How To Analyse Stock Using Simple Ratio's

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When it comes to investing in Bse Nse Stocks, analyzing financial statement if not
the most
important element in the fundamental analysis process. At the same time, the
massive amount of numbers in a company's financial statements can be
bewildering and intimidating to many investors. However, through financial ratio
analysis,you will be able to work with these numbers in an organized fashion.
Among the dozens of financial ratios available, we've that are the most
relevant to the investing process and organized them into six main categories as
per the following list:

1 Liquidity Measurement
Ratios.

1a Current
Ratio

1b Quick
Ratio

1c Cash
Ratio

1d Cash Conversion

4 Operating Performance
Ratios

4a- FixedAssetTurnover

4b- Sales/Revenue Per

Employee

4c- Operating Cycle

2 Profitability Indicator
Ratios.

2a- Profit Margin

Analysis

2b- Effective Tax Rate

2c- Return On Assets

2d-ReturnOnEquity
2e- Return On Capital
Employed

5 Cash Flow Indicator

Ratios

5a- Operating Cash

Flow/Sales Ratio

5b- Free
CashFlow/Operating Cash
Ratio

5c- Cash Flow

Coverage
Ratio

5d- Dividend
PayoutRatio

3 Debt Ratios.
3a- Overview OfDebt
3b- Debt Ratio
3c-Debt-EquityRatio
3d- Capitalization
3e- Interest Coverage Ratio
3f- Cash Flow To Debt
Ratio

6Investment Valuation
Ratios

6a- Per Share

Data

6b- Price/Book Value

Ratio

6c- Price/Cash Flow

Ratio

6d- Price/Earnings
Ratio

6e- Price/Earnings To
Growth Ratio

6f- Price/Sales

Ratio

6g- Dividend

Yield
6h- Enterprise Valu
Multiple

1) Liquidity Measurement Ratios:

The first ratios we'll takea look at in this tutorial are the liquidity ratios. Liquidity
ratios attempt to
measure a company's ability to pay off its short-term debt obligations. This is
done by comparing a company's most liquid assets (or, those that can be
easily converted to cash), its short-term liabilities.
In general, the greater the coverage of liquid assets to short-term liabilities the
better as it is a clear signal that acompany can pay its debts that are coming due
in the near future and still fund
its ongoing operations. On the other hand, a company with a low coverage rate
should raise a red flag for investors as it may be a sign that the company will have
difficulty meeting running its operations, as well as meeting its obligations.
The biggest difference between each ratio is the type of assets used in the
calculation. While each ratio includes current assets, the more conservative ratios
will exclude some current assets as they aren't as easily converted to cash.
The ratios that we'll look at are the current, quick and cash ratios and we will also
go over the cash conversion cycle, which goes into how the company turns its
inventory into cash.
1a ) Liquidity Measurement Ratios: Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity
(also referred to as its current or working capital position) by deriving the
proportion of current assets available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term
assets (cash, cash equivalents, marketable securities, receivables and inventory)
are readily available to pay off its short-term liabilities (notes payable, current
portion of term debt, payables,accrued expenses and taxes). In theory, the higher
the current ratio, the better.
Formula:Current Ratio= Current Assets / Current Liabilities

The current ratio is used extensively in financial reporting. However, while easy to
understand, it can be misleading in both a positive and negative sense - i.e., a
high current ratio is not
necessarily good, and a low current ratio is not necessarily bad (see chart below).
Here's why: Contrary to popular perception, the ubiquitous current ratio, as an
indicator of liquidity, is flawed because it's conceptually based on the liquidation
of all of a company's current assets to meet all of its current liabilities. In reality,
this is not likely to occur.
Investors have to look at a company as a going concern. It's the time it takes to
convert a company's working capital assets into cash to pay its current
obligations that is the key to its liquidity. In a word, the current ratio can be
"misleading."
A simplistic, but accurate, comparison of two companies' current position will
illustrate the weakness of relying on the current ratio or a working capital number
(current assets minus current liabilities) as a sole indicator of liquidity:

--

Company
ABC

Company
XYZ

Current
Assets

$600

$300

Current
Liabilities

$300

$300

Working
Capital

$300

$0

Current
Ratio

2.0

1.0

Company ABC looks like an easy winner in a liquidity contest. It has an ample
margin of current assets over current liabilities, a seemingly good current ratio,
and working capital of $300.
Company XYZ has no current asset/liability margin of safety, a weak current ratio,

and no working capital.

However, to prove the point, what if: (1) both companies' current liabilities have an
average payment period of 30 days; (2) Company ABC needs six months (180
days) to collect its account receivables, and its inventory turns over just once a
year (365 days); and (3) Company XYZ is paid cash by its customers, and its
inventory turns over 24 times a year (every
15 days).
In this contrived example, Company ABC is very illiquid and would not be able to
operate under the conditions described. Its bills are coming due faster than its
generation of cash. You can't pay bills with working capital; you pay bills with
cash! Company's XYZ's seemingly tight current position is, in effect, much more
liquid because of its quicker cash conversion.
When looking at the current ratio, it is important that a company's current assets
can cover its current liabilities;however, investors should be aware that this is not
the whole story on company
liquidity. Try to understand the types of current assets the company has and how
quickly these can be converted into cash to meet current liabilities. This important
perspective can be seen through the cash conversion cycle (read the chapter on
CCC now). By digging deeper into the current assets, you will gain a greater
understanding of a company's true liquidity.
1b) Liquidity Measurement Ratios: Quick Ratio
The quick ratio - aka
the quick assets ratio or the acid-test ratio - is a liquidity indicator that further
refines the current ratio by measuring the amount of the most liquid current
assets there are to cover current liabilities. The quick ratio is more conservative
than the current ratio because it excludes inventory and other current assets,
which are more difficult to turn into cash. Therefore, a higher
ratio means a more liquid current position.
Formula: Quick Ratio= ( Cash&Equivalents +ShortTermInvestment + Account
Receivable) / Current Liabilities
Some presentations of the quick ratio
calculate quick assets (the formula's numerator) by simply subtracting the
inventory figure from the total current assets figure. The assumption is that by
excluding relatively less-liquid (harder to turn into cash) inventory, the remaining
current assets are all of the more-liquid variety. Generally, this is close to the
truth, but not always.
As previously mentioned, the quick ratio is a more conservative measure of

