1. Financial Metrics
October 10, Jigar Bhakta

2. 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)

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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. Debt-Liquidity Ratios
Current Ratio
Quick Ratio
Debt/Equity

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

12. 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, ÷ $800,000
= 1.25

13. 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

14. 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

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

16. 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, ÷ $400,000
= 1.0

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

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

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

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

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

22. 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?