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DISCLAIMER
LEGALLY REQUIRED DISCLAIMER – THIS COURSE CONTAINS THE PERSONAL IDEAS AND OPINIONS OF THE COURSE
PROVIDERS. THE INFORMATION CONTAINED IN THIS COURSE IS FOR EDUCATIONAL PURPOSES ONLY. THERE IS NO
RECOMMENDATION OR ADVICE ON MAKING ANY INVESTMENT DECISIONS, BUYING OR SELLING ANY TYPES OF STOCKS,
SECURITIES OR INVESTMENTS DISCUSSED IN THIS COURSE. THE COURSE PROVIDERS ARE NEITHER STOCK BROKERS NOR
REGISTERED INVESTMENT ADVISORS. WE DO NOT RECOMMEND MAKING ANY INVESTMENT DECISIONS PROPOSED IN
THIS COURSE. INDIVIDUALS SHOULD FIND REGISTERED INVESTMENT ADVISORS TO HELP THEM MAKE INVESTMENT
DECISIONS. ALTHOUGH THE COURSE PROVIDERS HAVE STRIVED FOR PROVIDING THE MOST ACCURATE INFORMATION,
THERE IS NO GUARANTEE OR WARRANTY CONCERNING THE RELIABILITY, ACCURACY AND COMPLETENESS OF THE
PROVIDED INFORMATION. INDIVIDUALS SHOULD BE CAUTIOUS ABOUT MAKING THEIR OWN INVESTMENT DECISIONS.
INDIVIDUALS ARE SOLELY RESPONSIBLE FOR THEIR INVESTMENT DECISIONS. THE COURSE PROVIDERS ARE NOT
RESPONSIBLE FOR ANY LIABILITIES AND LOSSES, WHICH MAY ARISE FROM THE USE AND APPLICATION OF THE
INFORMATION AND STRATEGIES PROPOSED IN THIS COURSE.

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FINANCIAL STATEMENT ANALYSIS

THE ADVANCED FINANCIAL STATMEENT ANALYSIS
MODULE 5: INVESTMENT VALUE ASSESSMENT
LEARNING MATERIAL – TAKEAWAY NOTE

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Cash Flow & Share Price Ratios

 Many of the ratios in this group are among the best known and
most used of all public company financial measures.
 Virtually all of the other ratios we have examined could be used
for internal assessment purposes by the management of any
company, whether public or private, but those in this group
apply solely to publicly traded entities.

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Cash Flow & Share Price Measurement Ratios

 We will use eight ratios to evaluate cash flow and share price:

 Price to Sales  PEGY Ratio

 Price to Earnings  Earnings per Share
 Price to Cash Flow  Dividend Payout
 Price to Book  Dividend Coverage

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Price to Sales Ratio - In a Nutshell

 The price to sales ratio (P/S or PSR) is a valuation measurement
based on a company’s share price relative to its revenue.
 The calculation is normally based on the most recently
concluded fiscal year or on the previous (or trailing) twelve
months (TTM).
 A forward PSR uses projected revenue for a coming period

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Formula & Calculation

Market Capitalization
Price to Sales Ratio =
Total Sales

OR

Share Price
Price to Sales Ratio =
Sales per Share

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Real-world Examples

Amazon Costco Wholesale JC Penney Corp. Target Corp.

(AMZN) Corp. (COST) (JCP) (TGT)

Market Cap. $358.423 billion $69.118 billion $2.000 billion $35.144 billion

Total Sales $135.987 billion $118.719 billion $12.547 billion $69.495 billion

Price/Sales 2.636 0.582 0.159 0.506

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Further Explanation
 PSR is superior to the price to earnings ratio. Why?
 Simply put, there are many accounting techniques (which
seems a more polite term than “tricks”) that can be used by a
company to manipulate its earnings number.
 Sales, however, are much harder to manipulate, providing a
more honest basis for comparison.

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Things to Take Away!

 Key points for this ratio:
 Compares a company’s share price to its revenue as a relative
measure of how it is viewed by the market
 A low or high ratio is not “good” or “bad”; the point is how a
company compares to its peers and whether an unfavorable
ratio is justified by other factors

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Price to Earnings Ratio - In a Nutshell

 The price to earnings ratio (P/E) is another valuation ratio, and
the most commonly used by the financial media.
 It compares share price to earnings per share, resulting in a
multiple of earnings. For this reason, the PER is often referred to
as the “price multiple” or simply “multiple,” as in, “Company X is
trading at a multiple of 21.”

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Formula & Calculation

Share Price
Price to Earnings Ratio =
Earnings Per Share

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Real-world Examples

Amazon Costco Wholesale JC Penney Corp. Target Corp.

(AMZN) Corp. (COST) (JCP) (TGT)

Share Price $749.87 $157.56 $6.45 $63.70

Earnings Per Share $4.90 $5.33 ($0.03) $4.58

Price/Earnings 153.04 29.56 N/A 13.91

Price/Sales 2.636 0.582 0.159 0.506

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Further Explanation
 In the discussion of the price to sales ratio, we noted that the
PER is more easily manipulated through accounting techniques
and other measures. A common one is the share buyback. Many
companies have taken advantage of artificially low interest rates
to borrow money and use it to buy back their own shares.
 It has been very common over the past few years.

