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Fin 4201/8001

Fin 4201/8001. Topic 4: Valuing Companies The early years….Ratios. Ratios. Measure the strength of various firm aspects Informational needs of creditors and investors Facilitate time-series or cross-sectional analysis Five types Activity Liquidity Debt and solvency Profitability

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Fin 4201/8001

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

  2. Ratios • Measure the strength of various firm aspects • Informational needs of creditors and investors • Facilitate time-series or cross-sectional analysis • Five types • Activity • Liquidity • Debt and solvency • Profitability • Valuation

  3. Activity Ratios • Inventory turnover – COGS/Avg. inventory • Receivables turn – Sales/Avg. Receivables • Working Capital turn – Sales/Avg. Working Capital • Fixed Assets turn – Sales / Avg.Fixed Assets • Total Assets turn – Sales / Avg. Total Assets

  4. Activity Ratios

  5. Activity Ratios

  6. Activity Ratios

  7. Liquidity Ratios • Current – Current Asset / Current Liability • Quick – $+securities+AR / Current Liability • Cash – $+securities / Current Liability– COGS/Avg. inventory

  8. Liquidity Ratios

  9. Liquidity Ratios

  10. Debt and Solvency Ratios • Long-term Debt to Capital – Long-term debt + other long-term liab. / Total capital (debt + equity) • Long-term Debt to Equity – Long-term debt + other long-term liab. / Total capital (debt + equity) • Times Interest Earned – EBIT / Interest Expense

  11. Debt and Solvency Ratios

  12. Debt and Solvency Ratios

  13. Debt and Solvency Ratios

  14. Profitability Ratios • Gross Margin – Gross Profit / Sales • Operating Margin – Operating Income / Sales • Margin before Interest and Tax – EBIT / Sales • Pre-tax Margin – EBT / Sales • Profit Margin – Net Income / Sales

  15. Profitability Ratios

  16. Profitability Ratios

  17. Profitability Ratios

  18. Valuation Ratios • Price to Earnings (P/E) – Price / EPS • Price to Book (P/B) – Price / Book value per share • Price to Tangible Book – Price / Tangible Assets per share

  19. Valuation Ratios

  20. Valuation Ratios

  21. Other stuff not covered here, but may want to address in your analysis • Return on Invested Capital (ROIC) – NOPLAT/ Invested Capital covered with spreadsheet later • Return on Assets (ROA) – Net income + After-tax interest / Avg. Total Assets • Return on Equity (ROE) – Net Income / Avg. Total equity

  22. Other stuff not covered here, but may want to address in your analysis • DuPont system • 2 is greatest when no leverage • 1*2*3 = profit margin • 4 = asset turnover • 3 * 4 = ROA (does not depend on leverage) • 5 = leverage ratio – boosts ROE only if ROA>cost capital

  23. Dupont should get you to the same place

  24. Still more ratios • PEG – PE ratio / Earnings growthevaluates if price of growth is being realized • Enterprise value / EBITDA(market cap + total debt – Total cash) / EBITDAgood for comparisons if high level of debt or high level of cash • Fixed asset spending / Depreciationhigher may reveal long term planning, but needs to cover at least 3 years

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