(CVC) company valuation checklist (PART 1): some financial ratios

here are some financial ratios, and what they mean, that can be helpful in determining the value of a company. categorized by type.



short term solvency (liquidity)

current ratio = CA/CL

• how well can a firm cover its current obligations (from current assets)

quick ratio (aka acid test) = CA - Inventory / CL

• since inventory is a relatively illiquid asset the quick ratio discludes it

Long term solvency

debt-to-equity = total debt/total equity

• shows how many dollars of equity a firm has for every dollar of debt
  

cash coverage = EBIT + depreciation / Interest

• ability to generate cash; cash available to meet financial obligations

Asset management (aka turnover)

• how efficiently is the firm using its assets?

inventory turnover = CoGS / inventory

• how many times the inventory is turned over (aka sold off)

receivable turnover = sales / accounts receivable

• how many times per year are accounts receivable collected?

profitability

profit margin = net income / sales

• for every dollar of sales, what percent of that is kept as profit?

return on book assets (ROA) = net income / total assets

• how much profit does the firm make for every dollar of assets?

return on book equity (ROE) = net income / total equity

• how much profit does the firm make for every dollar of equity?

market values

earnings per share (EPS) = net income / # of shares outstanding

price- to-earnings ratio (P/E ratio) = price per share / EPS

• how much do a firms shares sell for compared to earnings?
  
• (ex - p/e of 15 means: "ABC company's shares are selling for 15 times its earnings)
• can be interpreted as an estimate of a company's future growth possibilites

thats all for now.
there are many more ratios to look at when valuing a company, and not to mention ratios are not the only thing to look at.

more on this later.