liquidity than the current ratio as it removes inventory from the current assets
used in the ratio's formula. By excluding inventory, the quick ratio focuses on the
more-liquid assets of a company.
The basics and use of this ratio are similar to the current ratio in that it gives
users an idea of the ability of a company to meet its short-term liabilities with its
short-term assets. Another beneficial use is to compare the quick ratio with the
current ratio. If the current ratio
is significantly higher, it is a clear indication that the company's current
assets are dependent on inventory.
While considered more stringent than the current ratio, the quick ratio, because of
its accounts receivable component, suffers from the same deficiencies as the
current ratio - albeit somewhat less. To understand these "deficiencies", readers
should refer to the
commentary section of the Current Ratio chapter. In brief, both the quick and
the current ratios assume a liquidation of accounts receivable and inventory as
the basis for measuring liquidity.
While theoretically feasible, as a going concern
a company must focus on the time it takes to convert its working capital assets
to cash - that is the true measure of liquidity. Thus, if accounts receivable,
as a component of the quick ratio, have, let's say, a conversion time of several
months rather than several days, the "quickness" attribute of this
ratio is questionable.
Investors need to be aware that the conventional
wisdom regarding both the current and quick ratios as indicators of a company's
liquidity can be misleading.
The cash ratio is an indicator of a company's liquidity that further refines both
the current ratio and the quick ratio by measuring the amount of cash,
cash equivalents or invested funds there are in current assets to cover current
liabilities.
1c) Liquidity Measurement Ratios: Cash Ratio
The cash ratio is an indicator of a company's liquidity that further refines both
the current ratio and the quick ratio by measuring the amount of cash,
cash equivalents or invested funds there are in current assets to cover current
liabilities.
Formula:Cash Ratio=cash+cash equivalents+Invested Funds / Current Liabilities
The cash ratio is the most stringent and conservative of the three shortterm liquidity ratios (current, quick and cash). It only looks at the most liquid

short-term assets of the company,

which are those that can be most easily used to pay off current obligations. It also
ignores inventory and receivables, as there are no assurances that these two
accounts can be converted to cash in a timely matter to meet current liabilities.
Very few companies will have enough cash and cash equivalents to fully cover
current liabilities, which isn't necessarily a bad thing, so don't focus on this ratio
being above 1:1.
The cash ratio is seldom used in financial reporting or by analysts in the
fundamental analysis of a company. It is not realistic for a company to
purposefully maintain high levels of cash assets to cover current liabilities. The
reason being that it's often seen as poor asset utilization for a company to hold
large amounts of cash on its balance sheet, as this money could be returned to
shareholders or used elsewhere to generate higher returns. While providing an
interesting liquidity perspective, the usefulness of this ratio is limited.
1d) Liquidity Measurement Ratios: Cash Conversion Cycle

This liquidity metric expresses the length of time (in days) that a company uses to
sell inventory,
collect receivables and pay its accounts payable. The cash conversion cycle
(CCC) measures the number of days a company's cash is tied up in the the
production and sales process of its operations and the benefit it gets from
payment terms from its creditors. The shorter this cycle, the more liquid the
company's working capital position is. The CCC is also known as the
"cash" or "operating" cycle.
Formula:Cash Conversion Cycle=DIO + DSO -DPO
Where
DIO = Days Inventory Outstanding
DSO =Days Sales Outstanding
DPO= Days Payable Outstanding

Components:
DIO is computed by:
1.
Dividing the cost of sales (income statement) by 365 to get a cost of
sales per day figure;
2.
Calculating the averageinventory figure by adding the year's
beginning (previous yearend amount) and ending inventory figure (both are

in the balance sheet) and dividing by

2 to obtain an average amount of inventory for any given year; and
3.
Dividing the average inventory figure by the cost of sales per day
figure.

(1) cost
of sales per day

739.4
365 = 2.0

(2)
average
inventory 2005

536.0 +
583.7 = 1,119.7
2 = 559.9

(3) days
inventory
outstanding

559.9
2.0 = 279.9

DIO gives a measure of the number of days it takes for the company's inventory to
turn over, i.e., to be converted to sales, either as cash or accounts receivable.
DSO is computed by:
1.
Dividing net sales (income statement) by 365 to get a net sales per
day figure;
2.
Calculating the average accounts receivable figure by adding the
year's beginning (previous yearend amount) and ending accounts
receivable amount (both figures are in the balance sheet) and dividing by 2
to obtain an average amount of accounts receivable for any given year; and
Dividing the average accounts receivable figure by the net sales per day
figure.

(1) net
sales per day

3,286.1
365 = 9.0

(2)
524.8 +
average accounts 524.2 = 1,049 2
receivable
= 524.5

(3) days
sales outstanding

524.5
9.0 = 58.3

DSO gives a measure of the number of days it takes a company to collect on sales
that go into accounts receivables (credit purchases).
DPO is computed by:
1.
Dividing the cost of sales (income statement) by 365 to get a cost of
sales per day figure;
2.
Calculating the average accounts payable figure by adding the year's
beginning (previous yearend amount) and ending accounts payable amount
(both figures are in the balance
sheet), and dividing by 2 to get an average accounts payable amount for
any
given year; and Dividing the average accounts payable figure by the cost of
sales per day figure.

(1) cost
of sales per day

739.4
365 = 2.0

(2)
average accounts
payable

131.6 +
123.6 = 255.2
125.6

(3) days
payable outstanding

125.6
2.0 = 63

DPO gives a measure of how long it takes thecompany to pay its obligations to
suppliers.
CCC computed:
cash conversion cycle for FY 2005 would be computed with these numbers
(rounded):

DIO

280 days

DSO

+58 days

DPO

-63
days

CCC

275
days

Variations:
Often the components of the cash conversion cycle - DIO, DSO and DPO - are
expressed in terms of turnover as a times (x) factor. For example, in the case of
Company, its days inventory
outstanding of 280 days would be expressed as turning over 1.3x annually (365
days 280 days = 1.3 times). However, actually counting days is more literal and
easier to understand when considering how fast assets turn into cash.
An often-overlooked metric, the cash conversion cycle is vital for two reasons.
First, it's an indicator of the company's efficiency in managing its important
working capital assets; second,
it provides a clear view of a company's ability to pay off its current liabilities.
It does this by looking at how quickly the company turns its inventory into sales,
and its sales into cash, which is then used to pay its suppliers for goods and
services. Again, while the quick and current ratios are more often mentioned in
financial reporting, investors would be well advised to measure true liquidity by
paying attention to a company's cash conversion cycle.
The longer the duration of inventory on hand and of the collection of receivables,
coupled with a shorter duration for payments to a company's suppliers, means
that cash is being tied up in inventory and receivables and used more quickly in
paying off trade payables. If this circumstance becomes a trend, it will reduce, or
squeeze, a company's cash availabilities. Conversely, a positive trend in the cash
conversion cycle will add to a company's liquidity.
By tracking the individual components of the CCC (as well as the CCC as a
whole), an investor is able to discern positive and negative trends in a company's
all-important working capital assets and liabilities.

