• COURSE CODE: FM60/ FINANCIAL

MANAGEMENT1
• CLASS: FM 1A
• SCHEDULE: MONDAY//5:30PM-8:30PM
• PROFESSOR: MS. EUNICEL D. BALANE
Continuation of Ratio
Analysis
1. Liquidity Ratios
2. Asset Management Ratios
3. Solvency Ratios/Debt management ratios
4. Profitability ratios
5.Market value ratios
 Market Value Ratios

• Market value ratios help evaluate the economic status of publicly traded companies and can play
a role in identifying stocks that may be overvalued, undervalued, or priced fairly.
• Market value ratios are also used to analyze stock trends. For example, a company's low price-
earnings ratio may indicate the stock is an undervalued bargain in a stable industry, but it also
could indicate the company's earnings prospects are relatively uncertain, and the stock may be a
risky bet.
• These ratios are mainly used by investors to check whether the prevailing market share prices are 
in sync with the company’s performance. And thus valued correctly in the market or they are
trading at a higher price or lower. The overvaluation or undervaluation of share helps investors
decide whether they should go long or short on the shares they are going to invest in. If a share is
overpriced, the price will fall for sure in the future and thus an investor should short the shares
for a while. And if the stock is underpriced then one should go long on it.
 Market Value Ratios

• The decision of buying and selling shares is very important. And if not done at the
right price then the money invested can turn into losses. So, market value ratios
calculation and interpretation is very crucial; for share market investments as well
as in other investments; and for the company management as well.
• There are different market value ratios used by the share market investors and
some of the most used ratios are mentioned in the next slides.
Table 3-1
ABC Company December31 Balance Sheets (In PhP)
2020 2019 inc(dec)
Assets
Current assets:
Cash and equivalents P80,000 (70,000)P10,000
Accounts receivable 375,000 315,000 60,000
Inventories 615,000 415,000 200,000
Total current assets 1,000,000 810,000 190,000
Net fixed assets:
Net plant and equipment (cost minus depreciation) 1,000,000 870,000 130,000
Total assets 2,000,000 1,680,000 320,000
Liabilities and Equity Current liabilities:
Accounts payable 60,000 30,000 30,000
Accruals 140,000 130,000 10,000
Notes payable 110,000 60,000 50,000
Total current liabilities 310,000 220,000 90,000
Long-term bonds 650,000 480,000 170,000
Total debt 1,060,000 800,000 260,000
Common equity: Common stock (50,000,000 shares) 130,000 130,000 0
Preferred Equity: preferred shares(9% 100 par value) 100,000 100,000 100,000
Retained earnings 810,000 750,000 60,000
Total common equity 940,000 880,000 60,0000
Total liabilities and equity 2,000,000 1,680,000 320,000
Table 3-2

ABC Company: Income Statements for Years Ending December 31 (in PhP)

2020 2019
Net sales 3,000,000 2,850,000
Operating costs except depreciation and amortization 2,616,200 2,497,000
Depreciation and amortization 100,000 90,000
Total operating costs 2,716,200 2,587,000
Operating income, or earnings before interest and taxes (EBIT) 283,800 263,000
Less interest (88,000) (60,000)
Earnings before taxes (EBT) 195,800 203,000
Taxes (40%) (78300) (81200)
Net income 117,500 121,800

Here are some related items: Total dividends 57,500 53,000

Addition to retained earnings =Net income – Total dividends 60,000 68,800
Per-share data: Common stock price 23.06 26.00

EARNINGS PER SHARE= NI / COMMON SHARES OUTSTANDING

DIVIDENDS PER SHARE= DIVIDENDS PAID TO COMMON STOCKHOLDERS / COMMON SHARES OUTSTANDING
BOOK VALUE PER SHARE= TOT AL COMMON EQUITY/ COMMON SHARES OUTSTANDING
Table 3-3

