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Financial Ratios-3

The document discusses various financial ratios used in ratio analysis to evaluate a company's performance, including Net Profit Margin, Earnings Per Share (EPS), Return on Assets (ROA), Return on Equity (ROE), Dividend Yield Ratio, Dividend Payout Ratio, Price/Earnings Ratio (P/E), Book Value Per Share, Market/Book Ratio, Current Ratio, Acid-Test Ratio, Times Interest Earned Ratio, Debt Ratio, Gross Profit Margin, Operating Profit Margin, and Net Profit Margin. Each ratio is defined, calculated, and assessed for its implications on a company's financial health and investment potential. The document emphasizes the importance of these ratios for value investors in making informed investment decisions.

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5 views13 pages

Financial Ratios-3

The document discusses various financial ratios used in ratio analysis to evaluate a company's performance, including Net Profit Margin, Earnings Per Share (EPS), Return on Assets (ROA), Return on Equity (ROE), Dividend Yield Ratio, Dividend Payout Ratio, Price/Earnings Ratio (P/E), Book Value Per Share, Market/Book Ratio, Current Ratio, Acid-Test Ratio, Times Interest Earned Ratio, Debt Ratio, Gross Profit Margin, Operating Profit Margin, and Net Profit Margin. Each ratio is defined, calculated, and assessed for its implications on a company's financial health and investment potential. The document emphasizes the importance of these ratios for value investors in making informed investment decisions.

Uploaded by

uaena
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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RATIO ANALYSIS

RATIO ANALYSIS involves


methods of calculating and
interpreting financial ratios to
analyze and interpret a firm’s
performance.

FINANCIAL RATIOS involve the use


Value investors use financial
of numerical values taken from
ratios to help analyze a company’s
fundamentals. both Income Statement and
Balance Sheet.
NET PROFIT MARGIN
Net Profit Margin = Net Profit
TotalRevenue
= P 221,000
P3,074,000
= 7.2%
Net profit margin is thepercentage of revenue
remaining after alloperating expenses, interest,
taxesand preferred stock dividends have been
deducted from a company's totalrevenue.

The higher the firm’s net profit margin, the better. Look for a company with a growth of at
least 7%, with no more than 2 years of declining earnings of 5%, during the past 10 years.
EARNINGS PERSHARE
EPS = Earnings Available for Common Shareholders
Number of Common StocksOutstanding

= P221,000
76,262 shares
= P2.90
It represents the amount earned on each
outstanding share of common stock, and is an
important indicator of a company’s profitability
and success.
The higher the EPS, the better.
Choose stocks with high EPS.
RETURN ON ASSETS

ROA = Earnings Available for Common Shareholders


Total Assets
= P221,000
P3,597,000
= 6.1%
Also known as Return in Investments (ROI). It
measures the overall effectiveness of
management in generating income with its
available assets.
The higher the firm’s return on assets,
the better.
RETURN ON COMMON EQUITY

ROE = Earnings Available for Common Shareholders


Common Stock Equity
= P221,000
P1,754,000
= 12.6%
ROE measures the return earned on
the common stockholders’
investment in the firm.

Generally, the owners are better off the


higher is the return. 1,754
If Barlett company’s common stock at the
end of 2012was selling at P32.25
DIVIDEND YIELDRATIO
Dividend Yield = Dividend Per Share
Market Price

= P1.29
P32.25
= 4%
A higher figure signals that the company is
doing well. It could signify a long term
investment as companies dividendpolicies
are generally fixed in the longrun.

A dividend yield that’s at least 2/3 of the long-term AAA bond yield. Example, if the bond yield is
6%, the company’s dividend yield should be at least 4%
A company two things to do with theirearnings:
1. To Distributedividends
2. To RetainEarnings
DIVIDEND PAY-OUTRATIO
Dividend Payout = Dividends Per Share
Earnings Per Share
= P1.29
P2.90
= 44%

Payout Ratio is to measure the


percentage of earnings given out
as dividends.
PRICE/EARNINGS PER SHARE • If Barlett company’s common
stock at the end of 2012 was
P/E Ratio= Market Price PerShare selling at P32.25
Earnings Per Share (EPS)
• This figure indicates that investors
= P32.25 were paying 11.10 peso for each 1
P2.90 peso earnings.
= 11.1 times
• A good rule of thumb for value
PER measures the amount that investorsare willing investors is to look for stocks with a
to pay for each peso of a firm’s earnings. P/E less than 40% of the stocks
It answers how expensive are the shares of stocks. highest P/E over the previous 5
years.
The higher the P/E ratio, the greater the
investor confidence. But a lower P/E Ratio is
seen as favorable by investors.
BOOK VALUE PER SHARE
Common StockEquity
BOOK VALUE PER SHARE =
Number of common sharesoutstanding
= P1,754,000
Also known as: 76,262
Intrinsic Value
= P23.00
Book Value is used to find high-growth
companies that are undervalued.
Generally, the higher the book value the better. 1,754
Look for a share price that’s no more than 2/3 of
intrinsic value. If the market value is $32.25, the
share price should be no more than $21.50
MARKET/BOOK RATIO
Market Price per share of common stock
PRICE/BOOK RATIO=
Book Value per share of common stock

= P32.25 This figure indicates that investors are


P23.00 currently paying P1.40 for each P1.00of
= 1.40times book value of the company’sstock.

MB Ratio provides an assessment of UNDERVALUED STOCKS


how investors view the firm’s BOOK VALUE > MARKETVALUE
performance.
A low MB Ratio is a sign that the stock is undervalued. Value investors seeks companies with
MB Ratio that falls below industry averages.
CURRENT RATIO 1.61 times

ACID-TEST RATIO Insufficient


info
TIMES INTEREST
EARNED RATIO 2.55 times
DEBT RATIO 61.24%

GROSS PROFIT
44.02%
MARGIN

OPERATING
31.84%
PROFIT MARGIN
NET PROFIT MARGIN 9.68%

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