Financial Analysis and

Reporting (FM 222)

1st Semester, School Year 2022-2023
 Financial Ratio Analysis
 Ratio analysis is a quantitative method of gaining insight into a
company's liquidity, operational efficiency, and profitability by
studying its financial statements such as the balance sheet and income
statement. 
 Investors and analysts employ ratio analysis to evaluate the financial
health of companies by scrutinizing past and current financial
statements
 Comparative data can demonstrate how a company is performing over
time and can be used to estimate likely future performance
 Can also compare a company's financial standing with industry
averages while measuring how a company stacks up against others
within the same sector
 Types of Financial Ratios
 Liquidity Ratios - are an important class of financial metrics used to determine a debtor's
ability to pay off current debt obligations without raising external capital
 Activity ratio - is a type of financial metric that indicates how efficiently a company is
leveraging the assets on its balance sheet, to generate revenues and cash.
 Stability Ratio – is the long-term counterpart of liquidity. Stability analysis investigates
how much debt can be supported by the company and whether debt and equity are
balanced.
 Profitability ratio - used to assess a business's ability to generate earnings relative to its
revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data
from a specific point in time
 Market ratio - 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.
Liquidity Ratios
 Liquidity - is the ability to convert assets into cash quickly and
cheaply
 important class of financial metrics used to determine a debtor's
ability to pay off current debt obligations without raising external
capital
 Common liquidity ratios include the quick ratio, current ratio, and
days sales outstanding
 determine a company's ability to cover short-term obligations and
cash flows, while solvency ratios are concerned with a longer-term
ability to pay ongoing debts
 Current Ratio
 Current Ratio - measures a company's ability to pay off its current liabilities (payable
within one year) with its total current assets such as cash, accounts receivable,
and inventories. The higher the ratio, the better the company's liquidity position
 Formula :

 Example:
 Quick Ratio

 Quick Ratio - measures a company's ability to meet its short-term obligations with its
most liquid assets and therefore excludes inventories from its current assets. It is also
known as the acid-test ratio.
 Quick Ratio

For example, let’s assume a company has:

Cash: $10 Million
Marketable Securities: $20 Million
Accounts Receivable: $25 Million
Accounts Payable: $10 Million
Computation: 10M + 20M + 25M = 55M = 5.5
10M 10M
This company has a liquidity ratio of 5.5, which means that it can pay its current liabilities 5.5
times over using its most liquid assets. A ratio above 1 indicates that a business has enough
cash or cash equivalents to cover its short-term financial obligations and sustain its operations
 Quick Ratio
 What’s Included and Excluded?
Generally speaking, the ratio includes all current assets, except:
Prepaid expenses – because they can not be used to pay other
liabilities
Inventory – because it may take too long to convert inventory to cash
to cover pressing liabilities
As you can see, the ratio is clearly designed to assess companies where short-term liquidity is
an important factor. Hence, it is commonly referred to as the Acid Test. An "acid test" is a
slang term for a quick test designed to produce instant results.
 Days Sales Outstanding (DSO)
 Days sales outstanding (DSO) is a measure of the average number of days that it takes a
company to collect payment for a sale. DSO is often determined on a monthly, quarterly, or
annual basis
 To compute DSO, divide the average accounts receivable during a given period by the total
value of credit sales during the same period and multiply the result by the number of days
in the period being measured
 Days sales outstanding is an element of the cash conversion cycle and may also be referred
to as days receivables or a
 Formula:
 Days Sales Outstanding (DSO)
 The formula is as follows:
(Accounts receivable ÷ Annual revenue) × Number of days in the year = Days sales
outstanding
Example :
As an example of the DSO calculation, if a company has an average accounts
receivable balance of $200,000 and annual sales of $1,200,000, then its DSO figure
is:
($200,000 Accounts receivable ÷ $1,200,000 Annual revenue) × 365 Days
 = 60.8 Days sales outstanding
 The calculation indicates that the company requires 60.8 days to collect a typical
invoice.
 Activity Ratios
 Activity ratios measure the efficiency of a business in using and managing its
resources to generate maximum possible revenue. 
 It indicates the investment in one particular group of assets and the revenue the
assets are producing.
 Assets such as raw materials and machinery are introduced to generate sales
and thereby, profits.
 Activity ratios play an active role in evaluating the operating efficiency of the
business as it not only shows how the company generates revenue but also how
well the company is managing the components in its balance sheet
 Different Activity Ratios: Accounts Receivable Turnover Ratio, Working
Capital Ratio, Asset Turnover Ratio, Fixed Assets Turnover Ratio, Inventory
Turn Over Ratio, Days Payable Outstanding
 Accounts Receivable Turnover Ratio
 The accounts receivables turnover ratio, also known as debtor’s
ratio, is an activity ratio that measures the efficiency with which the
business is utilizing its assets. It measures how many times a
business can turn its accounts receivables into cash.
 Formula: Accounts Receivable Turnover = Net Credit Sales /
Average Accounts Receivable
 The ratio indicates the efficiency with which the business is able to
collect credit it issues its customers.
 While a high ratio may indicate the company operates on a cash
basis or has quality customers that pay off their debts quickly, a low
ratio can suggest a bad credit policy and poor collecting process. It
helps in assessing if its credit policies are helping or hurting the
business.
Accounts Receivable Turnover Ratio
Example: Trinity Bikes Shop is a retail store that sells biking equipment and bikes. Due to
declining cash sales, John, the CEO, decides to extend credit sales to all his customers. In the
fiscal year ended December 31, 2017, there were $100,000 gross credit sales and returns of
$10,000. Starting and ending accounts receivable for the year were $10,000 and $15,000,
respectively. John wants to know how many times his company collects its average accounts
receivable over the year.

