Fin 4201/8001 Topic 4: Valuing Companies The early years….Ratios.

Fin 4201/8001Topic 4: Valuing Companies

The early years….Ratios

RatiosRatios Measure the strength of various firm Measure the strength of various firm

aspectsaspects Informational needs of creditors and Informational needs of creditors and

investorsinvestors Facilitate time-series or cross-Facilitate time-series or cross-

sectional analysissectional analysis Five typesFive types

ActivityActivity LiquidityLiquidity Debt and solvencyDebt and solvency Profitability Profitability Valuation Valuation

Activity RatiosActivity Ratios

1)1) Inventory turnover – COGS/Avg. Inventory turnover – COGS/Avg. inventoryinventory

2)2) Receivables turn – Sales/Avg. Receivables turn – Sales/Avg. Receivables Receivables

3)3) Working Capital turn – Sales/Avg. Working Capital turn – Sales/Avg. Working CapitalWorking Capital

4)4) Fixed Assets turn – Sales / Avg.Fixed Fixed Assets turn – Sales / Avg.Fixed AssetsAssets

5)5) Total Assets turn – Sales / Avg. Total Total Assets turn – Sales / Avg. Total AssetsAssets

Activity RatiosActivity Ratios11 Inventory TurnoverInventory Turnover 4.55 4.55

Cost of goods soldCost of goods sold 2142 2142

Average InventoryAverage Inventory 471 471

Avg. no. of days inventory in stockAvg. no. of days inventory in stock 80 80

22 Receivables turnoverReceivables turnover 10.76 10.76

SalesSales 4063 4063

Average ReceivablesAverage Receivables 378 378

Avg. no. of days receivables are Avg. no. of days receivables are outstandingoutstanding 34 34


44 Fixed assets turnoverFixed assets turnover 2.60 2.60

SalesSales406406

3 3

Average fixed assetsAverage fixed assets156156

3 3

33 Working capital turnoverWorking capital turnover 18.26 18.26

SalesSales406406

3 3

Average working capitalAverage working capital 223 223


55 Total assets turnoverTotal assets turnover 1.21 1.21

SalesSales406406

3 3

Avg. total assetsAvg. total assets334334

8 8

Liquidity RatiosLiquidity Ratios

1)1) Current – Current – Current Asset / Current LiabilityCurrent Asset / Current Liability

2)2) Quick – Quick – $+securities+AR / Current Liability$+securities+AR / Current Liability

3)3) Cash – Cash – $+securities / Current Liability– $+securities / Current Liability– COGS/Avg. inventoryCOGS/Avg. inventory


11 Current ratioCurrent ratio 1.25 1.25

Current AssetsCurrent Assets102102

0 0

Current LiabilitiesCurrent Liabilities 815 815

22 Quick ratioQuick ratio 0.72 0.72

Cash + Mkt. sec + Accounts Cash + Mkt. sec + Accounts ReceivableReceivable 584 584

Current LiabilitiesCurrent Liabilities 815 815


33 Cash RatioCash Ratio 0.23 0.23

Cash + Mkt. sec Cash + Mkt. sec 19190 0

Current LiabilitiesCurrent Liabilities81815 5

Debt and Solvency RatiosDebt and Solvency Ratios

1)1) Long-term Debt to Capital – Long-term Debt to Capital – Long-term debt + other long-term Long-term debt + other long-term liab. / Total capital (debt + equity) liab. / Total capital (debt + equity)

2)2) Long-term Debt to Equity – Long-term Debt to Equity – Long-term debt + other long-term Long-term debt + other long-term liab. / Total capital (debt + equity) liab. / Total capital (debt + equity)

3)3) Times Interest Earned – Times Interest Earned – EBIT / Interest ExpenseEBIT / Interest Expense


11Long-term Debt to total capital Long-term Debt to total capital (no (no deferred tax or CL)deferred tax or CL) 0.54 0.54

Long-term debtLong-term debt 1226 1226

Total capital (Long-term debt plus SH's Total capital (Long-term debt plus SH's eqty)eqty) 2268 2268

Long-term Debt to total capital Long-term Debt to total capital (no CL)(no CL) 0.60 0.60

Long-term debt plus deferred taxLong-term debt plus deferred tax 1547 1547

Total capitalTotal capital 2589 2589


22 Long-term Debt to equityLong-term Debt to equity 1.18 1.18

Long-term debtLong-term debt 1226 1226

Total equityTotal equity 1042 1042

Long-term Debt to equityLong-term Debt to equity 1.48 1.48

Long-term debt plus deferred taxLong-term debt plus deferred tax 1547 1547

Total equityTotal equity 1042 1042


33 Times Interest earnedTimes Interest earned 6.92 6.92

EBITEBIT 595 595

Interest expensesInterest expenses 86 86

Profitability RatiosProfitability Ratios

1)1) Gross Margin – Gross Profit / SalesGross Margin – Gross Profit / Sales2)2) Operating Margin – Operating Operating Margin – Operating

