than 30 seconds to interpret such a graph.

Let us now prepare the PE chart as provided above. Please download the PE Chart dataset here. The dataset includes the following: –

DateHistorical Stock PricesEPS estimate (forward) – Please note that this data may not be available in the public forum. You may use Bloomberg, Factset, and Factiva (all paid versions) to access such data.

Since we already know the stock price and the forward EPS, calculate the PE ratio of the stock for each date.

Calculate the average PE of the stock using the formula AVERAGE and use absolute references as the average of the data should remain constant across all the dates.

Calculate the UPPER and the LOWER range by using the following formula: –

UPPER = Average PE + Standard DeviationLOWER = Average PE – Standard Deviation
Forward PEAverage PEUPPERLOWER

It is very important as formatting can win if you highlight the important areas and make it more intuitive to comprehend.

Like the PE charts, you can also make a Price to Book Value Chart (P/BV), PEGPEGThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read more Graph, Price to Sales, or Price to Cashflow Charts.

#2 – PE Band Chart

Like the PE ratio graph, the PE band is also computed from the historical PE ratios for each stock/index. The line plotted from the average highest PE will form the upper PE band. At the same time, the average lowest PE will form the lower PE band. The middle PE band will be derived from the mean of the upper and lower band.

The above chart can be interpreted as follows: –

The price line (colored in GREEN) touches the maximum PE band line of 20.2x. Therefore, it implies that the stock is trading at its maximum PE and may be overvalued.The upper band would reflect the stock’s historical maximum price if it traded at its maximum PE. For example, If we trace back the maximum PE band line till March 2002, we find that the stock would have sold at ₹600/- if the PE during that period had been 20.2x.Also, we note that the stock has touched the lowest PE band of 5.0x many times in the last five years. Therefore, it denotes an ideal opportunity to buy the stock.
The advantage of the PE band is its consideration of both the fundamental factor (i.e., profitability) and the historical trading pattern of a stock.The use of the PE band is especially meaningful for listed companies with good track records.Its price tends to move within the PE band for a stock with stable earnings. In other words, the stock price in one extreme tends to move to the other extreme within the band.Also, note that the PE band chart is different from the PE ratio graph as we note that the Y-axis represents the price of the stock rather than the PE multiple.This PE band chart is effective because this graph can denote both the PE bands (valuation) and the corresponding prices. Along with the PE ratio graphs, this makes a case for taking a valuation call on stocks.

The PE band chart data set differs from the one we used earlier. It is the same! We require the following: –

Historical Stock PricesDatesForward EPS

Calculate the implied prices using the procedure below: –

Price (corresponding to Average) = Average PE x (Historical EPS)Price (corresponding to Maximum) = Maximum PE x (Historical EPS)Price (corresponding to Minimum) = Minimum PE x (Historical EPS)
Stock PriceImplied Average PriceImplied Maximum PriceImplied Minimum Price

You can make Band Charts for another set of valuation multiples like EV/EBITDA EV/EBITDAEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more (Enterprise Value Enterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more to EBITDA), P/CF, etc

#3 – Football Field Graph

Sometimes it is easier to represent the data in floating columns or bars in which columns (or bars) float, spanning a region from minimum to the maximum values. For example, below is a football field column chart.

The data represents the company’s fair valuation (price/share) under different assumptions, and valuation methodsValuation MethodsDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company.read more.Using DCFUsing DCFDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company’s future performance.read more, the firm’s valuation comes out to be $30/share (pessimistic case) and $45 under (most optimistic case).The highest fair valuation of the company is $50/share when using the replacement cost methodReplacement Cost MethodReplacement Cost is the capital amount required to replace the current asset with a similar one at the present market rate. Usually, assets replacement occurs when their repair & maintenance charges surge beyond a reasonable level. read more of valuation.However, the lowest fair valuation comes out to be $20/share when using the M&A Transaction Comp valuation.

Let us assume that you have been provided with the following data set. Naturally, you want to represent the below data in the best possible graphical format.

There can be different ways of making graphs on such data. However, they may not provide great insights when making a regular line or bar graph. Below is the representation (poor) of these regular graphs: –

The problem with this representation is that it is very difficult to interpret this data.

Again, the same problem is that it is very difficult to interpret such data.

It is now easy to understand that the solution lies in making the floating column or the bar chart in excel.