 Therefore, Trinity Bikes Shop collected its average accounts receivable approximately 7.2
times over the fiscal year ended December 31, 2017.
Accounts Receivable Turnover Ratio
Accounts Receivable Turnover in Days
The accounts receivable turnover in days shows the average number of days that it
takes a customer to pay the company for sales on credit.
The formula for the accounts receivable turnover in days is as follows:
Receivable turnover in days = 365 / Receivable turnover ratio
Determining the accounts receivable turnover in days for Trinity Bikes Shop in the
example:
Receivable turnover in days = 365 / 7.2 = 50.69
Therefore, the average customer takes approximately 51 days to pay their debt to the
store. If Trinity Bikes Shop maintains a policy for payments made on credit, such as
a 30-day policy, the receivable turnover in days calculated above would indicate that
the average customer makes late payments.
Working Capital Ratio
 Working capital and the working capital ratio are both measurements
of a company's current assets as compared to its current liabilities
 The working capital ratio is calculated by dividing current assets by
current liabilities. 
 A working capital ratio below one suggests that a company may be
unable to pay its short-term debts
 Conversely, a working capital ratio that is very high suggests that a
company is not effectively managing excess cash flow, which could
be better directed towards company growth
 Some analysts believe that the ideal working capital ratio is between
1.5 and 2.0, but this may vary from industry to industry.
Working Capital Ratio
Formula:

For example, if a company has $800,000 of current assets and has $1,000,000 of current
liabilities, its working capital ratio is 0.80. If a company has $800,000 of current assets and has
$800,000 of current liabilities, its working capital ratio is exactly 1
Asset Turnover Ratio
 The asset turnover ratio analyzes how well a company uses its assets
to drive sales
 The ratio is calculated by dividing a company's net sales for a
specific period by the average total assets the company held over the
same period
 Companies with a higher asset turnover ratio are more effective in
using company assets to generate revenue
 Like other ratios, the asset turnover ratio is highly industry-specific.
Sectors like retail and food & beverage have high ratios, while
sectors like real estate have lower ratios.
Asset Turnover Ratio
 Asset Turnover Ratio Example
Suppose company ABC had total revenue of $10 billion at the end of its fiscal year.
Its total assets were $3 billion at the beginning of the fiscal year and $5 billion at the
end. Assuming the company had no returns for the year, its net sales for the year was
$10 billion. The company's average total assets for the year was $4 billion (($3 billion
+ $5 billion) / 2 ).
 ABC Company's Asset Turnover Ratio = $10 billion / $4 billion = 2.5
On the other hand, company XYZ - a competitor of ABC in the same sector - had total
revenue of $8 billion at the end of the same fiscal year. Its total assets were $1 billion
at the beginning of the year and $2 billion at the end.
 XYZ Company's Asset Turnover Ratio = $8 billion / $1.5 billion = 5.33
 Though ABC has generated more revenue for the year, XYZ is more efficient in
using its assets to generate income as its asset turnover ratio is higher. XYZ has
generated almost the same amount of income with over half the resources as ABC.
Fixed Asset Turnover Ratio
 The fixed asset turnover ratio reveals how efficient a company is at generating
sales from its existing fixed assets
 A higher ratio implies that management is using its fixed assets more effectively
 A high FAT ratio does not tell anything about a company's ability to generate
solid profits or cash flows
Fixed Asset Turnover Ratio
Example: Fisher Company has annual gross sales of $10M in the year 2015, with sales returns
and allowances of $10,000. Its net fixed assets’ beginning balance was $1M, while the year-
end balance amounts to $1.1M.

