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Corporate
Analysis The
financial health of a company can be determined by studying the
company's financial statements (its accounts). From these certain
useful ratios can be calculated, usually divided into the areas
of profitability, price, liquidity, leverage, and efficiency. Ratios
from a particular company are compared to other companies within
the same sector in order to
get a handle on the sector norm. Net
Profit Margin A
company's net profit margin is net income divided by total sales.
This ratio indicates how much profit the company makes from its
sales. For example, a net profit margin of 20%, means that $0.20
of every $1.00 in sales actually profit. Price/Earnings
ratio The
Price/Earnings ratio (or P/E Ratio) is a security's current stock
price divided by the earnings per share (EPS) of the previous four
quarters. This tells you how much you must pay to get rights to
$1 of the company's earnings. For example, if a stock's price is
$50 and the EPS for the last four quarters was $5, the P/E ratio
is 10 (i.e. $50 / $5 = 10). This means that you must pay $10 to
"buy" $1 of the company's earnings (buying a single share
for $50 entitles you to $5 of earnings). Within a sector, comparing
P/E ratios usually reveals some interesting facts - the lower the
P/E ratio the better. Book
Value Book
value is total net assets (assets minus liabilities) divided by
total shares outstanding (in issue). Imagine a company with $5 billion
in cash and no liabilities whatsoever. You wouldn't expect the book
value of that company to be only $3 billion, would you? (If it was,
hungry investors would buy it up in the expectation of liquidating
it and turning an instant profit). Depending on the accounting method
used, the bok value of a company can be overstated or understated,
for example Enron used highly dubious accounting ideas to create
a book value far beyond any real possible valuation. |
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