FIN-3403 Lecture Notes - Lecture 3: Valuation Using Multiples, Reserve Requirement, Income Statement
- Computation of Measures to Help Make Better Decisions
o Internal Uses- evaluate performance, look for trouble spots, general
projections
o External Uses- make credit decisions, evaluate competitors, assess
acquisitions
o Problems
▪ No underlying financial theory; numbers are meaningless
without benchmark or comparison
▪ Finding comparable firms for benchmark
▪ What to do with conglomerates, multidivisional firms
▪ Differences in accounting practices
▪ Differences in capital structure
▪ Seasonal variations, one-time events
- Peer Group Analysis
o Compare to competition/others in industry
- Trend Analysis
o Compare to past/track changes through time
- Common-Size Statements
o Convert all account values to percentages
▪ For BS- total assets as denominator
▪ For income statement- sales as denominator
- Short-Term Solvency, or Liquidity, Measures
o Ability to pay bills in the short-run
o Current Ratio= current assets/current liabilities
o Quick Ratio= (Current Assets – Inventory)/ Current Liabilities
o Cash Ratio= Cash/Current Liabilities
- Long-Term Solvency Measures
o Ability to meet long-term obligations/measures of leverage
o Measure either level of indebtedness or the ability to service debt
o Of great interest to debtholders and therefore ratings agencies
o Total Debt Ratio= (total assets – total equity)/ total assets
o Long-Term Debt Ratio= long term debt/ (long term debt + total
equity)
o Cash Coverage Ratio= (EBIT + depreciation)/interest =
EBITDA/interest (also known as times interest earned)
- Asset Management, or Turnover, Measures
o Efficiency of asset use
find more resources at oneclass.com
find more resources at oneclass.com
