Everything I learned at J.P. Morgan in 23 Minutes

While at JP Morgan, I worked as the sole analyst on over $14 billion worth of deals, working 80 to 100 hours a week for over 125 weeks straight. I made

plenty of mistakes, got thrown into the fire, and learned how Wall Street really works, not from textbooks, but from a front row seat to billiondoll transactions. An investment banker's

transactions. An investment banker's superpower is their ability to analyze a company through a financial lens, which is what allows them to advise the world's top CEOs and generate millions

of dollars in fees. In this video, I'm going to teach you everything I learned at JP Morgan by breaking down all the technical skills bankers actually use, accounting valuation accretion

dilution, all through the story of Supreme, the streetear brand that became a billiondoll empire. And I promise that by the end of this video, you're not just going to be ready for Wall Street

interviews, you're going to be able to start seeing businesses like a banker.

But before getting started, if you're watching this and managing a financial services business, you're likely feeling the pressure of today's market challenges. From the all-time high

challenges. From the all-time high consumer debt of 17.7 trillion to rising digital competition. If you are in that

digital competition. If you are in that situation, I actually do have some good news for you. HubSpot for Financial Services can help you turn all of that pressure into performance. They have

been actually transforming these exact challenges into growth opportunities for institutions like yours. Their platform

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what impressed me most was seeing their real results. Financial service

real results. Financial service companies using HubSpot have achieved a 225% increase in inbound leads, 64% more deals closed, and 55% more tickets

resolved. So, if your legacy tech stack

resolved. So, if your legacy tech stack is holding you back from delivering personalized experiences at scale, I highly recommend checking out the free HubSpot guide I've linked in the description below. It's a great overview

description below. It's a great overview of what a digital first strategy could look like for you. All right, with that, let's now go into our first topic, accounting, which is the language of

finance. And let's go back in time in

finance. And let's go back in time in 1994. Imagine you're James Jebia, the

1994. Imagine you're James Jebia, the founder of Supreme, and you just started selling these t-shirts with a red box logo to skaters in lower Manhattan.

Sales are going well in your first year, but you can't just count your money in the cash register, right? You're going

to need to keep proper track of your finances, and that's where accounting comes in. The first thing you need to

comes in. The first thing you need to know is that there are three different financial statements. the income

financial statements. the income statement, balance sheet, and cash flow statement. And let's go into these one

statement. And let's go into these one by one. Let's start with the income

by one. Let's start with the income statement, which in basic terms over a specific period of time answers the question, did I make money or lose money? Let's say throughout the year of

money? Let's say throughout the year of 1994, Supreme sold 1,000 t-shirts for $30 each, making their revenue $30,000.

And this is known as the top line. to

make each shirt cost money, which let's say is $7 per shirt. Making your cost of goods sold or COGS$7,000 and your gross profit 23,000. After that comes your

profit 23,000. After that comes your operating expenses, which are costs associated with running the business, such as 6,000 in rent for your Manhattan storefront, 4,000 in salaries for your

part-time employee, and 2,000 that you spent on marketing totaling to $12,000.

This results in your operating income, also known as your EBIT, to be 11,000 and divided by revenue of 30,000 gives you an operating margin of 37%. And this

is a key metric management and investors look at to see whether or not a company is efficient and profitable. Lastly,

assuming no interest expense and the 1994 corporate tax rate of 35%. Supreme

pays 3,850 in taxes resulting in net income of 7150. And this is known as your profit or your bottom line. While

the income statement is super helpful in figuring out how profitable your company is, you need the balance sheet to see what your company owns, what it owes, and how much equity is left over for you

as the owner. Similar to how when you look at your own financial health, you don't just look at how much money you make each year, but also what assets you own, like a home, car, and investment accounts, and how much you owe in

mortgage, auto loans, and student debt.

The number one most important rule about the balance sheet is that assets must always 100% equal liabilities plus equity. And you can also remember this

equity. And you can also remember this through the acronym ALE. The second most important rule to remember is that while the income statement and cash flow statement show income and cash over a

period of time, the balance sheet is only a snapshot in time. Just as how you might look at your cash in your checking account one day, but it can fluctuate on a daily basis. Going back to our example

with Supreme, let's take a look at the company's balance sheet at the end of 1994. Assets are the resources a company

1994. Assets are the resources a company owns. And you can see here Supreme has

owns. And you can see here Supreme has cash of 10,000, inventory of t-shirts to sell worth 3,000, and plant property and equipment of 2,000 totaling $15,000 for

assets. Liabilities are financial

assets. Liabilities are financial obligations a company needs to pay later. Most often things like debt. But

later. Most often things like debt. But

for Supreme, let's say it includes accounts payable to suppliers of 2,000 and acred expenses of wages not yet paid of 1,000 totaling $3,000 in liabilities.