Allied Food Products: Statement of Cash Flows for 2020 (in PhP)
2020
A. I. Operating Activities
B. Net income P117,500
C. Depreciation and amortization 100,000
D. Increase in inventories (200,000)
E. Increase in accounts receivable (60,000)
F. Increase in accounts payable 30,000
G. Increase in accrued wages and taxes 10,000
H. Net cash provided by (used in) operating activities (2,500)
I. II. Long-Term Investing Activities
J. Additions to property, plant, and equipment (230,000)
K. Net cash used in investing activities ( 230,000)
L. III. Financing Activities
M. Increase in notes payable 50,000
N. Increase in bonds outstanding 170,000
O. Payment of dividends to stockholders (57,500)
P. Net cash provided by financing activities 162,500
Q. IV. Summary
R. Net decrease in cash (Net sum of I, II, and III) (70,000)
S. Cash and equivalents at the beginning of the year 80,000
T. Cash and equivalents at the end of the year 10,000
 7.1 Earnings Per Share
EARNINGS PER SHARE= NET INCOME / TOTAL OUTSTANDING SHARES

• Earnings per share measure a company's net income per share of outstanding stock,
indicating a company's profitability to investors.
• This ratio shows the earnings of the company earned in the period under analysis period with
respect to the outstanding number of the company’s shares during that period. This ratio is
used to understand whether investing in it is worth the money or not.
• Earnings per share are the net earnings of the company earned on one share. It is an
important and widely used metric which audited financial reports of the companies also
particularly mentions in most countries. In other words, it expresses the earning capacity of
the company, if divided by the value of one share. We commonly call it return on equity.
• Higher the EPS, the better is the performance and prospects of the company. The track
record of EPS for several years reflects the growth rate of the company and potential
investors look forward to investing in the company if they see an increasing trend.
 7.2 Price to Earnings or PE Ratio
PRICE/EARNINGS OR PE RATIO = PRICE PER SHARE /
EARNINGS PER SHARE (EPS)

• The P/E ratio analysis shows the direct relationship between the market price of the share of a company and its earnings.
Hence, if a company’s earnings per share rise; it leads to a rise in its market price, while lower earnings per share indicate a
fall in its market price. Thus, these two factors mainly define the real performance and growth of a company.
• This is the most used and important ratio under this category of ratios. It is used to check whether the shares are over or
underpriced as compared to its earnings potential. It is measured as the price of the share in the current time against the
earnings the company has reported for the financial period on per share basis.
• The P/E ratio is useful in accessing the relative attractiveness of a potential investment. It helps investors analyze how
much they should pay for a stock on the basis of its current earnings and also shows if the market is overvaluing or
undervaluing the company.
• Similarly, a company with a high PE ratio are often considered to be growth stocks. While on the other hand, a company
with a lower PE ratio indicates poor current and future earnings growth.
• The P/E ratio is prominent for the investment valuation indicators. It is because it indicates the expected price of a share
based on its earnings. And therefore, the investment community makes the extensive use of this valuation metric
 7.3 Book Value per Share

BOOK VALUE PER SHARE = (SHAREHOLDERS' EQUITY -

PREFERRED EQUITY) / TOTAL OUTSTANDING COMMON SHARES.
• This ratio is again one of the most important market value ratios to analyze and decide whether the market
price per share of the company is how near or far with respect to its book value per share. This ratio shows
the relation between the book value of the company (total equity excluding the preference shares of
the shareholders) and the outstanding shares in the market. Book Value is a total of the contributed value
plus the operational profits or losses of the company over the years.
• The book value per share is the amount of the assets that will go to common equity in the event of
liquidation. So higher book value means the shares have more liquidation value.
• Book value of equity per share effectively indicates a firm's net asset value (total assets - total liabilities) on a
per-share basis.
• When a stock is undervalued, it will have a higher book value per share in relation to its current stock price in
the market.
• BVPS is used mainly by stock investors to evaluate a company's stock price.
 7.4 Dividend Yield

