CURRENT RATIO CURRENT ASSETS/CURRENT LIABILITIES 2. 46 0. 88 • The co. has $2. 46 of Current Assets to cover every $1 of Current Liabilities • A liquidity ratio that measures a company’s ability to pay short-term obligations using its short term assets • The higher the current ratio, the more capable the company is paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. • While this shows the company is not good financial health, it does not necessarily mean that it will go bankrupt – as there are many ways to access financing – but it is definitely not a good sign. • A ratio under 0. 7 indicates illiquid and potentially bankrupt co. A ratio over 2. 0 indicates excess of liquidity which could be used to develop the co. or return cash to shareholders.
QUICK RATIO (ACID-TEST) (CURRENT ASSETS-INVENTORY/CURRENT LIABILITIES 2. 43 0. 27 • The co. has $2. 43 of Current Assets other than inventory to pay off every $1 of Current Liabilities. • A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. • The quick ratio is far more strenuous than the current ratio, primarily because the current ratio allows for the inclusion of inventory assets. • Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. • If the quick ratio is much lower than the current ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
GROSS MARGIN (SALES-CGS)/SALES 34. 4% 25. 3% • For every $100 of Sales, the co. generated $34. 40 in Gross Margin. • Gross Margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. • The higher the percentage, the more the company retains on each dollar of sales to service its other costs (Selling&Administration, R&D, interest, taxes). • If GM rises, it can be a result of: Ø Ø Higher prices Lower costs per unit because of increased volume A change to a richer mix of products being sold Some combination of the above
ROS: Return on Sales Net Income/Sales 14. 9% 3. 9% • For every $100 of Sales, the co. generated $14. 90 in Net Income. • ROS = Profit Margin • Measures how much out of every dollar of sales a company actually keeps in earnings. • A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. • If Sales increases but costs have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control. • Cos. with low ROS need to have high sales to remain attractive to investors. • 0 -5% Japan, 5 -10% Europe, 10 -15% U. S. , >15% exceptional
ROA: Return on Assets Net Income/Total Assets 12. 2% 9. 1% • For every $100 of Total Assets, the co. generated $12. 20 in Net Income. • A measure of how profitable a co. is compared to the assets to co. owns or controls. • Allows analysts to judge how efficient the management is at utilizing their assets to generate earnings compared to another co. in the same industry. • Manufacturing cos. Will have a low ROA because they need a large amount of assets. Service cos. Will have a higher ROA because the need less assets.
ROE: Return on Equity (Net Income-Preferred Stock Dividend)/Common Equity 23. 0% • For every $100 of Common Equity, the co. generated $23. 00 after paying the preferred stockholders their dividends. • Measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. • Common Equity excludes Preferred Stock. • The Dupont Equation breaks down ROE into its 3 components: Equity Multiplier x Total Assets Turnover x Return on Sales.
PE: Price Earnings Market Price Per Share/Earnings Per Share 17. 81 12. 54 • Investors are willing to pay $17. 81 for every dollar of Net Income. The market price of the share is 17. 81 times its EPS. The market capitalization is 17. 81 times its Net Income. • The higher the PE the more investors believe the company has a high potential for earnings growth in the future. • The higher the PE the more expensive it is for a shareholder to purchase the stock. • A normal PE is around 20. • One of the main valuation multiples used to determine how much a co. would pay to aqcuire another co.
EPS: Earnings Per Share (Net Income-Preferred Stock Dividend)/Common Shares Outstanding $5. 36 $4. 47 • For every share that a shareholder owned, the company earned $5. 36 after paying preferred stockholders their dividends. • If there is no preferred stock, the preferred stock dividends is zero. • The most important ratio in determining a co’s market share price. • Do not use to compare between 2 companies. Use the PE ratio. • The growth rate in EPS is very important.
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