Equity is what's left over after subtracting liabilities from assets and represents the value that belongs to the owners. Supreme's equity section

owners. Supreme's equity section includes common equity of 4850 initially invested by James W and 7150 in retained earnings from the year's net income

totaling 12,000. As you can see, both

totaling 12,000. As you can see, both your assets and your liabilities plus equity equal 15,000 each, and so your balance sheet balances, hence why they call it the balance sheet. Last but not

least is the cash flow statement, which answers the question, how much cash is flowing in and out of the business. Cash

is very different from profits because there are a lot of cash related inflows and outflows in a business that are not recorded in the income statement such as raising debt, buying a building aka

capital expenditures, or making a minority investment in another company.

Bankers always say that cash is king because the amount of actual cash a business generates is the true value of the company. And even if a company is

the company. And even if a company is profitable, it can go bankrupt if it runs out of cash. The cash flow statement is split into three sections, operating, investing, and financing

activities. And line items from the

activities. And line items from the income statement and balance sheet create the cash flow statement. And so

looking at Supreme, you'll have the 7150 in net income from the income statement flow to the top of the cash flow statements, cash from operation section, where you'll also find changes in working capital like extra inventory

paid for to sell in the future, which decreases cash by 3,000. But on the flip side, Supreme didn't yet pay all its wages or bills yet. It owes 2,000 to

suppliers and 1,000 in unpaid wages. And

since those haven't been paid in cash yet, they add back to your cash flow, totaling 3,000 and resulting in total cash from operations of 7150. Next is

cash flow from investing activities, which includes cash spent on things like equipment, vehicles, or other long-term assets. and Supreme spent 2,000 to buy

assets. and Supreme spent 2,000 to buy equipment to set up its store. And that

gets recorded as a cash outflow of 2,000. Finally, we have cash from

2,000. Finally, we have cash from financing activities, which is how the business raised or returned money. In

this case, James Jebia put in 48.50 of his own money to get the business started, which is a financing inflow of 48.50. And so, when you add up

48.50. And so, when you add up everything from each of the three sections, you get a total increase in cash of 10,000. And since Supreme started the year with no cash, the

company ends 1994 with 10,000 in the bank, which ties to the cash line we previously discussed on the balance sheet. While there's a lot more to

sheet. While there's a lot more to accounting, hopefully you can see roughly how these three statements work together. And if you put in the time to

together. And if you put in the time to understand how to read and build these three financial statements, you'll have a superpower that most people don't.

Whether you're investing, building a business, or just trying to understand how companies really work, accounting is the foundation for everything in finance. And so, let's next fast forward

finance. And so, let's next fast forward 24 years to 2017 when Carlile, a private equity firm, acquired a 50% stake in Supreme at a 1 billion valuation. When

people say that a company is worth $1 billion, what does that really mean?

This is where the concept of equity and enterprise value comes in. Equity value

is the value of a company's shares, which means slightly different things for a public versus private company. For

a public company, equity value is simply the share price times the number of shares. So, if Supreme had 10 million

shares. So, if Supreme had 10 million shares and was trading at $100 per share, its equity value would be $1 billion. For a private company, there is

billion. For a private company, there is no public share price, but private companies still do have a share account.

Usually, it's not disclosed. And when a private company is bought out, all those shares are being purchased. In Supreme's

case, if we assume that the company had 100 million shares, each share that the owners, employees, and investors owned were essentially being bought out at $10 a share. With all this said, the true

a share. With all this said, the true purchase price of buying out a company is not its equity value, but its enterprise value, which is the total value of the entire business. Because

there are other types of stakeholders who are owed money besides equity investors, including debt holders, preferred stock investors, and non-controlling interest. Personally, I

non-controlling interest. Personally, I like to think of the value of a company like a pie chart. And each different stakeholder is owed a slice in order to purchase an entire company minus any

cash the company has. Using Supreme as an example, if the company's equity value is 1 billion and the company holds debt of 150 million, 50 million of cash, which makes its debt essentially 100

million, 50 million in preferred stock and 50 million in non-controlling interest. The company's enterprise value

interest. The company's enterprise value is 1.2 billion, and this is the amount a company would need to pay to own 100% of Supreme with zero financial obligations

to any other previous stakeholder. Now

that we know how to think about the total value of a company, this begs the question of how do we actually get to that number? This is where valuations

that number? This is where valuations analysis comes in. And this is what investment bankers get paid the big bucks for. There are four types of

bucks for. There are four types of valuation methodologies we're going to go over, including trading comps, transaction comps, discounted cash flow, and leverage buyout. Trading and

transaction comps are often grouped together because they are what are known as relative valuation methodologies in which you're comparing a company with other similar ones and value them based

on key financial metrics. Starting with

trading comps, also known as public comparables. You're looking at how

comparables. You're looking at how public companies similar to yours are trading in the market. So in Supreme's case, you would be looking at peers like Nike Adidas Lululemon Deckers and

on. What I used to do all the time at JP

on. What I used to do all the time at JP Morgan is put together a comps table that summarizes each company's key financial metrics like revenue growth, ibita margins and multiples which are

really are what at the heart of comps.

