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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Valuation Formats

Definition:

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:

RATIO

DEFINITION

Return on Sales (ROS) or Net MarginAfter 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 RatioCurrent 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/AssetsTotal 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
Inventory TurnsCOGS/Inventory
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