For example, an increasing trend in DIO could mean decreasing demand for a
company's products. Decreasing DSO could indicate an increasingly competitive
product, which allows a company to tighten its buyers' payment terms.
As a whole, a shorter CCC means greater liquidity, which translates into less of a
need to borrow, more opportunity to realize price discounts with cash purchases
for raw materials, and an increased capacity to fund the expansion of the
business into new product lines and
markets. Conversely, a longer CCC increases a company's cash needs and
negates
all the positive liquidity qualities just mentioned.
Current Ratio Vs. The CCC
The obvious limitations of the current ratio as an indicator of true liquidity clearly
establish a strong case for greater recognition, and use, of the cash conversion
cycle in any analysis of a
company's working capital position.
Nevertheless, corporate financial reporting,investment literature and investment
research services seem to be stuck on using the current ratio as an indicator of
liquidity. This circumstance is similar to the financial media's and the general
public's attachment to the Dow Jones Industrial Average. Most investment
professionals see this index as unrepresentative of the stock market or the
national economy. And yet, the popular Dow marches on as the market indicator
of choice.
The current ratio seems to occupy a similar position with the investment
community regarding financial ratios that measure liquidity. However, it will
probably work better for investors to pay more attention to the cash-cycle concept
as a more accurate and meaningful measurement of a company's liquidity.
2 Profitability Indicator Ratios: Introduction
This section of the tutorial discusses the different measures of
corporate profitability and financial performance. These ratios, much like the
operational performance ratios, give users a good understanding of how well the
company utilized its resources in generating profit and shareholder value.
2a)Profitability Indicator Ratios: Profit Margin Analysis
n the income statement,there are four levels of profit or profit margins - gross
profit, operating
profit, pretax profit and net profit. The term "margin" can apply to the absolute

number for a given profit level and/or the number as a percentage of net
sales/revenues. Profit margin analysis uses the percentage calculation to provide
a comprehensive measure of a company's profitability on a historical basis (3-5
years) and in comparison to peer companies and industry benchmarks.
Basically, it is the amount of profit (at the gross, operating, pretax or net income
level) generated by the company as a percent of the sales generated. The
objective of margin analysis is to detect consistency or positive/negative trends in
a company's earnings. Positive profit margin analysis translates into positive
investment quality. To a large degree,
it is the quality, and growth, of a company's earnings that drive its stock price.
Formulas: Gross Profit Margin=Gross Profit/Net Sales (Revenue)
Operating Profit Margin =Operating Profit/Net Sales (Revenue)
PreTaxProfit Margin=PreTax Profit/Net Sales (Revenue)
Net Profit Margin= Net Income/Net Sales (Revenue)
2b) Profitability Indicator Ratios: Effective Tax Rate

This ratio is a measurement of a company's tax rate, which is calculated by

comparing its income tax expense to its pretax income. This amount will often
differ from the company's stated jurisdictional rate due to many accounting
factors, including foreign exchange
provisions. This effective tax rate gives a good understanding of the tax rate
the company faces.
Formula:Effective Tax Rate %=Income Tax Expense/PreTax Income
2c) Profitability Indicator Ratios: Return On Assets
This ratio indicates how profitable a company is relative to its total assets.
The return
on assets (ROA) ratio illustrates how well management is employing the
company's
total assets to make a profit. The higher the return, the more efficient
management is in utilizing its asset base. The ROA ratio is calculated by
comparing net income to average total assets, and is expressed as a percentage.
Formula:Return On assets=Net Income/Average Total assets
Some investment analysts use the operating-income figure instead of the netincome figure when calculating the ROA ratio.

The need for investment in current and non-current assets varies greatly among
companies. Capital-intensive businesses (with a large investment in fixed assets)
are going to be more asset heavy than technology or service businesses.
In the case of capital-intensive businesses, which have to carry a relatively large
asset base, will calculate their ROA based on a large number in the denominator
of this ratio. Conversely,
non-capital-intensive businesses (with a small investment in fixed assets) will be
generally favored with a relatively high ROA because of a low denominator
number.
It is precisely because businesses require different-sized asset bases that
investors need to think about how they use the ROA ratio. For the most part, the
ROA measurement should be used historically for the company being analyzed. If
peer company comparisons are made, it is
imperative that the companies being reviewed are similar in product line and
business type. Simply being categorized in the same industry will not
automatically make a company comparable. Illustrations (as of FY 2005) of the
variability of the ROA ratio can be found in such companies as General Electric,
2.3%; Proctor & Gamble, 8.8%; and Microsoft, 18.0%.
As a rule of thumb, investment professionals like to see a company's ROA come
in at no less than 5%. Of course, there are exceptions to this rule. An important
one would apply to banks, which strive to record an ROA of 1.5% or above.
2d) Profitability Indicator Ratios: Return On Equity
This ratio indicates how profitable a company is by comparing its net income to
its average shareholders' equity. The return on equity ratio (ROE) measures how
much the shareholders
earned for their investment in the company. The higher the ratio percentage, the
more efficient management is in utilizing its equity base and the better return is to
investors.
Formula:Return On Equity=Net Income/Average ShareHolders Equity
Widely used by investors, the ROE ratio is animportant measure of a company's
earnings performance. The ROE tells common shareholders how effectively their
money is being employed. Peer company, industry and overall market
comparisons are appropriate; however, it should be recognized that there are
variations in ROEs among some types of businesses. In
general, financial analysts consider return on equity ratios in the 15-20% range
as representing attractive levels of investment quality.
While highly regarded as a profitability indicator, the ROE metric does have a
recognized weakness. Investors need to be aware that a disproportionate amount

