A small menu of how bankers, investors and Cramer compare and value companies:
1. Multiple of Sales—The company does $100 mil a year in sales. Buy it for... twice? Thrice times sales? What’s the industry standard? How are others trading?
2. Multiple of Margin (Gross or Operating)—Same as above, only with margins instead of sales used as the delimiter.
3. Multiple of Cash Flow—Often used in industries which don’t really depreciate (like the entertainment industry—""Gone with the Wind"" or ""Snow White"" might be worth more today than in 1932).
4. Multiple of Earnings—the most common denominator. This valuation ideology is based on the precept that a company is worth the value of dividends it will throw off in the future. This means dividends paid to common stockholders plus the value of the company when the Argentineans buy it in 2009.
5. Establishing the Health of the Company (We’re going to pick some of the McDonald "dirty" Dozen ratios to illustrate some valuation techniques)—We’ll use SnowPlow and just focus on today. In real life you’d have to cover every single blasted year but we’re in Cyberspace now so it’s all right to slide a bit.
The McDonald "Dirty Dozen" Ratios:
|Return on Sales (ROS) or Net Margin||After Tax Profit/Total Sales|
|Gross Margin||(Total Sales - COGS)/Total Sales|
|Return on Assets (ROA)||Net Income/Beginning of Year Total Assets|
|Return on Equity (ROE)||Net Income/Beginning of Year Shareholders’ Equity|
|Current Ratio||Current Assets/Current Liabilities|
|Quick Ratio||(Cash + Stocks & Bonds… + Accounts Receivable)/Current Liabilities|
|Borrowed Debt/Capitalization||(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases))/(Short Term Debt + Current Portion of Long Term Debt + Long Term Debt (incl. Capitalized Leases) + Shareholders’ Equity)|
|Pretax Interest Coverage (times Interest Earned)||(Pretax Income + Interest Expense)/Interest Expense|
|Asset Turns (TURNS): Sales/Assets||Total Sales/Beginning of Year Total Assets|
|Days Sales Outstanding (DSO)||(Accounts Receivable x 365)/Total Sales on Credit|
|Days Payable Outstanding (DPO)||(Accounts Payable x 365)/Total Purchases on Credit|