Financial Ratios

Question 1

Price To Earnings(P/E)

Answer 1

(market value per share)/(earnings per share)

Indicates dollar amount investors can expect to invest in a company in order to receive one dollar of that company’s earnings.

Lower the P/E the better.

Question 2

Price To Earnings Growth(PEG)

Answer 2

(P/E)/(EPS growth)

Tells you what you’re paying for each unit of earnings growth.

Lower PEG may indicate a undervaluation. Result less than 1.0 implied room for future growth.

Question 3

Price To Sales(P/S)

Answer 3

(market value per share)/(sales per share)

Shows how much investors are willing to pay for every dollar in annual sales.

Question 4

Price To Cash Flow(P/CF)

Answer 4

(share price)/(operating cash flow per share)

Companies that cannot produce positive cash flows, will face eventual liquidity and solvency issues.

Question 5

Price To Book(P/BV)

Answer 5

(market capitalization)/(total assets - total liabilities)

Tells you how much you are paying for every dollar of assets owned by the company.

Ratios under 1 are typically considered more solid investments.

Question 6

Debt To Equity(D/E)

Answer 6

(total liabilities)/(total shareholders equity)

Measure of financial leverage telling you the percentage of a company’s assets finance by debt. Reflects ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

Lower numbers are generally preferred because high debt loads can turn into big problems in a downturn.

Question 7

Debt To Cash Flow(D/CF)

Answer 7

(cash flow from operations)/(total debt)

Coverage ratio used to determine how long it would take to repay its debt if it used all of its cash flow for debt repayment.

Higher ratio indicates company is better able to pay back its debt and this able to take on more debt.

Question 8

Return On Equity(ROE)

Answer 8

(net income)/(average shareholders equity)

How effectively management is using a company’s assets to create profits.

Acceptable ratios are close to the long term return of the S&P(9%)

Question 9

Return On Assets(ROA)

Answer 9

(net income)/(total assets)

Management effectiveness to grow profits from a given base of assets accounting for debts(liabilities).

Companies with comparatively low ROA will need to borrow or sell equity to achieve the same amount of profit.

Question 10

Dividend Payout(DP)

Answer 10

(Dividends Paid)/(Net Income)

Proportion of earnings paid out in dividends. How much money is returned to the shareholders versus how much money is it keeping to reinvest in growth, payoff debt, or increase reserves.

Lower the ratio, the greater the chances that the company will sustain and hide the payout down the road.