Multiples are valuation ratios like enterprise value over revenue or over ibita. And these tell you how much an

ibita. And these tell you how much an investor is willing to pay for every dollar of revenue or ibita that the company earns. And a higher multiple

company earns. And a higher multiple means a company is more expensive while a lower one means that it's cheaper and potentially on sale. How this would be put into practice is that using

Supreme's set of peers, we see that the median 2025 IBITa multiple is 12.9. And

assuming Supreme's Ibita is 100 million, then multiplying these two together, this implies Supreme's enterprise value to be 1.29 billion. Moving on to transaction comps, also known as

President Transactions. This involves a

President Transactions. This involves a similar approach, but instead of looking at current publicly traded companies, you're looking at past M&A deals with companies similar to Supreme and see

what multiples buyers were willing to pay for in the past when acquiring those businesses. So, for example, based on

businesses. So, for example, based on these previous five transactions, the median multiple is 15 times IBITa. And

so, similar to trading comps, we can simply multiply Supreme's EBITa of 100 million by the multiple of 15 to get a valuation of 1.5 billion. As you can

see, valuation through comps is fairly easy if you have the data. But it's not just as easy as just picking the median and using that for valuation. Instead,

bankers will look at the data at the comps table and make an argument for which multiples to use. So, for example, if Supreme is going faster and has higher margins, a banker might argue

that an 18 times multiple may make more sense than a 15 times multiple. With all

this said, comps are not a perfect analysis because no two companies are ever alike. And the markets change so

ever alike. And the markets change so much that trading comps multiples can swing violently and transaction comps multiples may be stale because you're looking at transactions that happened

years ago. This is why during every M&A

years ago. This is why during every M&A process, investment bankers will use the discounted cash flow method or DCF, which is an intrinsic valuation methodology and the most famous one that

bankers are known for. The DCF measures the value of a company based on how much cash is projected to generate from today until the end of time, all discounted

back to present value, aka today. The

foundation of the DCF is based upon a concept called the time value of money, which states that a dollar today is worth more than a dollar tomorrow. To

understand this, imagine if you won the lottery and you had the option of $1 million today or $1 million 10 years from now. You would obviously choose the

from now. You would obviously choose the $1 million today, right? Now, that's not just because of the instant gratification of getting the money today, but also because you could invest

that 1 million today in the stock market and earn an annual return of 8%. So,

there's real economic value of having cash earlier than in the future. And so,

let's see how a DCF works using Supreme as an example. First, you project out your revenue, operating expenses, taxes, and repeatable cash flow items including

DNA, capex, and changes in networking capital. And this is used to calculate

capital. And this is used to calculate your free cash flow which we project out for 5 to 10 years. Then what we need to do is discount the free cash flow we projected and bring it back to present

value through a discount rate called the weighted average cost of capital or whack which is the return investors expect for putting money into Supreme and more specifically takes into account

both the cost of equity or what shareholders expect to earn and the cost of debt or the interest rates lenders charge and weigh them based on Supreme's capital structure. Assuming a whack of

capital structure. Assuming a whack of 10%, we discount Supreme's projected free cash flow for each year to get our present value of those future cash flows in today's dollars. But here's the

thing, a business doesn't just stop after 5 years, right? Or hopefully not.

So to capture all the value beyond our forecast, we need to calculate something called terminal value, which represents the value of all future cash flows beyond year 5. And there are two main

ways to calculate terminal value. First

is the Gordon growth method where you assume cash flows grow forever at a modest rate like 2 to 3% and you calculate terminal value using this formula here. And then there's the

formula here. And then there's the second method which is the exit multiple method where you assume that the business is sold at the end of the forecast period for a certain multiple

of ITA like 15x. Once we have the terminal value, we also discount that back to today using the same whack of 10% and add it to the sum of our discounted cash flows, which finally

gives us our implied enterprise value of supreme of $1.5 billion. As you can tell, DCFS are a lot more complex than comps and are entirely driven by

assumptions, which is both a gift and a curse because it means that you're in total control of your model, but it also can be entirely accurate. And so even still, the DCF is an incredibly powerful

tool bankers use to value companies. And

you can learn more about them if you want in this video here. Now, in terms of valuation, last but not least, we have the leverage buyout or LBO, which is a returns driven analysis and is

often called the floor valuation because it aims to provide the amount a private equity buyer could pay while still meeting return requirements. And the LBO was definitely an analysis used by