10,000,000 – 10,000 = 9,990,000 = 9.51

(1,000,000 + 1,100,000) /2 1,050,000
Based on the given figures, the fixed asset turnover ratio for the year is 9.51, meaning that for
every one dollar invested in fixed assets, a return of almost ten dollars is earned.  The average
net fixed asset figure is calculated by adding the beginning and ending balances, then dividing
that number by 2.
Inventory Turnover Ratio
 inventory turnover measures how efficiently a company uses its
inventory by dividing the cost of goods sold by the average
inventory value during the period
 Inventory turnover ratios are only useful for comparing similar
companies, and are particularly important for retailers
 A relatively low inventory turnover ratio may be a sign of weak
sales or excess inventory, while a higher ratio signals strong sales
but may also indicate inadequate inventory stocking
 Accounting policies, rapid changes in costs, and seasonal factors
may distort inventory turnover comparisons
Inventory Turnover Ratio
Formula:
Inventory Turnover Ratio
Example of an Inventory Turnover Calculation
Walmart Inc. (WMT)
For fiscal year 2022, Walmart Inc. (WMT) reported cost of sales of $429 billion and year-end
inventory of $56.5 billion, up from $44.9 billion a year earlier.7
Walmart’s inventory turnover ratio for the year was:

$429 billion ÷ [($56.5 billion + $44.9 billion)/2], or about 8.5

Its days inventory equaled:

(365 ÷ 8.75), or 42 days
This showed that Walmart turned over its inventory every 42 days on average during the year.
Days Payable Outstanding (DPO)
 Days payable outstanding (DPO) computes the average number of
days a company needs to pay its bills and obligations
 Companies that have a high DPO can delay making payments and
use the available cash for short-term investments as well as to
increase their working capital and free cash flow
 However, higher values of DPO, though desirable, may not always
be a positive for the business as it may signal a cash shortfall and
inability to pay
Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO)
Example of How DPO Is Used
As a historical example, the leading retail corporation Walmart (WMT) had accounts
payable worth $49.1 billion and cost of sales (cost of goods sold) worth $420.3
billion for the fiscal year ending Jan. 31, 2021.
 These figures are available in the annual financial statement and balance sheet of
the company. Taking the number of days as 365 for annual calculation, the DPO
for Walmart comes to [ (49.1 x 365) / 420.3 ] = 42.63 days.

Similar calculations can be used for technology leader Microsoft (MSFT), which had
$2.8 billion as AP and $41.3 billion as COGS, leading to a DPO value of 24.7 days.
 It indicates that during the fiscal year ending in 2021, Walmart paid its invoices
around 43 days after receiving the bills, while Microsoft took around 25 days, on
average, to pay its bills.
Stability/Solvency Ratio
 A solvency ratio examines a firm's ability to meet its long-term
debts and obligations
 Solvency ratios are often used by prospective lenders when
evaluating a company's creditworthiness as well as by potential
bond investors
 Solvency ratios and liquidity ratios both measure a company's
financial health but solvency ratios have a longer-term outlook than
liquidity ratios
 The main solvency ratios include the debt-to-assets ratio, the
interest coverage ratio, the equity ratio, and the debt-to-equity (D/E)
ratio
Types of Stability/Solvency Ratio
 Interest Coverage Ratio

 The interest coverage ratio measures how many times a company can cover its current
interest payments with its available earnings. In other words, it measures the margin of
safety a company has for paying interest on its debt during a given period.
 The higher the ratio, the better. If the ratio falls to 1.5 or below, it may indicate that a
company will have difficulty meeting the interest on its debts.
Interest Coverage Ratio
For example, if a company's earnings before taxes and interest amount
to $50,000, and its total interest payment requirements equal $25,000,
then the company's interest coverage ratio is two—$50,000/$25,000.
Types of Stability/Solvency Ratio
 Debt to Assets Ratio

 The debt-to-assets ratio measures a company's total debt to its total assets. It measures a
company's leverage and indicates how much of the company is funded by debt versus
assets, and therefore, its ability to pay off its debt with its available assets. A higher ratio,
especially above 1.0, indicates that a company is significantly funded by debt and may
have difficulty meetings its obligations.
Debt to Asset Ratio

Debt to Assets Comparison

From the example above, the companies are ordered from highest degree of flexibility to lowest degree of
flexibility.