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Things to Take Away!

 Key points for this ratio:
 The most commonly used valuation ratio, it compares share
price to earnings per share
 Normally uses diluted normalized earnings per share
 Since is based on earnings, it is more subject to manipulation
through accounting, including share buybacks

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Price to Cash Flow Ratio - In a Nutshell

 The price to cash flow ratio (P/CF) is a valuation ratio that
considers cash flow rather than revenue or earnings.
 The removal of non-cash expenses such as depreciation help
level the playing field for companies that may have large
depreciation and/or amortization charges because of their
capital structure.

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Formula & Calculation

Share Price
Price to Cash Flow Ratio =
Cash Flow per Share

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Real-world Examples
Amazon Costco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)

Share Price $749.87 $157.56 $6.45 $63.70

Cash Flow $3.444 billion ($1.422 billion) ($13 million) ($1.534 billion)

Shares Outstanding 477 million 439 million 308 million 578 million

Cash Flow per Share $7.22 ($3.24) ($0.04) ($2.65)

Price/Cash Flow 103.86 −48.630 −161.250 −24.038

Price/Earnings 153.04 29.56 N/A 13.91

Price/Sales 2.636 0.582 0.159 0.506

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Further Explanation
 In the most general terms, a low P/CF usually means that a
company may be undervalued, while a higher number indicates
possible overvaluation.
 The first caveat is that, as with all our ratios, “low” and “high”
are relative terms in the context of industry and peers.
 The second caveat is that—once again—details matter.

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Things to Take Away!

 Key points for this ratio:
 Valuation measure that considers cash flow rather than
revenue or earnings
 Low values may indicate an undervalued company
 A significant difference in shares outstanding can skew the
comparison between companies

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Price to Book Ratio - In a Nutshell

 The price to book ratio (P/B) is a measure of how much an
investor will pay for each dollar of a company’s net assets.
 It essentially determines the liquidation value of a company and
compares that against the share price.

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Formula & Calculation

Price per Share

Price to Book Ratio =
(Total Assets − Total Liabilities)
Shares Outstanding

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Real-world Examples
Amazon Costco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)
Share Price $749.87 $157.56 $6.45 $63.70
Shares Outstanding 477 million 439 million 308 million 578 million
Total Assets $83.402 billion $33.163 billion $9.118 billion $37.431 billion
Total Liabilities $64.117 billion $21.084 billion $7.764 billion $26.478 billion
Book Value/Share $40.43 $27.52 $4.40 $18.95
Price/Book Value 18.55 5.72 1.47 3.36
Price/Cash Flow 103.86 −48.63 −161.25 −24.04
Price/Earnings 153.04 29.56 N/A 13.91
Price/Sales 2.636 0.582 0.159 0.506
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Further Explanation
 One of the most significant impacts on the P/B ratio is high
research and development costs.
 Accounting rules are by nature conservative, and intangible
assets—such as intellectual property developed through R&D—
are not valued unless they are acquired in the purchase of an
existing business.

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Further Explanation
 In addition to being less useful for companies with large R&D
budgets, P/B is similarly less accurate for companies with large
fixed asset values.
 P/B is best used for companies with predominantly liquid assets.
 Differing accounting standards can produce different book values
and therefore distort a P/B comparison.

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Things to Take Away!

 Key points for this ratio:
 Assesses share price per dollar of net assets
 A company with a low P/B may be undervalued or may have
financial problems
 Can be used for a company with negative net earnings (but
not negative book value)

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Things to Take Away!

 Key points for this ratio:
 Most useful for companies with predominantly liquid assets;
less useful for those with large amounts of fixed assets or high
R&D expenditures
 Different accounting standards can distort the comparison of
companies

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P/E to Growth & Dividend Yield Ratio - In a Nutshell

 The PEGY ratio is a variation on the basic price to earnings

growth (PEG) ratio that adds dividend yield.
 PEGY is not applicable to a company with no dividend payments,
which should be evaluated with the basic PEG ratio.
 However, it will automatically yield a PEG calculation for a
company with a dividend yield of zero.

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Formula & Calculation

PE Ratio
PEGY =
Earnings Growth Rate+ Dividend Yield

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Real-world Examples
Amazon Costco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)

Share Price $749.87 $157.56 $6.45 $63.70

P/E 153.04 29.56 N/A 13.91

Earnings Growth −1.17 8.96 67.29 −9.27

Dividend Yield 0 1.28 0 4.31

PEGY −130.80 2.89 N/A −2.80

Price/Earnings 153.04 29.56 N/A 13.91

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Further Explanation
 PEGY does its best to look into the future
 Earnings growth is based on the most recent fiscal year compared
to the prior fiscal year, or the current TTMs over the prior trailing
twelve months.
 Since earnings growth is the most significant portion of the
calculation, the ratio is as reliable as the accuracy of the prediction.