of debt in a company's capital structure would translate into a smaller equity

base. Thus, a small amount of net income
(the numerator) could still produce a high ROE off a modest equity base (the
denominator).
2e) Profitability Indicator Ratios: Return On Capital Employed
The return on capital employed (ROCE) ratio, expressed as a percentage,
complements the return on equity (ROE) ratio by adding a company's debt
liabilities, or funded debt, to
equity to reflect a company's total "capital employed". This measure narrows the
focus to gain a better understanding of a company's ability to generate returns
from its available capital base.
By comparing net income to the sum of a company's debt and equity capital,
investors can get a clear picture of how the use of leverage impacts a company's
profitability. Financial analysts consider the ROCE measurement to be a more
comprehensive profitability indicator because
it gauges management's ability to generate earnings from a company's total pool
of capital
Formula:Return On Capital Employed(ROCE)=Net Income/Capital Employed
Capital Employed=Average Debt Liabilities + Average Share Holders Equity
The return on capital employed is an important measure of a company's
profitability. Many investment analysts think that factoring debt into a company's
total capital provides a more comprehensive evaluation of how well management
is using the debt and equity it has at its
disposal. Investors would be well served by focusing on ROCE as a key, if not the
key, factor to gauge a company's profitability. An ROCE ratio, as a very general
rule of thumb, should be at or above a company's average borrowing rate.
3 Debt Ratios: Introduction
The third series of ratios in this tutorial are debt ratios. These ratios give users a
general idea of the company's overall debt load as well as its mix of equity and
debt. Debt ratios can be used to determine the overall level of financial risk a
company and its shareholders face. In general, the greater the amount of debt
held by a company the greater the financial risk of bankruptcy.
3a) Debt Ratios: Overview Of Debt
Before discussing the various financial debt ratios, we need to clear up the
terminology used with "debt" as this concept relates to financial statement

presentations. In addition, the debt-related topics of "funded debt" and credit

ratings are discussed below.
There are two types of liabilities operational and debt. The former includes balance sheet accounts, such as
accounts payable, accrued expenses, taxes payable, pension obligations, etc. The
latter includes notes payable and other short-term borrowings, the current
portion of long-term borrowings, and long-term borrowings. Often times, in
investment literature, "debt" is used synonymously with total
liabilities. In other instances, it only refers to a company's indebtedness.
The debt ratios that are explained herein arethose that are most commonly used.
However, what companies, financial analysts and investment research services
use as components to calculate these ratios is far from standardized. In the
definition paragraph for each ratio, no matter how the ratio is titled, we will clearly
indicate what type of debt is being used in
our measurements.
3b) Debt Ratios: The Debt Ratio
The debt ratiocompares a company's total debt to its total assets, which is used to
gain
a general idea as to the amount of leverage being used by a company. A low
percentage means that the company is less dependent on leverage, i.e., money
borrowed from and/or owed to others. The lower the percentage, the less leverage
a company is using and the stronger its equity position. In general, the higher the
ratio, the more risk that company is considered to have taken on.
Formula: Debt Ratio=Total Liabilities/Total assets
3c) Debt Ratios: Debt-Equity Ratio
The debt-equity ratio is another leverage ratio that compares a company's total
liabilities to
its total shareholders' equity. This is a measurement of how much suppliers,
lenders, creditors and obligors have committed to the company versus what the
shareholders have committed.
To a large degree, the debt-equity ratio provides another vantage point on a
company's leverage position, in this case, comparing total liabilities to
shareholders' equity, as opposed to total assets in the debt ratio. Similar to the
debt ratio, a lower the percentage means that a company is using less leverage
and has a stronger equity position.
Formula:Debt- Equity Ratio=Total Liabilities/ShareHolders Equity

3d) Debt Ratios: Capitalization Ratio

The capitalization ratio measures the debt component of a company's capital
structure, or capitalization (i.e., the sum of long-term debt liabilities and
shareholders' equity) to support a company's operations and growth.
Long-term debt is divided by the sum of long-term debt and shareholders' equity.
This ratio is considered to be one of the more meaningful of the "debt" ratios - it
delivers the key
insight into a company's use of leverage.
There is no right amount of debt. Leverage varies according to industries, a
company's line of business and its stage of development. Nevertheless, common
sense tells us that low debt and high equity levels in the capitalization ratio
indicate investment quality.
Formula:Capitalization Ratio=LongTerm debt/LongTerm debt + ShareHolders
Equity

A company's capitalization (not to be confused with its market capitalization) is

the term used to describe the makeup of a company's permanent or long-term
capital, which consists of both long-term debt and shareholders' equity. A low
level of debt and a healthy proportion of
equity in a company's capital structure is an indication of financial fitness.
Prudent use of leverage (debt) increases the financial resources available to a
company for growth and expansion. It assumes that management can earn more
on borrowed funds than it pays in interest expense and fees on these funds.
However successful this formula may seem, it does require a company to
maintain a solid record of complying with its various
borrowing commitments.
A company considered too highly leveraged (too much debt) may find its freedom
of action restricted by its creditors and/or have its profitability hurt by high
interest costs. Of course, the worst of all scenarios is having trouble meeting
operating and debt liabilities on time and
surviving adverse economic conditions. Lastly, a company in a highly competitive
business, if hobbled by high debt, will find its competitors taking advantage of its
problems to grab more market share.
As mentioned previously, the capitalization ratio is one of the more meaningful
debt ratios because it focuses on the relationship of debt liabilities as a
component of a company's total capital base, which is the capital raised by
shareholders and lenders.

3e) Debt Ratios: Interest Coverage Ratio

The interest coverage ratio is used to determine how easily a company can pay
interest expenses on outstanding debt. The ratio is calculated by dividing a
company's earnings
before interest and taxes (EBIT) by the company's interest expenses for the same
period. The lower the ratio, the more the company is burdened by debt expense.
When a company's interest coverage ratio is only 1.5 or lower, its ability to meet
interest expenses may be questionable.
Formula:Interest Coverage Ratio=EBITA/Interest Expenses