DIVIDEND YIELD = TOTAL DIVIDENDS PAID IN A YEAR / NUMBER

OF SHARES OUTSTANDING

• Investors check both the price and dividend earnings from a share so, this ratio helps in measuring the amount
of dividend distributed in a year against the number of shares outstanding. This gives an insight into the
company’s earning and investors can decide whether they want to invest in the shares which pay a certain
level of dividend against the current price of the share in the market.
• Dividend yield shows how much % return an investor would earn if he invests in a stock at current market
prices. If the objective is to assess a company on ‘better dividend returns’, then dividend yield will be the right
choice.
• So, the investor looking for some regular income through investment should consider dividend yield as a
metric for comparison. The usage of this metric is limited to dividends only due to several reasons like
misleading in stock market fluctuations, insufficient as an overall return metric, and dividend as a compulsion.
Hence, for an overall return perspective, it is advisable to look at the larger picture by considering the industry
in which company operates, past dividend patterns, dividend policy and investment opportunities available to
company etc.
 7.5 Cash Earnings per Share (CEPS)

CASH EARNINGS PER SHARE (CEPS) = NET INCOME + NON-CASH

ITEMS x (1-tax rate) / OUTSTANDING SHARES

• As we all know cash is a very important part of the business operations, sustenance and
growth. Cash earnings per share is of recent evolution and gives a glimpse of the actual
cash earned by the company per share. This is a further variation to the EPS. The formula
to calculate the CEPS is somewhat like EPS with a small difference that all the non-cash
items in the profit and loss statement is also added.
• The higher a company's cash EPS, the better it is considered to have performed over a
period.
• High cash earnings could imply strong underlying performance of a company. Analysts
normally look at annual growth rate of this ratio over several years, so a high growth rate
is also highly desirable for company. 
 7.6 Dividend payout ratio

1. Dividend Payout Ratio = Dividends Paid / Net Income​​

2. DPR = 1 – Retention ratio (the retention ratio, which measures the percentage of net income
that is kept by the company as retained earnings, is the opposite, of the dividend payout ratio)

3. DPR = Dividends per share / Earnings per share

*DPS = (total dividends paid out over a period - any special dividends) ÷ (shares outstanding)

• The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to
the net income of the company. It is the percentage of earnings paid to shareholders in dividends.
• The dividend payout ratio helps investors determine which companies align best with their investment
goals. 
• A high DPR means that the company is reinvesting less money back into its business, while paying out
relatively more of its earnings in the form of dividends. A low DPR means that the company is reinvesting
more money back into expanding its business. By virtue of investing in business growth, the company will
likely be able to generate higher levels of capital gains for investors in the future.
 7.6 Dividend payout ratio
Dividend payout ratio

• The dividend payout ratio is not intended to assess whether a company is a “good” or “bad”
investment. Rather, it is used to help investors identify what type of returns – dividend income vs.
capital gains – a company is more likely to offer the investor. Looking at a company’s historical
DPR helps investors determine whether or not the company’s likely investment returns are a good
match for the investor’s portfolio, risk tolerance,  and investment goals. For example, looking at
dividend payout ratios can help growth investors or value investors identify companies that may
be a good fit for their overall investment strategy.
• There isn’t an optimal dividend payout ratio, as the DPR of a company depends heavily on the
industry they operate in, the nature of their business, and the maturity and business plan of the
company.
 Plowback Ratio/ retention ratio
Plowback Ratio = 1 - Payout ratio OR
[1 - (Dividend / Net Earnings Per Share)]

• Plowback Ratio is a term that refers to the size of profit reinvested back into the enterprise.
• The ratio is used by the management of the enterprise and investors. The idea of the ratio is that
the more earnings the enterprise retains, the more growth it can raise.
• The retention ratio helps investors determine how much money a company is keeping to reinvest
in the company's operations.
 Market Ratios

Market value ratios are very critical and useful  for all sorts of stock investing. And
be it secondary market investments, be it investment in a company as a minor or
major stakeholder,  or be it for merger and acquisition decision, etc. The different
market value ratios provide different insight of the company and investors can
decide about their investment and strategies using these ratios.
End of lecture7!

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