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Things to Take Away!

 Key points for this ratio:
 Expands the P/E ratio to evaluate earnings growth and
dividend yield
 For companies with no dividend, the calculation will produce
a simple PEG (price to earnings growth) ratio

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Things to Take Away!

 Key points for this ratio:
 Limited by the fact that earnings growth is based on historical
performance, which could change significantly in the future
 Generally speaking, a PEGY under 1.0 (but positive) indicates
an undervalued company

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Earnings per Share - In a Nutshell

 The earnings per share ratio (EPS) is a basic measure of profit,
express on a per-share basis.
 EPS is the most heavily used evaluation of a stock, and one of the
few ratios that in and of itself is not sensitive to industry. It does
have its fair share of limitations, however, which we will discuss
shortly.

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Formula & Calculation

(Net Income − Dividends on Preferred Stock)

Earnings per Share =
Shares Outstanding

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Real-world Amazon
ExamplesCostco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)

Share Price $749.87 $157.56 $6.45 $63.70

Net Income $2.371 billion $2.350 billion $1.00 million $2.737 billion

Norm. Inc./Comm. $2.371 billion $2.350 billion ($10 million) $2.669 billion

Shares Outstanding 474 million 439 million 308 million 578 million

EPS $5.00 $5.35 ($0.03) $4.62

PEGY −130.80 2.89 N/A −2.80

Price/Earnings 153.04 29.56 N/A 13.91

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Things to Take Away!

 Key points for this ratio:
 The most used of all financial ratios
 Applies across industries
 Presented as part of any public company’s financial statements
 Relatively easy to manipulate through accounting techniques
and stock buybacks

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Dividend Payout Ratio - In a Nutshell

 The dividend payout ratio (DPR) calculates the percentage of a
company’s earnings that it returns to stockholders in the form of
dividends.
 Since the return on a stock investment comes from two
sources—stock price appreciation and dividends—this is an
important measure for investment analysis.

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Formula & Calculation

Annual Dividend per Share

Dividend Payout Ratio =
Earnings per Share

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Real-world Examples
Amazon Costco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)

Share Price $749.87 $157.56 $6.45 $63.70

Net Income $2.371 billion $2.350 billion $1.00 million $2.737 billion

Dividends Paid $0.00 $746 million $0.00 $1.359 billion

Dividend Payout 0.00 0.32 0.00 0.50

EPS $5.00 $5.35 ($0.03) $4.62

PEGY −130.80 2.89 N/A −2.80

Price/Earnings 153.04 29.56 N/A 13.91

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Further Explanation
 Dividends are also seen as a sign that a company has matured
 It is important to distinguish established from startup companies.
 A Payout Ratio of 1.00 means a company is paying out all of its
earnings as dividends, which is not generally a good idea.
 The most important aspect of the dividend payout ratio is its
history.

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Things to Take Away!

 Key points for this ratio:
 Only applies to companies that pay dividends
 Should be used not only within the same industry but also with
companies of similar maturity levels
 Ratio should normally be below 1.00
 Must consider the company’s dividend payment history

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Dividend Coverage Ratio - In a Nutshell

 The dividend coverage ratio (DCR) assesses how many times a
company could pay its current dividend with its current net
earnings.
 It serves as a risk assessment tool and also to determine how
much money a company is retaining to invest in growth.

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Formula & Calculation

Net Income
Dividend Coverage Ratio =
Dividends Paid

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Real-world Examples
Amazon Costco Wholesale JC Penney Corp. Target Corp.
(AMZN) Corp. (COST) (JCP) (TGT)
Share Price $749.87 $157.56 $6.45 $63.70
Net Income $2.371 billion $2.350 billion $1.00 million $2.737 billion
Dividends Paid $0.00 $746 million $0.00 $1.359 billion
Dividend Coverage N/A 3.15 N/A 2.01
Dividend Payout 0.00 0.32 0.00 0.50
EPS $5.00 $5.35 ($0.03) $4.62
PEGY −130.80 2.89 N/A −2.80

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Further Explanation
 The lower the DCR, the higher the risk associated with the
company.
 A ratio under 1.00 means the company is either borrowing or
digging into cash reserves to pay its dividends.
 History—of dividend payments, of DPR, of DCR—matters much
more than any one “snapshot” number.

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Things to Take Away!

 Key points for this ratio:
 Is simply the inverse of the dividend payout ratio
 A low DCR means greater risk, though that risk is mostly
associated with continued dividends
 A DCR below 1.00 means the company is paying dividends
with debt or cash reserves

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WHAT YOU WILL LEARN?
• Fully Develop a Successful Entrepreneurial Mindset (Most Important)
• What does really mean ‘doing business’?
THANK YOU FOR READING!
• Create Multiple Streams of Income
• How to Start a Business Effectively
• Master in Using the Power of Leverage
• How to Build a Successful Business Plan