3f) Debt Ratios: Cash Flow To Debt Ratio

This coverage ratio compares a company's operating cash flow to its total debt,
which, for
purposes of this ratio, is defined as the sum of short-term borrowings, the current
portion of long-term debt and long-term debt. This ratio provides an indication of
a company's ability to cover total debt with its yearly cash flow from operations.
The higher the percentage ratio, the better the company's ability to carry its total
debt.
Formula:Cash Flow To debt Ratio=Operating Cash Flow/Total Debt
4 Operating Performance Ratios: Introduction
Each of these ratios have differing inputs and measure different segments of a
company's overall operational performance, but the ratios do give users insight
into the
company's performance and management during the period being measured.
These ratios look at how well a company turns its assets into revenue as well as
how efficiently a company converts its sales into cash. Basically, these ratios look
at how efficiently and effectively a company is using its resources to generate
sales and increase shareholder value. In general, the better these ratios are, the
better it is for shareholders.
In this section, we'll look at the fixed-asset turnover ratio and the sales/revenue
per employee ratio, which look at how well the company uses its fixed assets and
employees to generate sales. We will also look at the operating cycle measure,

which details the company's ability to

convert is inventory into cash.
4a) Operating Performance Ratios: Fixed-Asset Turnover
This ratio is a rough measure of the productivity of a company's fixed assets
(property, plant
and equipment or PP&E) with respect to generating sales. For most companies,
their investment in fixed assets represents the single largest component of their
total assets. This annual turnover ratio is designed to reflect acompany's
efficiency in managing these significant assets. Simply put, thehigher the yearly
turnover rate, the better.
Formula:Fixed Asset Turn Over Ratio=Revenue/Property,Plant and Equipment
Net Sales/Investments
Before putting too much weight into this ratio, it's important to determine the type
of company that you are using the ratio on because a company's investment in
fixed assets is very
much linked to the requirements of the industry in which it conducts its business.
Fixed assets vary greatly among companies. For example, an internet company,
like Google, has less of a fixed-asset base than a heavy manufacturer like
Caterpillar. Obviously, the fixed-asset ratio for Google will have less relevance
than that for Caterpillar.
4b) Operating Performance Ratios: Sales/Revenue Per Employee
As a gauge of personnel productivity, this indicator simply measures the amount
of dollar sales, or revenue, generated per employee. The higher the dollar figure
the better. Here again, labor-intensive businesses (ex. mass market retailers) will
be less productive in this metric than a high-tech, high product-value
manufacturer.
Formula:Sales/Revenue Per Employee=Revenue/Number of Employees(Average)
4c) Operating Performance Ratios:Operating Cycle
Expressed as an indicator (days) of management performance efficiency, the
operating cycle is a "twin" of the cash conversion cycle. While the parts are the
same - receivables, inventory and payables - in the operating cycle, they are
analyzed from the perspective of how well the company is managing these critical
operational capital assets, as opposed to their impact on cash.

Formula:Operating Cycle(Days)=DIO+DSO-DPO
DIO=Days Inventory Outstanding
DSO=Days sales Outstanding
DPO=Days Payable Outstanding
DIO is computed by:
1.
Dividing the cost of sales (income statement) by 365 to get a cost of
sales per day figure;
2.
Calculating the average inventory figure by adding the year's
beginning (previous yearend amount) and ending inventory figure (both are
in the balance sheet) and dividing by
2 to obtain an average amount of inventory for any given year; and
3.
Dividing the average inventory figure by the cost of sales per day
figure.
DSO is computed by:
1.
Dividing net sales (incomestatement) by 365 to get net sales per day
figure;
2.
Calculating the average accounts receivable figure by adding the
year's beginning (previous yearend amount) and ending accounts
receivable amount (both figures are in
the balance sheet) and dividing by 2 to obtain an average amount of
accounts receivable for any given year; and Dividing the average accounts
receivable figure by the net sales per day figure.
DPO is computed by:

Dividing the cost of sales (income statement) by 365 to get a cost of sales
per day figure;

Calculating the average accounts payable figure by adding the year's

beginning (previous yearend amount) and ending accounts payable amount (both
figures are in the balance
sheet), and dividing by 2 to get an average accounts payable amount for any given
year; and Dividing the average accounts payable figure by the cost of sales per
day figure.
5 Cash Flow Indicator Ratios: Introduction
This section of the financial ratio tutorial looks at cash flow indicators, which
focus on the cash being generated in terms of how much is being generated and
the safety net that it provides to the company. These ratios can give users another
look at the financial health and performance of a company.
At this point, we all know that profits are very important for a company. However,
through the magic of accounting and non-cash-based transactions, companies
that appear very profitable can actually be at a financial risk if they are generating

little cash from these profits. For example, if a company makes a ton of sales on
credit, they will look profitable but haven't actually received cash for the sales,
which can hurt their financial health since they have obligations to pay.
The ratios in this section use cash flow compared to other company metrics to
determine how much cash they are generating from their sales, the amount of
cash they are generating free and clear, and the amount of cash they have to
cover obligations. We will look at the
operating cash flow/sales ratio, free cash flow/operating cash flow ratio and cash
flow coverage ratios.
5a)Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio
Thisratio, which is expressed as a percentage, compares a company's operating
cash flow to its net sales or revenues, which gives investors an idea of the
company's ability to turn sales into cash.
It would be worrisome to see a company's sales grow without a parallel growth in
operating cash flow. Positive and negative changes in a company's terms of sale
and/or the collection experience of its accounts receivable will show up in this
indicator.
Formula:OCF/Sales Ratio=Operating cash Flow/Net Sales(Revenue)
The statement of cash flows has three distinct sections, each of which relates to
an aspect of a company's cash flow activities - operations, investing and
financing. In this ratio, we use the
figure for operating cash flow, which is also variously described in financial
reporting as simply "cash flow", "cash flow provided by operations", "cash flow
from operating activities" and "net
cash provided (used) by operating activities".
In the operating section of the cash flow statement, the net income figure is
adjusted for non-cash charges and increases/decreases in the working capital
items in a company's current assets and liabilities. This reconciliation results in
an operating cash flow figure, the foremost source of a company's cash
generation (which is internally generated by its operating activities).
The greater the amount of operating cash flow, the better. There is no standard
guideline for the operating cash flow/sales ratio, but obviously, the ability to
generate consistent and/or improving percentage comparisons are positive
investment qualities.

