Corporate valuation Market capitalization Share values , nominal, book, market Earning per share Dividend per share Dividend cover and the pay out ratio Earning yield Dividend yield PE ratio Market to book ratio Cash earning per share CEPS = PAT – Preferred dividend + non-cash charges / no. of equity shares o/s
P E ratio ( Earning Multiple) Red flag to measure how expensive or cheap The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. The higher the P/E the more over-valued the stock is. Example. Changes in the market price and EPS. Trailing and projected P E Ratio N/A 0-13 14-20 21-28 28 + disparate interpretation. Averages and Market P E Ratio.
RETURN ON INVESTMENTSTWO MEASURES TO COMPUTE1. RETURN ON TOTAL ASSETS2. RETURN ON EQUITY
RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX _________________________________ TOTAL ASSETSHERE , 112 / 800 = 14 %RETURN ON NET ASSETS=PAT/ FIXED ASSETS + WORKING CAPITAL
RETURN ON EQUITY PAT / OWNER FUNDS 60 / 360 16.6 % Preference dividend
RETURN ON CAPITAL EMPLOYED ROCE= PBIT / CAPITAL EMPLOYED. Return on Capital Employed ratio measures the efficiency of the business in using the capital invested in it to make a profit. Therefore, the higher the percentage the more efficient the company is
Du pont trend ROE = NI / TE Multiply by 1 and then rearrange ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM Multiply by 1 again and then rearrange ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM ROE = PM * TAT * EM Profit margin is a measure of the firm’s operating efficiency – how well does it control costs Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage its assets Equity multiplier is a measure of the firm’s financial leverage
LIQUIDITY MEASURES CURRENT RATIOCURENT ASSETS / CURRENT LIABILITIES320 / 240 =1.33QUICK RATIOCURRENT ASSETS – INVENTORY200/ 240 = .833WORKING CAPITAL / SALES RATIOCA-CL/ SALES80/1120 = .071
FINANCIAL MEASURES DEBT TO EQUITY RATIO Debt over equity and debt over total funds. Interest cover PBIT/ INTEREST
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