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October 27, 2011

[FINANCIAL STATEMENT VALUATION TABLE]

Profit Margin
Name of indicator
Gross margin

Formulae
Gross profit/sales

Operating margin

Operating income/ sales

Net profit margin

Net income/ sales

Return on equity
(ROE)
Return on Assets

Net profit / equity


(P/B ratio / P/E ratio)
EBIT/total assets

Highlight
The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs
associated with producing the goods and services sold by a company. The higher the percentage, the more the company
retains on each dollar of sales to service its other costs and obligations
A measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as
wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as
interest on debt. It is best to look at the change in operating margin over time and to compare the company's yearly or
quarterly figures to those of its competitors.
A higher profit margin indicates a more profitable company that has better control over its costs compared to its
competitors.
Measuring a corporation's profitability by revealing how much profit a company generates with the money shareholders
have invested.
ROA gives an idea as to how efficient management is at using its assets to generate earnings. The assets of the company are
comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The
ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income.
The higher the ROA number, the better, because the company is earning more money on less investment.

Financial condition
Name of indicator
Debt equity ratio1
Quick Ratio
Current Ratio

Formulae
Total liabilities/shareholders equity
(Current assets -inventory)/current
liabilities
Current assets/current liabilities

Interest coverage

EBIT/ interest expense

Highlight
Book debt-equity ratio: only long-term, short-term and note payable are counted as debt. High ratio, high risk.
The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher
the quick ratio, the better the position of the company.
A ratio higher than one indicates that a company will have a high chance of being able to pay off its debt, whereas,
ratios below one indicate that a company will not be able to pay off its debt
To determine how easily a company can pay interest on outstanding debt . The lower the ratio, the more the company is
burdened by debt expense.

A high debt/equity ratio: a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance
increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt
cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates
on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing

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October 27, 2011

[FINANCIAL STATEMENT VALUATION TABLE]

Management Efficiency
Name of indicator
Fixed asset
turnover2

Formulae
Sales/fixed assets

Inventory turnover

Sales/ inventory or
Cost of good/ average inventory

Asset turnover

Sales / total assets

Highlight
A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets
to generate revenues. This ratio is often used as a measure in manufacturing industries, where major purchases are made
for PP&E to help increase output.
Showing how many times a company's inventory is sold and replaced over a period. A low turnover implies poor sales and,
therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are
unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble
should prices begin to fall.
The amount of sales generated for every dollar's worth of assets-the higher, the better. It indicates pricing strategy:
companies with low profit margins tend to have high asset turnover, while those with high profit margins have low ones.

Price Ratio/valuation ratio


Name of indicator
Price earnings ratio
(P/E ratio)

Formulae
Market capitalization/ net income
Or Share price/ EarningsPerShare

Price/sales ratio
Price/book ratio
(P/B ratio)

Share price/ revenue per share


Market value of equity/ book
value of equity

Highlight
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies
with a lower P/E. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to
pay per dollar of earnings. Low P/E ratio does not necessarily mean that a company is undervalued. Rather, it could mean
that the market believes the company is headed for trouble in the near future
Because it doesn't take any expenses or debt into account, the ratio is somewhat limited in the story it tells
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally
wrong with the company. This ratio also gives some idea of whether you're paying too much for what would be left if the
company went bankrupt immediately.

Growth rates
Name of indicator
Net income
Dividends
Sales
Plowback ratio

Highlight
Bottom line
Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much,
but the dividend attempts to make up for this.
High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.
The sales number reported on a company's financial statements is a net sales number, reflecting the deduction of returns, allowances for damaged or missing goods and
any discounts allowed.
The amount of earnings retained after dividends have been paid out {(EPS-dividend)/EPS}.
The more earnings a company retains, the more growth it can foster.

Question: debt/equity ratio= total liabilities/ shareholder equity or debt (short-term +long-term+ notable payment

Fixed assets: property, plant and equipment

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