Financial Metrics October 10, 2016 Jigar Bhakta.

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Presentation transcript:

Financial Metrics October 10, 2016 Jigar Bhakta

Ratios we will cover Investment Ratios: Debt-Liquidity Ratios: Earnings per Share (EPS) Price to Earnings (P/E) EV/EBITDA Debt-Liquidity Ratios: Current Ratio Quick Ratio Debt/Equity Profitability Ratios: Return on Assets (ROA) Return on Equity (ROE)

Investment Ratios Earnings per Share (EPS) Price to Earnings (P/E) EV/EBITDA

Earnings per Share (EPS) Earnings ÷ Average Outstanding Common Shares The more you earn per share, the more it is “worth” Used to benchmark a stock’s performance in quarterly reports

EPS Example In its 2015 annual report, Gifford & Co. earned $100,000,000 and had a weighted average of 50,000,000 common shares outstanding for the fiscal year. What is its EPS? Earnings ÷ Average Outstanding Common Shares = $100,000,000 ÷ 50,000,000 shares = $2

Price to Earnings (P/E) Price ÷ EPS Used as a valuation method in comparable company analysis Incorporates future expectations into valuation Very emotional

P/E Example Gifford & Co. currently trades at $30. What is its P/E ratio? Recall that EPS is $2. Price ÷ EPS = $30 ÷ $2 = 15.0x

EV/EBITDA Enterprise Value to Earnings Before Interest, Tax, Depreciation & Amortization Enterprise Value ÷ EBITDA The other main multiple used in comparable company analysis Market-independent May be manipulated

EV/EBITDA Example Gifford & Co. has an enterprise value of $1,500,000,000 and an EBITDA of $150,000,000. What is its EV/EBITDA? Enterprise Value ÷ EBITDA = $1,500,000,000 ÷ $150,000,000 = 10.0x

Debt-Liquidity Ratios Current Ratio Quick Ratio Debt/Equity

Current Ratio Current Assets ÷ Current Liabilities Measure of short term liquidity

Current Ratio Example Coffrin, LLC’s balance sheet shows current assets of $1,000,000 and current liabilities of $800,000. What is its current ratio? Current Assets ÷ Current Liabilities = $1,000,000 ÷ $800,000 = 1.25

Quick Ratio (Current Assets- Inventory) ÷ Current Liabilities Recognize that Inventory might not sell of as quickly as liquidation may occur To acknowledge this, we exclude it from the current ratio and call it the quick ratio

Quick Ratio Example Coffrin, LLC’s balance sheet shows current assets of $1,000,000 and current liabilities of $800,000. Embedded in current assets is $200,000 in inventory. What is the quick ratio? (Current Assets- Inventory) ÷ Current Liabilities = ($1,000,000 - $200,000) ÷ $800,000 = $800,000 ÷ $800,000 = 1.0

Debt/Equity Total Liabilities ÷ Total Equity Shows the ratio of creditor funding and equity ownership

Debt/Equity Example Coffrin, LLC’s liabilities show $400,000 in debt. Its shareholders’ equity totals to $400,000. What is its Debt/Equity ratio? Total Liabilities ÷ Total Equity = $400,000 ÷ $400,000 = 1.0

Profitability Ratios Return on Assets (ROA) Return on Equity (ROE)

Return on Assets (ROA) Earnings ÷ Assets A measure of how efficiently a firm utilizes its assets

ROA Example Allen Group has earnings of $1,000,000 and assets worth $5,000,000. What is its ROA? Earnings ÷ Assets = $1,000,000 ÷ $5,000,000 = 20%

Return on Equity (ROE) Earnings ÷ Equity Measures efficiency by comparing profit to the amount of money invested by shareholders

ROE Example Allen Group has $3,333,333 in equity. What is its ROE? Recall, earnings are $1,000,000. Earnings ÷ Equity = $1,000,000 ÷ $3,333,333 = 30%

Ratios we have covered Investment Ratios: Debt-Liquidity Ratios: Earnings per Share (EPS) Price to Earnings (P/E) EV/EBITDA Debt-Liquidity Ratios: Current Ratio Quick Ratio Debt/Equity Profitability Ratios: Return on Assets (ROA) Return on Equity (ROE) Questions?