Carlile when it purchased a 50% stake in Supreme for $500 million. In an LBO, the buyer uses a mix of debt and equity to finance a deal. Just like when you buy a

house with a 20% down payment and finance the rest with debt through a mortgage. The idea here is to use

mortgage. The idea here is to use leverage to fund the deal and the company's cash flow to pay down debt over time so that the buyer doesn't have to put in as much equity upfront and

still keep a lot of the upside. Using

Supreme as an example, let's say the company was generating 100 million in Ibita and Carl believed it could be bought at a 12 times multiple for $1.2 billion in enterprise value. Now, if

Carl used 70% debt to buy the whole company, that would mean 840 million of debt financing and 360 million of equity. But since Carl only bought 50%,

equity. But since Carl only bought 50%, they would have contributed 180 million of their own equity and raised 420 million in debt. Next, let's say that over the next 3 years, Supreme continues

to grow and expands internationally, raises prices, and improves operating efficiency. and Carlile is able to help

efficiency. and Carlile is able to help boost Supreme's Ebita from 100 million to 140 million while also paying down hund00 million in debt. This means that

when VF Corporation bought 100% of Supreme in December 2020 for $2.1 billion, this implies it bought the company at a 15 times Ebita multiple and

Carile's 50% stake of Supreme was worth 1.05 billion at exit. Since Carile had only put in 180 million of equity and borrowed 420 million and since 100

million of debt had been paid down, their share of the remaining debt at exit would have been 370 million. And so

from the 1.05 billion in sale proceeds, you subtract the $370 million of remaining debt Carlile was responsible for, leaving $680 million in equity

value return to Carlile, resulting in a 3.8 eight times money over money return in 3 years yielding an internal rate of return or IRRa of 58%. This type of

annual return would never be possible without leverage because let's say Carile had put in equity of 500 million the return would be roughly two times instead of twice that at 3.8 times. And

this is why private equity firms love the LBO. It's all about putting in less

the LBO. It's all about putting in less money, using the company's own cash flow to reduce risk, and walking away with huge returns if the business performs.

And so, as a recap on valuation, comps tell you what others are paying. The DCF

tells you what the business is worth, and the LVL tells you what a financial buyer can afford. And because each of these methods have their strengths and weaknesses, a banker would never rely

just on one method and instead showcase all of them in what's known as a football field to triangulate to a reasonable range. But we're actually not

reasonable range. But we're actually not done yet. There is one last really

done yet. There is one last really important financial analysis bankers use all the time. It's not as commonly known to those outside of finance, and it's called the accretion dilution analysis.

This analysis doesn't ask what is Supreme worth, but instead asks if we buy Supreme, does it make our earnings per share or EPS go up or down? When SLR

Lxodica or Eel bought Supreme from VF Corporation in July 2024 for 1.5 billion, the deal was expected to be accretive, meaning the acquisition would increase the combined company's EPS

after the deal. So, you may be wondering why does this even matter? And it

matters because public companies are judged heavily on their EPS. If buying

another company boosts that number, shareholders are generally happy the stock may go up. But if EPS goes down in what's called a a dilutive deal, it raises questions about whether or not

the buyer overpaid or if the deal creates too little value and the stock could go down. Now, in order to figure out if a deal is accretive or dilutive, you compare the acquirers's standalone

EPS before the acquisition with the combined company's EPS afterwards. Using

Supreme and Eel as an example, let's say E was earning $2 billion in net income and had 1 billion shares outstanding, making their standalone EPS $2. Let's

assume that E acquired Supreme for $ 1.5 billion all through cash, meaning no debt is raised and no shares are issued.

And assuming Supreme brings in 150 million in net income, the total combined net income of the combined company is $2.15 billion. Dividing this

by the 1 billion shares, the combined company's EPS is now $2.15. And since this new EPS is higher

$2.15. And since this new EPS is higher than the original standalone at $2, this deal is accretive. Now, of course, that was a very simplified example, and there are a lot of other factors that could

have easily made the combined company's EPS lower, mainly if Supreme's net income was too low relative to the cost of capital or new shares issued. But the

point is that accretion dilution is all about understanding how a deal impacts the buyer's shareholders and is a key indicator as to whether or not the combined company is stronger together or

apart. So, everything we discussed in

apart. So, everything we discussed in today's video is the majority of how bankers use financial analyses to advise clients on billion-dollar deals. And I

hope you found a lot of value in what I've shared today. In the next screen, you're going to see a video for my top tips for breaking into banking in 2025.

Feel free to check that out if you're interested. Thank you as always so much

interested. Thank you as always so much for watching and hope to catch you all in the next video.

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