The first series represents the minimum, and the second represents the range (maximum-minimum). Please see below the two series on which we create our graph.

The secret to making the floating chart is to use the column chart in excel Column Chart In ExcelColumn chart is used to represent data in vertical columns. The height of the column represents the value for the specific data series in a chart, the column chart represents the comparison in the form of column from left to right.read more in an effective way by selecting the “stacked column chart in excelStacked Column Chart In ExcelA stacked column chart in Excel is a column chart where multiple series of the data representation of various categories are stacked over each other. The stacked series are vertical.read more” using two series.

You will get the below chart.

Select the minimum column bars (blue color) and from the top menu, change the color to “No Fill.”

With this, you will get the graph below.

Change the X-axis to reflect the valuation methodology.Remove the legends on the right-hand side (range and minimum)Change the color of the bars to suit your color taste (please do not make the columns pink; it is investment banking, you know!)

# 4 – Scenario Graphs

Sometimes, we need to accept that valuation is not scientific. It depends on assumptions and scenarios. While we value a stock, you may make different beliefs while preparing a financial model – projecting an income statement, balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, and cash flows. While we take the most typical case while we do the valuation, it is equally important to show the impact of different topics, such as if the tax rates go down or if the production moves up more than expected. These scenarios can be easily built using financial models.

You can use the following financial models for your reference: –

Alibaba IPO Financial Model Box IPO Financial Model

Please see below a sample scenario graph: –

We note above that the base case valuation for the stock XYZ is $300.The scenario graphs provide us with additional inputs on downsides concerning the following: –If the product price decreases, the stock’s fair price would decrease by $17.If corporate taxesCorporate TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more are higher, then the stock’s fair price would move further down by another $28.If raw material prices move up, then fair prices of the stock would move down even more by another $25.If we consider all the pessimistic cases (an event when all three negative events happen together), then the fair valuation of the stock would drop to $230 per share. Likewise, you can find the additional inputs on the upsides. Considering all the optimistic cases (higher prices, higher taxes, and lower raw material costs), the stock’s fair price will increase to $410 per share.

The dataset required for this graph is shown below. The table below arrives after inputting new assumptions in your financial model and recalculating the fair share price.

If the product price decreases, the stock’s fair price would decrease by $17.
If corporate taxesCorporate TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more are higher, then the stock’s fair price would move further down by another $28.If raw material prices move up, then fair prices of the stock would move down even more by another $25.If we consider all the pessimistic cases (an event when all three negative events happen together), then the fair valuation of the stock would drop to $230 per share.

We will assume that you already have the data like the one above. With this, let us look at the steps involved in building the scenario graphs: –

This graph builds on the Football Field Graph (#3) we made earlier.Again, we use the column stacked graph, where Y data gets stacked over the X data.In addition, we make the X data set invisible to get the floating Y dataset.For example, if you closely observe the scenario graph – downside scenario – Price decrease shows a floating visible data of $17 (Y data). Immediately below this dataset is the invisible $283 (X data).

Please note that we are not preparing the chart on the original data set. Instead, we prepare the converted dataset (X and Y) chart.

Hide the X dataset by selecting the columns and choosing “No Fill” from the menu’s formatting options.

Conclusions

As we noted above, there can be a different graphical representation of stock valuation. We use such graphs to save time for the clients and make the research report or pitch book Pitch BookPitch Book is an information layout or presentation used by investment banks, business brokers, corporate firms, and others to provide potential investors with the firm’s main attributes and valuation analysis, which helps them decide whether or not to invest in the client’s business. A pitch book is also known as Confidential Information Memorandum, which is used by the firm’s sales department to help them sell products and services to a client.read more a time-saving and effective document. You will find the four types of valuation graphs in a majority of the tier-1 brokerage firm research reports. I had worked earlier at JPMorgan as an equity research analyst and found the football field and scenario graphs to be the most useful representation for clients. Of course, you can use these in ratio analysis Ratio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more graphs too.

What’s Next?

If you learned something new or enjoyed the post, please comment below. Let me know what you think. Many thanks, and take care.

Investment Banking Charts – Football Field & PE Band Charts#

# 1 – PE Chart#

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#2 – PE Band Chart#

#3 – Football Field Graph#

# 4 – Scenario Graphs#

Conclusions#

Recommended Articles#

What’s Next?#