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MGAB01H3 Chapter 2.4: chapter 2.4

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ochretortoise616
26 Oct 2010
School
UTSC
Department
Financial Accounting
Course
MGAB01H3
Professor
Liang Chen

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MGAB01H3 Full Course Notes
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MGAB01H3 Full Course Notes
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Document Summary

Ratio analysis expresses the relationships between selected items of financial statement data: liquidity, profitability and solvency ratios. There are three comparisons that use ratios: intracompany (same over a period time), intercompany (between competitors of the same industry), and industry average (between industries). Profitability ratios measure a companys earnings or operating success for a given period of time. Earnings per share measures the net earnings for each common share. It is calculated by taking the net earnings available to common shareholders/weighted average number of common shares. Price-earnings ratio is frequently used to measure the ratio of the stock market price of each common share to its earnings per share. It is calculated by dividing the market price per share by earnings per share. The price-earnings ratio shows what investors expect of a companys future earnings. Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.

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Related Questions

15-3 Assume that two companies in the same industry have equal earnings. Why might these companies have different price-earnings ratios? If a company has a price-earnings ratio of 20 and reports earnings per share for the current year of $4, at what price would you expect to find the stock selling on the market?

Compare Companies --- Netflix (NFLX) vs. GEO Holdings (TOK) Compute financial ratios, time value, variables, and returns using industry standard tools for optimizing financial success. Analyze corporate financial data in evaluating past and future financial performances.

Industry Averages

A. Obtain current industry averages of three of the financial calculations above for both companies and add this information to your spreadsheet for comparison. Ensure the accuracy and organization of your data.

B. In this context, how is each company’s financial health? How do these two companies compare to one another? Consider the appropriate date range you should use.

Netflix Inc. (NMS: NFLX) 2016 2015 2014
Price Earnings Ratio = Market Value Per Share/EPS 0.98 0.97 0.97
Debt Equity Ratio = Total Liability/Shareholder Equity 4.07 3.59 2.8
Free Cash Flow 1467576 1809330 1113608
Earnings Per Share 0.44 0.29 0.634
Return on Equity = Net Income/Sharholder Equity 0.0697 0.0552 0.1436
Net Profit Margin = Net Profit/Revenue 0.0211 0.0181 0.0485
Geo Holdings Corp (TOK: 2681) 2016 2015 2014
Price Earnings Ratio = Market Value Per Share/EPS 0.99 1 -54.4
Debt Equity Ratio = Total Liability/Shareholder Equity 1.01 1.03 0.37
Free Cash Flow 37683 32052 19869
Earnings Per Share 205.78 137.99 -70
Return on Equity = Net Income/Sharholder Equity 16.33% 11.70% 6.86%
Net Profit Margin = Net Profit/Revenue 3.94% 2.71% 1.54%


As a stockholder of Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $15 million, liabilities of $10 million, after-tax earnings of $3 million, and 819,000 outstanding shares of common stock.
(a)

Calculate the earnings per share of Bozo Oil’s common stock. (Round your answer to 2 decimal places.)
Earnings per share: ??? $
(b)

Assuming a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s price-earnings ratio?. (Round your intermediate calculation to 2 decimal places and final answer to the nearest whole number.)
Price-earnings ratio: ???
(c)

Calculate the book value of a share of Bozo Oil’s common stock. (Round your answer to 2 decimal places.)
Book value per share: ??? $