5b) Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio
The free cash flow/operating cash flow ratio measures the relationship between
free cash flow and operating cash flow.
Free cash flow is most often defined as operating cash flow minus capital
expenditures, which, in analytical terms, are considered to be an essential outflow
of funds to maintain a company's
competitiveness and efficiency.
The cash flow remaining after this deduction is considered "free" cash flow, which
becomes available to a company to use for expansion, acquisitions, and/or
financial stability to weather difficult market conditions. The higher the percentage
of free cash flow embedded in a
company's operating cash flow, the greater the financial strength of the company.
Formula:FCF/OCF Ratio=Free Cash Flow(Operating Cash Flow-Capital
Expenditure)/Operating cash Flow
5c)Cash Flow Indicator Ratios:Cash Flow Coverage Ratio
This ratio measures the ability of the company's operating cash flow to meet its
obligations including its liabilities or ongoing concern costs.
The operating cash flow is simply the amount of cash generated by the company
from its main operations, which are used to keep the business funded.
The larger the operating cash flow coverage for these items, the greater the
company's ability to meet its obligations, along with giving the company more
cash flow to expand its business, withstand hard times, and not be burdened by
debt servicing and the restrictions typically
included in credit agreements
Formulas:Short Term Debt Coverage=Operating Cash Flow/Short-term Debt
Capital Expenditure Coverage=Operating cash Flow/Capital Expenditures
Divident Coverage=Operating Cash Flow/Cash Dividents
CAPEX+Cash Divident Coverage=Operating Cash flow/Capital Expenditure+cash
Dividents
The short-term debt coverage ratio compares the sum of a company's short-term
borrowings and the current portion of its long-term debt to operating cash flow.

The capital expenditure coverage ratio compares a company's outlays for

its property, plant and equipment (PP&E) to operating cash flow. In the case of
ABC Holdings, as mentioned above, it has ample margin to fund the acquisition
of needed capital assets. For most analysts and investors, a positive difference
between operating cash flow and capital expenditures defines free cash flow.
Therefore, the larger this ratio is, the more cash assets a company has to work
with.
The dividend coverage ratio provides dividend investors with a narrow look at the
safety of the company's dividend payment. not paying a dividend, although with
its cash buildup and cash
generation capacity, it certainly looks like it could easily become a dividend payer.
For conservative investors focused on cash flow coverage, comparing the sum of
a company's capital expenditures and cash dividends to its operating cash flow is
a stringent measurement that puts cash flow to the ultimate test. If a company is
able to cover both of these outlays
of funds from internal sources and still have cash left over, it is producing what
might be called "free cash flow on steroids". This circumstance is a highly
favorable investment quality
5c) Cash Flow Indicator Ratios: Dividend Payout Ratio
This ratio identifies the percentage of earnings (net income) per common share
allocated to paying cash dividends to shareholders. The dividend payout ratio is
an indicator of how well
earnings support the dividend payment. Here's how dividends "start" and "end."
During a fiscal year quarter, a company'sboard of directors declares a dividend.
This event triggers the posting of a current liability for "dividends payable." At the
end of the quarter, net income is credited to a company's retained earnings, and
assuming there's sufficient cash on hand and/or from current operating cash flow,
the dividend is paid out. This reduces cash, and the dividends payable liability is
eliminated.
The payment of a cash dividend is recorded in the statement of cash flows under
the "financing activities" s
Formula:Divident Payout Ratio %=Dividents Per Common Share/Earnings Per
Share

6 ) Investment Valuation Ratios: Introduction

This last section of the ratio analysis tutorial looks at a wide array of ratios that
can be used by
investors to estimate the attractiveness of a potential or existing investment and

get an idea of its valuation.

However, when looking at the financial statements of a company many users can
suffer from information overload as there are so many different financial values.
This includes revenue,
gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes
on. Investment valuation ratios attempt to simplify this evaluation process by
comparing relevant data that help users gain an estimate of valuation.
For example, the most well-known investment valuation ratio is the P/E ratio,
which compares the current price of company's shares to the amount of earnings
it generates. The purpose of this ratio is to give users a quick idea of how much
they are paying for each $1 of earnings. And
with one simplified ratio, you can easily compare the P/E ratio of one company to
its competition and to the market.
The first part of this tutorial gives a great overview of "per share" data and the
major considerations that one should be aware of when using these ratios. The
rest of this section covers the various valuation tools that can help you determine
if that stock you are
interested in is looking under or overvalued.
6a)Investment Valuation Ratios: Per Share Data
Before discussing valuation ratios, it's worthwhile to briefly review some
concepts that are integral to the interpretation and calculation of the most
commonly used per share indicators.
Per-share data can involve any number of items in a company's financial position.
In corporate financial reporting - such as the annual report, Forms 10-K and 10-Q
(annual and quarterly reports, respectively, to the SEC) - most per-share data can
be found in these
statements, including earnings and dividends.
Additional per-share items (which are often reported by investment research
services) also include sales (revenue), earnings growth and cash flow. To
calculate sales, earnings and cash flow per share, a weighted average of the
number of shares outstanding is used. For book value per share, the fiscal
yearend number of shares is used. Investors can rely on
companies and investment research services to report earnings per share on this
basis.
In the case of earnings per share, a distinction is made between basic and diluted

income per share. In the case of the latter, companies with outstanding warrants,
stock options, and convertible preferred shares and bonds would report diluted
earnings per share in addition
to their basic earnings per share.
The concept behind this treatment is that if converted to common shares, all these
convertible securities would increase a company's shares outstanding. While it is
unlikely for any or all of these items to be exchanged for common stock in their
entirety at the same time,
conservative accounting conventions dictate that this potential dilution (an
increase in a company's shares outstanding) be reported. Therefore, earnings per
share come in two varieties - basic and diluted (also referred to as fully diluted).
An investor should carefully consider the diluted share amount if it differs
significantly from the basic share amount. A company's share price could suffer if
a large number of the option holders of its convertible securities decide to switch
to stock.
For example, let's say that XYZ Corp. currently has one million shares
outstanding, one million in convertible options outstanding (assumes each option
gives the right to buy one share), and the company's earnings per share are $3. If
all the options were exercised (converted), there would be two million shares
outstanding. In this extreme example, XYZ's earnings per share would drop from
$3 to $1.50 and its share place would plummet.
While it is not very common, when companies sell off and/or shut down a
component of their operations, their earnings per share (both basic and diluted)
will be reported with an additional qualification, which is presented as being
based on continuing and discontinued operations.
The absolute dollar amounts for earnings, sales, cash flow and book value are
worthwhile for investors to review on a year-to-year basis. However, in order for
this data to be used in calculating investment valuations, these dollar amounts
must be converted to a per-share
basis and compared to a stock's current price. It is this comparison that gives rise
to the common use of the expression "multiple" when referring to the relationship
of a company's stock price (per share) to its per-share metrics of earnings, sales,
cash flow and book value. These so-called valuation ratios provide investors with
an estimation, albeit a simplistic one, of whether a stock price is too high,
reasonable, or a bargain as an investment opportunity.

