Chapter 2 - Financial Market Value Ratios Flashcards

Question

Operating Income margin (Ebit Margin) + formula & explain fully

Answer 1

EBIT / Total revenues It shows the percentage of revenue remaining after operating expenses (like rent, wages, and marketing). EBIT (Earnings Before Interest & Taxes) represents the company's profit from core operations, excluding interest and tax expenses. A high EBIT margin means the company runs efficiently before financing costs and taxes.

Answer 2

is the money a business makes from its main activities (like selling products or services) after paying for things like rent, employee salaries, and materials—but before paying taxes or interest on loans. Operating Income = Gross profit - Operating expenses

Answer 3

Operating cash flows are the actual cash a business gets from its main activities, like selling products or services, after paying for things like rent, salaries, and supplies. It shows how much real cash the business is making from its daily operations. Operating cash flows = Net Income + Non-Cash Expenses + changes in Working Capital

Answer 4

Total Funds used to finance a business, including debt & equity Total Capital = Debt + equity

Answer 5

a financial framework used to break down Return on Equity (ROE) into three key components to analyze a company’s profitability, efficiency, and leverage. Profit Margin (Net Income / Revenue) → Measures profitability. Asset Turnover (Revenue / Assets) → Measures efficiency in using assets. Equity Multiplier (Assets / Equity) → Measures financial leverage.

Answer 6

Total assets are everything a business owns that has value, like cash, buildings, equipment, and inventory. These assets help the business make money. total liabilities + total (owners) equity

Answer 7

Analyzing ROE and ROA shows how a company makes profits and if its performance is sustainable. It helps identify strengths, risks (like too much debt), and areas for improvement, ensuring better decisions for long-term growth.

Answer 8

Since the return on them are low, if, any, return. ALSO if firms have a lot of cash laying around -> managers make bad decisions, so if managers if too many liquid assets and use the excess cash irresponsibly

Answer 9

the value of inventory on the balance sheet is questionable.

Answer 10

Investors have higher expectations about the future of the firm with the higher market multiple.

Answer 11

Total Enterprise Value (TEV) is a company's total worth, including debt and equity. Market Capitalization + Net Debt + Minority Interest

Answer 12

value of all of the equity in the market, usually calculated as the stock price multiplied by the number of shares outstanding.

Answer 13

Net Debt shows how much debt a company has after subtracting its cash. Short Term Debt + Long Term Debt – (Cash and Cash Equivalents) short & long term debt, is interesting bearing debt and is debt purchased by investors. Cash and cash equivalents are deducted because the firm could use the cash to pay down the debt.

Answer 14

Represents the ownership of a subsidiary of less than 50% and shows up on the balance sheet of the company that owns a majority interest in the company. It is included in TEV multiples (TEV/EBIT and TEV/EBITDA)

Answer 15

Forward EPS = Expected earnings per share for the next period. (Uses expected Earnings per share.) Trailing EPS = Actual earnings per share from the past period (uses past earnings per share).

Answer 16

Stockholders care about current earnings because they are generally a good indicator of the future earning power of the company.

Answer 17

when stock prices are very small or negative. A negative EPS (earnings per share) will result in a negative P/E ratio and a very small EPS usually results in a inflated P/E ratio Average P/E ratio is 23 (of the S&P?) above that it is inflated

Answer 18

compares a company's market value to its book value. It shows how much investors are willing to pay for each dollar of net assets. Price per Share / Book Value of Common Equity per Share High P/B Ratio → Growth firm, expected to grow faster. Low P/B Ratio → Value firm, possibly undervalued. Tobin’s Q = Market value vs. replacement cost of assets. PVGO → Part of stock price based on future growth.

Answer 19

BVPS shows how much each share would be worth if the company’s assets were sold and debts paid off. Book Value Per Share = Total Stockholders' Equity / Number of Shares Outstanding

Answer 20

If the market is efficient, then prices accurately reflect the information available about the asset. As new information becomes available, prices quickly and accurately change to reflect that new information

Answer 21

prices accurately reflect all historic pricing information about the stock. Technical Analysis assumes that the market is not weak form efficient.

Answer 22

means that prices accurately reflect all public and private information. If the market is strong form efficient, then insider information is already considered in the price of the asset Generally not true

Answer 23

1. Intra-Industry Rivalry → More competition = Lower profits 2. Barriers to Entry → High barriers = Higher profits 3. Substitutes → More substitutes = Lower profits 4. Supplier Power → Strong suppliers = Lower profits (No supplier should have >20% of sales) 5. Buyer Power → Strong buyers = Lower profits (No buyer should have >20% of sales)

Answer 24

1.Cost Leadership – Competing on low price (e.g., Walmart, gas stations). 2. Differentiation – Competing by being unique (e.g., Apple, fast food chains). 3. Focus – Targeting a specific audience, either by: 3.A) Differentiation Focus → Luxury, unique appeal (e.g., Ferrari). 3B) Cost Leadership Focus → Low price for a niche market. 4. Speed, if you can make & deliver it faster 5. Ease of use & convenience = if it is easier and more convenient to use 6. Certainty -> Increasing trust and confidence that the outcome will happen