Valuation Formats
Categories: Investing, Stocks, Managed Funds, Company Valuation, Metrics
A small sample of how bankers, investors and others compare and value companies:
- Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice that number? How are others handling this?
- Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales as the foundation.
- Multiple of Cash Flow—Often used in industries which don't really depreciate (like the entertainment industry—Gone with the Wind or Snow White might be worth more today than when they were made).
- Multiple of Earnings—the most common denominator. This means dividends paid to common stockholders plus the value of the company when the Argentinians buy it in 2009.
- Establishing the Health of the Company—There are lots of ratios and equations you can use here to please your cold mathlete heart. We've put together the "dirty" Dozen ratios to illustrate some valuation techniques. That's a lot of number crunching.
The "Dirty Dozen" Ratios
RATIO | DEFINITION |
| Return on Sales (ROS) or Net Margin | After Tax Profit/Total Sales |
| Gross Margin | (Total Sales - COGS)/Total Sales |
| Return on Assets (ROA) | Net Income/Beginning of Year Total Assets |
| Return on Equity (ROE) | Net Income/Beginning of Year Shareholders’ Equity |
| Current Ratio | Current Assets/Current Liabilities |
| Quick Ratio | (Cash + Stocks & Bonds… + Accounts Receivable)/Current Liabilities |
| Borrowed Debt/Capitalization | (Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases))/(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases) + Shareholders’ Equity) |
| Pretax Interest Coverage (times Interest Earned) | (Pretax Income + Interest Expense)/Interest Expense |
| Asset Turns (TURNS): Sales/Assets | Total Sales/Beginning of Year Total Assets |
| Days Sales Outstanding (DSO) | (Accounts Receivable x 365)/Total Sales on Credit |
| Days Payable Outstanding (DPO) | (Accounts Payable x 365)/Total Purchases on Credit |
| Inventory Turns | COGS/Inventory |