Lastly, it is very important to once again to remind investors that while some
financial ratios have general rules (or a broad application), in most instances it is
a prudent practice to look at a company's historical performance and use peer
company/industry comparisons to
put any given company's ratio in perspective. This is particularly true of
investment valuation ratios. This paragraph, therefore, should be considered as
an integral part of the discussion of each of the following ratios.
6b)Investment Valuation Ratios: Price/Book Value Ratio
A valuation ratio used by investors which compares a stock's per-share price
(market value) to its book value (shareholders' equity). The price-to-book value
ratio, expressed as a multiple (i.e. how many times a company's stock is trading
per share compared to the company's book value per share), is an indication of
how much shareholders are paying for the net assets of a company.
The book value of a company is the value of a company's assets expressed on the
balance sheet. It is the difference between the balance sheet assets and balance
sheet liabilities and is an estimation of the value if it were to be liquidated.
The price/book value ratio, often expressed simply as "price-to-book", provides
investors a way to compare the market value, or what they are paying for each
share, to a conservative measure of the value of the firm.

Formula:Price/Book Value Ratio=Stock Price per share/Share Holders Equity per

share
If a company's stock price (market value) is lower than its book value, it can
indicate one of two possibilities. The first scenario is that the stock is being
unfairly or incorrectly undervalued by
investors because of some transitory circumstance and represents an attractive
buying opportunity at a bargain price. That's the way value investors think. It is
assumed that the company's positive fundamentals are still in place and will
eventually lift it to a much higher price level.
On the other hand, if the market's low opinion and valuation of the company are
correct (the way growth investors think), at least over the foreseeable future, as a
stock investment, it will be
perceived at its worst as a losing proposition and at its best as being a stagnant
investment.
Some analysts feel that because a company's assets are recorded at historical

cost that its book value is of limited use. Outside the United States, some
countries' accounting standards allow for the revaluation of the property, plant
and equipment components of fixed assets
in accordance with prescribed adjustments for inflation. Depending on the age of
these assets and their physical location, the difference between current market
value and book value can be substantial, and most likely favor the former with a
much higher value than the latter.
Also, intellectual property, particularly as we progress at a fast pace into the socalled "information age", is difficult to assess in terms of value. Book value may
well grossly undervalue these kinds of assets, both tangible and intangible.
The P/B ratio therefore has its shortcomings but is still widely used as a valuation
metric. It is probably more relevant for use by investors looking at capitalintensive or finance-related businesses, such as banks.
In terms of general usage, it appears that the price-to-earnings (P/E) ratio is firmly
entrenched as the valuation of choice by the investment community. (Skip ahead
to the P/E chapter here.)
6c ) Investment Valuation Ratios: Price/Cash Flow Ratio
The price/cash flow ratio is used by investors to evaluate the investment
attractiveness, from a value standpoint, of a company's stock. This metric
compares the stock's market price to the amount of cash flow the company
generates on a per-share basis.
This ratio is similar to the price/earnings ratio, except that the price/cash flow ratio
(P/CF) is seen by some as a more reliable basis than earnings per share to
evaluate the acceptability, or lack thereof, of a stock's current pricing. The
argument for using cash flow over earnings is that the former is not easily
manipulated, while the same cannot be said for earnings, which, unlike cash flow,
are affected by depreciation and other non-cash factors.
Formula:Price/Cash Flow Ratio=Stock Price per share/Operating Cash Flow per
share
6d ) Investment Valuation Ratios: Price/Earnings Ratio
The price/earnings ratio (P/E) is the best known of the investment valuation
indicators. The P/E
ratio has its imperfections, but it is nevertheless the most widely reported and
used valuation by investment professionals and the investing public. The financial
reporting of both companies and investment research services use a
basic earnings per share (EPS) figure divided into the current stock price to

calculate the P/E multiple (i.e. how many times a stock is trading (its
price) per each dollar of EPS).
It's not surprising that estimated EPS figures are often very optimistic during bull
markets, while reflecting pessimism during bear markets. Also, as a matter of
historical record, it's no secret that the accuracy of stock analyst earnings
estimates should be looked at skeptically by
investors. Nevertheless, analyst estimates and opinions based on forward-looking
projections of a company's earnings do play a role in BSe nse stock-pricing
considerations.
Historically, the average P/E ratio for the broad market has been around 15,
although it can fluctuate significantly depending on economic and market
conditions. The ratio will also vary widely among different companies and
industries.
Formula:Price/earnings Ratio=Stock Price per share/Earnings Per share(EPS)
The basic formula for calculating the P/E ratio is fairly standard. There is never a
problem with the numerator - an investor can obtain a current closing stock price
from various sources, and
they'll all generate the same dollar figure, which, of course, is a per-share
number. However, there are a number of variations in the numbers used for the
EPS figure in the denominator. The most commonly used EPS dollar figures
include the following:

Basic earnings per share - based on the past 12 months as of the most
recent reported
quarterly net income. In investment research materials, this period is often
identified as trailing twelve months (TTM). As noted previously, diluted earnings
per share could also be used, but this is not a common practice. The term "trailing
P/E" is used to identify a P/E ratio calculated on this basis.

Estimated basic earnings per share - based on a forward 12-month

projection as of
the most recent quarter. This EPS calculation is not a "hard number", but rather
an estimate generated by investment research analysts. The term, estimated P/E
ratio, is used to identify a P/E ratio calculated on this basis.

The Value Line Investment Survey's combination approach - This wellknown and
respected independent stock research firm has popularized a P/E ratio that uses
six months of actual trailing EPS and six months of forward, or estimated, EPS as
its earnings per share component in this ratio.

Cash Earnings Per Share - Some businesses will report cash earnings per

share,
which uses operating cash flow instead of net income to calculate EPS.