Google is not weighed down by debt obligations and will likely be able to secure additional capital at potentially
lower rates compared to the other two companies. Although its debt balance is more than three times higher than
Costco, it carries proportionally less debt compared to total assets compared to the other two companies.
Costco has been financed nearly evenly split between debt and equity. This means the company carries roughly the
same amount of debt as it does in retained earnings, common stock, and net income.
Hertz is relatively known for carrying a high degree of debt on its balance sheet. Although its debt balance is
smaller than the other two companies, almost 90% of all the assets it owns are financed. Hertz has the lowest
degree of flexibility of these three companies as it has legal obligations to fulfill (whereas Google has flexibility
regarding dividend distributions to shareholders).
Types of Stability/Solvency Ratio
 Equity Ratio

 The equity ratio, or equity-to-assets, shows how much of a company is funded by equity as
opposed to debt. The higher the number, the healthier a company is. The lower the number,
the more debt a company has on its books relative to equity.
Equity Ratio
Example: Let’s look at an example to get a better understanding of how the ratio works. For
this example, Company XYZ’s total assets (current and non-current) are valued $50,000, and
its total shareholder (or owner) equity amount is $22,000. Using the formula above:

Equity Ratio – 22,000 = 0.44

50,000

The resulting ratio above is the sign of a company that has

leveraged its debts. It holds slightly more debt ($28,000) than
it does equity from shareholders, but only by $6,000.
Types of Stability/Solvency Ratio
 Debt to Equity Ratio

 The D/E ratio is similar to the debt-to-assets ratio, in that it indicates how a company is
funded, in this case, by debt. The higher the ratio, the more debt a company has on its
books, meaning the likelihood of default is higher. The ratio looks at how much of the debt
can be covered by equity if the company needed to liquidate.
Debt to Equity Ratio
Solvency Ratios vs. Liquidity Ratios
 Solvency ratios and liquidity ratios are similar but have some important differences. Both
of these categories of financial ratios will indicate the health of a company. The main
difference is that solvency ratios offer a longer-term outlook on a company whereas
liquidity ratios focus on the shorter term.
 Solvency ratios look at all assets of a company, including long-term debts such as bonds
with maturities longer than a year. Liquidity ratios, on the other hand, look at just the
most liquid assets, such as cash and marketable securities, and how those can be used to
cover upcoming obligations in the near term.
Limitations of Solvency Ratios
  A company may have a low debt amount, but if its cash
management practices are poor and accounts payable are surging as a
result its solvency position may not be as solid as would be indicated
by measures that include only debt.
 It's important to look at a variety of ratios to comprehend the
true financial health of a company, as well as understand the reason
that a ratio is what it is. Furthermore, a number itself won't give much
of an indication. A company needs to be compared to its peers,
particularly the strong companies in its industry, to determine if the
ratio is an acceptable one or not.
 For example, an airline company will have more debt than a
technology firm just by the nature of its business. An airline company
has to buy planes, pay for hangar space, and buy jet fuel; costs that are
significantly more than a technology company will ever have to face.
Profitability Ratio
 Profitability ratios assess a company's ability to earn profits from its sales
or operations, balance sheet assets, or shareholders' equity
 Profitability ratios indicate how efficiently a company generates profit and
value for shareholders
 Higher ratio results are often more favorable, but these ratios provide
much more information when compared to results of similar companies,
the company's own historical performance, or the industry average
 having a higher value relative to a competitor's ratio or relative to the same
ratio from a previous period indicates that the company is doing well.
Profitability ratios are most useful when compared to similar companies,
the company's own history, or average ratios for the company's industry
Gross Profit Margin
 The gross profit margin is the percentage of revenue that exceeds
the COGS.
 A high gross profit margin indicates that a company is successfully
producing profit over and above its costs.
 The net profit margin is the ratio of net profits to revenues for a
company; it reflects how much each dollar of revenue becomes
profit.
Gross Profit Margin
 Example of Gross Profit Margin
 For the fiscal year ending September 30, 2017, Apple reported total sales or
revenue of $229 billion and COGS of $141 billion as shown from the company's
consolidated 10K statement below:

Apple's gross profit margin for

2017 was 38%. Using the formula
above, it would be calculated as
follows:
Operating Profit Margin
 Your operating profit margin ratio shows you how profitable your
company is.
 The larger the ratio, the more money your company makes on each
dollar of sales.
 To calculate your company's operating profit margin ratio, divide
your operating income by your net sales revenue.
 You can find the inputs you need for calculating a company's
operating profit margin on its income statement.
Operating Profit Margin
Example:
Operating Profit Margin = Operating Income / Net Sales Revenue
Operating Income (EBIT) = Gross Income - (Operating Expenses + Depreciation &
Amortization Expenses) 
Let's say your small business has a gross income of $250,000 for the last 12-month
period—that's also your net sales revenue. The cost of goods sold and operating
expenses for the same time period equals $175,000. First, we need to calculate the
operating income (or EBIT), which is your gross income or net sales revenue minus
your operating expenses and the cost of goods sold:
 $250,000 - $175,000 = $75,000
Now, we can calculate the operating profit margin ratio, which is operating income
($75,000) divided by your net sales revenue ($250,000).
 $75,000 / $250,000 = 0.3
Your operating profit margin ratio is 0.3, or 30%. For every $1 of sales, your company
makes 30 cents of profit.
Net Profit Margin
 Net Profit Margin (also known as “Profit Margin” or “Net Profit
Margin Ratio”) is a financial ratio used to calculate the percentage
of profit a company produces from its total revenue.
 It measures the amount of net profit a company obtains per dollar of
revenue gained
 The net profit margin is equal to net profit (also known as net
income) divided by total revenue, expressed as a percentage.
Net Profit Margin
Earnings Per Share (EPS)
 Earnings per share (EPS) is a company's net profit divided by the
number of common shares it has outstanding
 EPS indicates how much money a company makes for each share of
its stock and is a widely used metric for estimating corporate value
 A higher EPS indicates greater value because investors will pay
more for a company's shares if they think the company has higher
profits relative to its share price.
 EPS can be arrived at in several forms, such as excluding
extraordinary items or discontinued operations, or on a diluted
basis.
 Like other financial metrics, earnings per share is most valuable
when compared against competitor metrics, companies of the same
industry, or across a period of time.
Earnings Per Share (EPS)
Earnings per share formula:
 ​EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding
Earnings Per Share Formula Example
ABC Ltd has a net income of $1 million in the third quarter. The company announces
dividends of $250,000. Total shares outstanding is at 11,000,000.
The EPS of ABC Ltd. would be:
​ PS = ($1,000,000 – $250,000) / 11,000,000
E
EPS = $0.068
Since every share receives an equal slice of the pie of net income, they would each receive
$0.068.
Return on Assets
 Return on assets is a metric that indicates a company's profitability
in relation to its total assets.
 ROA can be used by management, analysts, and investors to
determine whether a company uses its assets efficiently to generate
a profit.
 You can calculate a company's ROA by dividing its net income by
its total assets.
 It's always best to compare the ROA of companies within the same
industry because they'll share the same asset base.
 ROA factors in a company's debt while return on equity does not.
Return on Assets
ROA is calculated by dividing a company’s net income by its total assets.
Formula:

For example, pretend Sam and Milan both start hot dog stands. Sam spends $1,500
on a bare-bones metal cart, while Milan spends $15,000 on a zombie apocalypse-
themed unit, complete with costume.

Let's assume that those were the only assets each firm deployed. If over some given
period, Sam earned $150 and Milan earned $1,200, Milan would have the more
valuable business but Sam would have the more efficient one. Using the above
formula, we see Sam’s simplified ROA is $150 / $1,500 = 10%, while Milan's
simplified ROA is $1,200/$15,000 = 8%.
Return on Equity
 Return on equity (ROE) is the measure of a company's net income
divided by its shareholders' equity.
 ROE is a gauge of a corporation's profitability and how efficiently it
generates those profits.
 The higher the ROE, the better a company is at converting its equity
financing into profits.
 To calculate ROE, divide net income by the value of shareholders'
equity.
 ROEs will vary based on the industry or sector in which the
company operates.
Return on Equity
ROE is calculated by dividing a company’s net income by its average shareholder’s
equity.
Formula:

 Example of Return on Equity

For example, imagine a company with an annual income of $1,800,000 and average
shareholders' equity of $12,000,000. This company’s ROE would be 15%, or $1.8 million
divided by $12 million.
As a real-world example, consider Apple Inc. (AAPL)'s financials for the fiscal year ending
Sept. 29, 2018, the company generated $59.5 billion in net income. At the end of the fiscal
year, its shareholders’ equity was $107.1 billion versus $134 billion at the beginning.2
Apple’s return on equity, therefore, is 49.4%, or $59.5 billion / [($107.1 billion + $134
billion) / 2].
Market Value Ratios
 Market value ratios are financial metrics that measure and analyze
stock prices and compare market prices with those of competitors and
against other facts and figures.
 These ratios track the financial performance of public companies to
understand their position in the market.
 It can determine whether the stocks of a particular company are
overvalued, undervalued, or rightly valued.
 It can also figure out the optimal prices at which the shares should be
bought or sold
 These metrics also help existing and potential investors to make
financial decisions about investing in shares
Price/Earnings Ratio
 The price-to-earnings (P/E) ratio relates a company's share price to its
earnings per share.
 A high P/E ratio could mean that a company's stock is overvalued, or that
investors are expecting high growth rates in the future.
 Companies that have no earnings or that are losing money do not have a
P/E ratio because there is nothing to put in the denominator.
 Two kinds of P/E ratios—forward and trailing P/E—are used in practice.
 A P/E ratio holds the most value to an analyst when compared against
similar companies in the same industry or for a single company across a
period of time.
Price/Earnings Ratio

Example of the P/E Ratio

As a historical example, let's calculate the P/E ratio for Walmart Inc. (WMT) as of Feb. 3,
2021, when the company's stock price closed at $139.55.
The company's earnings per share for the fiscal year ending Jan. 31, 2021, was $4.75,
according to The Wall Street Journal.

Therefore, Walmart's P/E ratio was:

$139.55 / $4.75 = 29.38
Book to Market Ratio
 The book-to-market ratio helps investors find a company's value by
comparing the firm's book value to its market value.
 A high book-to-market ratio might mean that the market is valuing
the company's equity cheaply compared to its book value.
 Many investors are familiar with the price-to-book ratio, which is
simply the inverse of the book-to-market ratio formula.
Book to Market Ratio
For calculating book values to derive this ratio, an investor can use the following formula:
 Book Value = Total Assets – Total Liabilities – Preferred Stock – Intangible Assets
 or Book Value = Shareholder’s Equity (Broadly, Equity Share Capital + Reserves and
Surpluses)
Market Value = Market Price per share * No. of Equity Shares Outstanding.

 Assume there is a company X whose publicly traded stock price is $20, and it has 100,000
outstanding equity shares.  The book value of the company is $1,500,000.
Market-to-book value ratio = 20* 1 00 000 / 1,500,000 = 2,000,000/1,500,000 = 1.33
Here, the market perceives a market value of 1.33 times the book value of company X.
Dividend Yield
 The dividend yield—displayed as a percentage—is the amount of
money a company pays shareholders for owning a share of its stock
divided by its current stock price.
 Mature companies are the most likely to pay dividends.
 Companies in the utility and consumer staple industries often have
relatively higher dividend yields. 
 It's important for investors to keep in mind that higher dividend
yields do not always indicate attractive investment opportunities
because the dividend yield of a stock may be elevated as a result of
a declining stock price. 
Dividend Yield

 Example of Dividend Yield 

 Suppose Company A’s stock is trading at $20 and pays annual dividends of $1 per
share to its shareholders. Suppose that Company B's stock is trading at $40 and
also pays an annual dividend of $1 per share. 
 This means Company A's dividend yield is 5% ($1 / $20), while Company B's
dividend yield is only 2.5% ($1 / $40). Assuming all other factors are equivalent,
an investor looking to use their portfolio to supplement their income would likely
prefer Company A over Company B because it has double the dividend yield.
Price Earnings Growth Ratio
 The PEG ratio enhances the P/E ratio by adding expected earnings
growth into the calculation.
 The PEG ratio is considered to be an indicator of a stock's true
value, and similar to the P/E ratio, a lower PEG may indicate that a
stock is undervalued.
 The PEG for a given company may differ significantly from one
reported source to another.
 Differences will depend on which growth estimate is used in the
calculation, such as one-year or three-year projected growth.
 A PEG lower than 1.0 is best, suggesting that a company is
relatively undervalued.
Price Earnings Growth Ratio

Assume the following data for two Computation:

hypothetical companies:
Price Earnings Growth Ratio
Many investors may look at
Company A and find it more
attractive since it has a lower P/E
ratio among the two companies. But
compared to Company B, it doesn't
have a high enough growth rate to
justify its current P/E. Company B is
trading at a discount to its growth
rate and investors purchasing it are
paying less per unit of earnings
growth. Based on its lower PEG,
Company B may be relatively the
better buy.