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Valuation Basics from the Income Statement

• Earnings per share (EPS) =$Earnings\; available\; to\; common\; shareholders\; /\; Number\; of\; common\; shares\; outstanding$
• Payout ratio = $Dividends\; per\; share\; /\; Earnings\; per\; share$
• Price to Earnings ratio (P/E) = $Market\; share\; price\; /\; Earnings\; per\; share$
• Dividend yield = $Dividends\; per\; share\; /\; Market\; share\; price$

Classification System of Financial Ratios

A. Profitability Ratios

Show how profitable a company is
The ratios are:

• 1a. Profit margin=$Net\; income\; /\; Sales$
• 1b. Gross profit margin =$(Revenue\; -\; Cost\; of\; Goods\; Sold)\; /\; Revenue$
• 2. Return on assets (ROA) (investment) =$Net\; income\; /\; Total\; assets$
• 3. Return on equity (ROE) (common shareholders) =$Formula\; 3a.Net\; income\; /\; Shareholder\text{'}s\; equity$$Formula\; 3b.Total\; Assets\; /\; Equity$$Formula\; 3c.ROA\; x\; Equity\; Multiplier$

B. Asset Utilization Ratios

Show how effectively a company uses its assets
The ratios are:

• 4a. Receivable turnover =$Net\; Credit\; Sales\; /\; Average\; Accounts\; Receivables$
• 4b. Average collection period (day’s sales outstanding) =$Receivables\; /\; Average\; daily\; credit\; sales$
• 5a. Inventory turnover =$Cost\; of\; Goods\; Sold\; /\; Average\; Inventory$
• 5b. Inventory holding period =$(Inventory\; /\; Average\; daily\; Cogs(=Cogs\; X\; 365)$
• 6a. Accounts payable turnover =$Cogs\; /\; Average\; Accounts\; Payable$
• 6b. Accounts payable period =$Accounts\; Payable\; /\; Average\; daily\; Purchases(COGS)$
• 7. Capital asset turnover =$Net\; sales\; /\; Capital\; Assets$
• 8. Total asset turnover =$Net\; sales\; /\; Total\; Assets$

C. Liquidity Ratios

Show how liquid a company is or how much cash it
has to meet short-term needs.
The ratios are:

• 9. Current ratio =$Current\; asset\; /\; Current\; liability$
• 10. Quick ratio (acid test) =$(Current\; assets\; –\; Current\; liability)\; /\; Current\; liability$

D. Debt Utilization Ratios

Show how well a company is managing or using debt.
The ratios are:

• 11. Debt to total assets =$(Short\; Term\; Debt\; +\; Long-term\; Debt)\; /\; Total\; Assets$
• 12. Times interest earned =$Income\; Before\; interest\; and\; Tax\; (EBIT)\; /\; Interest\; Expense$
• 13. Fixed charge coverage =$EBIT\; +\; Fixed\; Charges\; Before\; Taxes\; /\; Fixed\; Charges\; before\; Taxes\; +\; Interest$

DuPont Analysis

Reveals the relationships between profitability ratios and asset utilization ratios and debt utilization ratios
Decomposes Return on Asset (ROA) into two factors:
$ROA\; =\; Net\; Income\; /\; Assets=\; (Net\; Income\; /\; Sales)\; x\; (Sales\; /\; Assets)=\; Profit\; Margin\; x\; Asset\; Turnover$

DuPont Analysis Part 2

Decomposes Return on Equity (ROE) into three factors
$ROE\; =\; Net\; Income\; /\; Equity=\; (Net\; Income\; /\; Sales)\; x\; (Sales\; /\; Assets)\; x\; (Assets\; /\; Equity)=\; Profit\; Margin\; x\; Asset\; Turnover\; x\; Equity\; Multiplier$
ROE = ROA x Equity Multiplier