Other Earnings Per Share - Often referred to as "headline EPS", "whisper

numbers", and "pro forma", these other earnings per shares metrics are all based
on assumptions due to special circumstances. While the intention here is to
highlight the impact of some
particular operating aspect of a company that is not part of its conventional
financial reporting, investors should remember that the reliability of these forms
of EPS is questionable.
A stock with a high P/E ratio suggests that investors are expecting higher
earnings growth in the future compared to the overall market, as investors are
paying more for today's earnings in
anticipation of future earnings growth. Hence, as a generalization, stocks with this
characteristic are considered to be growth stocks. Conversely, a stock with a low
P/E ratio suggests that investors have more modest expectations for its future
growth compared to the market as a whole.
The growth investor views high P/E ratio stocks as attractive buys and low P/E
stocks as flawed, unattractive prospects. Value investors are not inclined to buy
growth stocks at what they consider to be overpriced values, preferring instead to
buy what they see as underappreciated and undervalued stocks, at a bargain
price, which, over time, will hopefully perform well.
Note: Though this indicator gets a lot of investor attention, there is an important
problem that arises with this valuation indicator and investors should avoid
basing an investment decision solely on this measure. The ratio's denominator
(earnings per share) is based on accounting conventions related to a
determination of earnings that is susceptible to assumptions, interpretations and
management manipulation. This means that the quality of the P/E ratio is only as
good as the quality of the underlying earnings number.
Whatever the limitations of the P/E ratio, the investment community makes
extensive use of this valuation metric. It will appear in most stock quote
presentations on an updated basis, i.e., the latest 12-months earnings (based on
the most recent reported quarter) divided by the
current stock price. Investors considering a stock purchase should then compare
this current P/E ratio against the stock's long-term (three to five years) historical
record. This information is readily available in Value Line or S&P stock reports, as
well as from most financial websites, such as Yahoo!Finance and MarketWatch.
It's also worthwhile to look at the current P/E ratio for the overall market (S&P
500), the company's industry segment, and two or three direct competitor
companies. This comparative exercise can help investors evaluate the P/E of their
prospective stock purchase as being in a
high, low or moderate price range.

6e ) Investment Valuation Ratios: Price/Earnings To Growth Ratio

The price/earnings to growth ratio, commonly referred to as the PEG ratio, is
obviously closely related to the P/E ratio. The PEG ratio is a refinement of the P/E
ratio and factors in a stock's estimated earnings growth into its current valuation.
By comparing a stock's P/E ratio with its projected, or estimated, earnings per
share (EPS) growth, investors are given insight into the degree of overpricing or
underpricing of a stock's current valuation, as indicated by the
traditional P/E ratio.
The general consensus is that if the PEG ratio indicates a value of 1, this means
that the market is correctly valuing (the current P/E ratio) a stock in accordance
with the stock's current estimated earnings per share growth. If the PEG ratio is
less than 1, this means that EPS
growth is potentially able to surpass the market's current valuation. In other
words, the stock's price is being undervalued. On the other hand, stocks with high
PEG ratios can indicate just the opposite - that the stock is currently overvalued.
Formula:PEG ratio=(Price/Earnings (P/E) Ratio) /Earnings Per Share(EPS) Growth
6f) Investment Valuation Ratios:Price/Sales Ratio
A stock's price/sales ratio (P/S ratio) is another stock valuation indicator similar to
the P/E ratio. The P/S ratio measures the price of a company's stock against its
annual sales, instead of earnings.
Like the P/E ratio, the P/S reflects how many times investors are paying for every
dollar of a company's sales. Since earnings are subject, to one degree or another,
to accounting estimates and management manipulation, many investors consider
a company's sales (revenue) figure a more reliable ratio component in calculating
a stock's price multiple than the
earnings figure.
Formula:Price/sales Ratio=Stock Price Per share/Net Sales (revenue) per share

6g) Investment Valuation Ratios:Dividend Yield

A stock's dividend yield is expressed as an annual percentage and is calculated
as the company's annual cash dividend per share divided by the current price of
the stock. The dividend yield is found in the stock quotes of dividend-paying
companies. Investors should note that stock quotes record the per share dollar

amount of a company's latest quarterly declared dividend. This quarterly dollar

amount is annualized and compared to the current stock price to
generate the per annum dividend yield, which represents an expected return.
Income investors value a dividend-paying stock, while growth investors have little
interest in dividends, preferring to capture large capital gains. Whatever your
investing style, it is a matter of historical record that dividend-paying stocks have
performed better than
non-paying-dividend stocks over the long term.
Formula:Divident Yield=Annual Divident Per share/Stock Price per share

6h) Investment Valuation Ratios:Enterprise Value Multiple

This valuation metric is calculated by dividing a company's "enterprise value" by
its earnings
before interest expense, taxes, depreciation and amortization (EBITDA).
Overall, this measurement allows investors to assess a company on the same
basis as that of an acquirer. As a rough calculation, enterprise value multiple
serves as a proxy for how long it would take for an acquisition to earn enough to
pay off its costs (assuming no change in EBITDA).
Formula: Enterprice Value Multiple=Enterprice Value/EBITDA

Components:

Market Capitalization
$16,712
($67.44 x 247.8 MM)

--

--

Debt

82

Minority Interest

--

$16,796

Less Cash/Cash Equivalents (233)

Enterprise Value

$16,563

Enterprise value is calculated by adding a company's debt, minority interest, and

preferred stock to its market capitalization (stock price times number of shares
outstanding). The data
for ABC Holdings' enterprise value and earnings before interest, taxes,
depreciation and amortization (EBITDA) were obtained from its stock quote,
income statement and balance sheet as of December 31, 2005. By simply dividing,
the equation gives us the company's enterprise multiple of 15.7, which means that
it would take roughly 16 years for earnings (assuming EBITDA doesn't change) to
pay off the acquisition cost of ABC Holdings.
Enterprise value, also referred to as the value of the enterprise, is basically a
modification of market capitalization, which is determined by simply multiplying a
company's number of shares
outstanding by the current price of its stock. Obviously, a company's stock price
is heavily influenced by investor sentiment and market conditions, which, in turn,
will be determined by a company's market-cap value.
On the other hand, a company's enterprise value, which is the metric used by the
acquiring party in an acquisition, is a term used by financial analysts to arrive at a
value of a company viewed as a going concern rather than market capitalization.
For example, in simple terms,
long-term debt and cash in a company's balance sheet are important factors in
arriving at enterprise value - both effectively serve to enhance company's value
for the acquiring company.

As mentioned previously, enterprise value considerations seldom find their way

into standard stock analysis reporting. However, it is true that by using enterprise
value, instead of market
capitalization, to look at the book or market-cap value of a company, investors can
get a sense of whether or not a company is undervalued.

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