chapter 2 financial ratio analysis. 2-2 example 2.1 problem rylan enterprises has 5 million shares...
TRANSCRIPT
Chapter 2
Financial Ratio Analysis
2-2
Example 2.1
• Problem
Rylan Enterprises has 5 million shares outstanding.
The market price per share is $22.
The firm’s book value of equity is $50 million.
What is Rylan’s market capitalization?
How does the market capitalization compare to Rylan’s book value of equity?
2-3
Example 2.1
• Solution
Rylan’s market capitalization is $110 million
• 5 million shares × $22 share = $110 million.
• The market capitalization is significantly higher than Rylan’s book value of equity of $50 million.
2-4
2.2 Balance Sheet (cont'd)
• Balance Sheet Analysis
Market-to-Book Ratio
• Value Stocks Low M/B ratios
• Growth stocks High M/B ratios
Market Value of EquityMarket-to-Book Ratio
Book Value of Equity
2-5
2.2 Balance Sheet (cont'd)
• Balance Sheet Analysis
Debt-Equity Ratio
• Measures a firm’s leverage
• Using Book Value versus Market Value
Total DebtDebt-Equity Ratio
Total Equity
2-6
2.2 Balance Sheet (cont'd)
• Other Balance Sheet Information
Current Ratio• Current Assets / Current Liabilities
Quick Ratio• (Current Assets – Inventories) / Current Liabilities
2-7
2.3 Income Statement (cont'd)
• Income Statement Analysis
• Gross Margin = Gross Profit / Total Sales
• Operating Margin
• Net Profit Margin
Operating IncomeOperating Margin
Total Sales
Net IncomeNet Profit Margin
Total Sales
2-8
2.3 Income Statement (cont'd)
• Asset Turnover = Total Revenue / Total Assets
• Accounts Receivable Days
Accounts ReceivableAccounts Receivable Days
Average Daily Sales
2-9
2.3 Income Statement (cont'd)
Interest Coverage Ratios
• EBIT / Interest Expense
• Operating Income / Interest Expense
• EBITDA / Interest Expense
2-10
2.3 Income Statement (cont'd)
Investment Returns
• ROA Net Income / Total Assets
• ROE
Valuation Ratios
• P/E Ratio
Net IncomeReturn on Equity
Book Value of Equity
Market Capitalization Share PriceP / E Ratio
Net Income Earnings per Share