Income / SalesIncome / Sales3)3) Margin before Interest and Tax – EBIT / Margin before Interest and Tax – EBIT /

SalesSales4)4) Pre-tax Margin – EBT / SalesPre-tax Margin – EBT / Sales5)5) Profit Margin – Net Income / Sales Profit Margin – Net Income / Sales


11 Gross marginGross margin 0.47 0.47

Gross profitGross profit192192

1 1

SalesSales406406

3 3

22 Operating marginOperating margin 0.19 0.19

Operating incomeOperating income 753 753

SalesSales406406

3 3


33 Margin before interest and taxMargin before interest and tax 0.15 0.15

EBITEBIT 595 595

SalesSales406406

3 3

44 Pre-tax marginPre-tax margin 0.14 0.14

EBTEBT 557 557

SalesSales406406

3 3


55 Profit marginProfit margin 0.08 0.08

Net IncomeNet Income 341 341

SalesSales406406

3 3

Valuation RatiosValuation Ratios

1)1) Price to Earnings (P/E) – Price / EPSPrice to Earnings (P/E) – Price / EPS2)2) Price to Book (P/B) – Price / Book value Price to Book (P/B) – Price / Book value

per shareper share3)3) Price to Tangible Book – Price / Price to Tangible Book – Price /

Tangible Assets per shareTangible Assets per share


11 P/E RatioP/E Ratio 32.73 32.73

Price per sharePrice per share 62 62

Earnings per shareEarnings per share 1.89 1.89

22 Price to book valuePrice to book value 10.71 10.71


Book Value per shareBook Value per share 5.79 5.79

Book Value = Sh's equity / no. of Book Value = Sh's equity / no. of sharesshares


33 Price to Tangible AssetsPrice to Tangible Assets 3.88 3.88


Tangible assets per shareTangible assets per share 16 16

Other stuff not covered here, but Other stuff not covered here, but may want to address in your may want to address in your

analysisanalysis Return on Invested Capital (ROIC) – Return on Invested Capital (ROIC) –

NOPLAT/ Invested Capital NOPLAT/ Invested Capital covered with spreadsheet latercovered with spreadsheet later

Return on Assets (ROA) – Net income Return on Assets (ROA) – Net income + After-tax interest / Avg. Total + After-tax interest / Avg. Total AssetsAssets

Return on Equity (ROE) – Net Return on Equity (ROE) – Net Income / Avg. Total equityIncome / Avg. Total equity

Other stuff not covered here, but Other stuff not covered here, but may want to address in your may want to address in your

analysisanalysis DuPont systemDuPont system

2 is greatest when no leverage2 is greatest when no leverage 1*2*3 = profit margin1*2*3 = profit margin 4 = asset turnover4 = asset turnover 3 * 4 = ROA (does not depend on leverage)3 * 4 = ROA (does not depend on leverage) 5 = leverage ratio – boosts ROE only if ROA>cost 5 = leverage ratio – boosts ROE only if ROA>cost

capitalcapital

(5) (4) (3) (2) (1)

Equity

Assets*

Assets

Sales*

Sales

EBIT*

EBIT

ProfitPretax *

ProfitPretax

NetProfitROE

Dupont should get you to Dupont should get you to the same placethe same place

Return on equity (ROE)Return on equity (ROE) 0.36 0.36

Net IncomeNet Income 341 341

Average total equityAverage total equity 948 948

OROR

Profit marginProfit margin 0.08 0.08

Total asset turnoverTotal asset turnover 1.21 1.21

Financial leverageFinancial leverage 3.53 3.53

Note some rounding errorNote some rounding error 0.35 0.35

Still more ratiosStill more ratios

PEG – PE ratio / Earnings growthPEG – PE ratio / Earnings growthevaluates if price of growth is being realizedevaluates if price of growth is being realized

Enterprise value / EBITDAEnterprise value / EBITDA(market cap + total debt – Total cash) / EBITDA(market cap + total debt – Total cash) / EBITDAgood for comparisons if high level of debt or high good for comparisons if high level of debt or high level of cashlevel of cash

Fixed asset spending / DepreciationFixed asset spending / Depreciationhigher may reveal long term planning, but needs higher may reveal long term planning, but needs to cover at least 3 yearsto cover at least 3 years

Fin 4201/8001 Topic 4: Valuing Companies The early years….Ratios.

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