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Additional Ratios

Book Value Of Equity Per Share (BVPS)


A financial measure that represents a per share assessment of the minimum value of a company's equity.
More specifically, this value is determined by relating the original value of a firm's common stock adjusted
for any outflow (dividends and stock buybacks) and inflow (retained earnings) modifiers to the amount of
shares outstanding.

Calculated as:

While book value of equity per share is one factor that investors can use to determine whether a stock is
undervalued, this metric should not be used by itself as it only presents a very limited view of the firm's
situation. BVPS provides a snap shot of a firm's current situation, but considerations of the firm's future are
not included.

For example, XYZ Corp, a widget producing company, may have a share price that is currently lower than its
BVPS. This may not indicate that the XYZ is undervalued, because looking ahead, the growth opportunities
for the company are vastly limited as fewer and fewer people are buying widgets.

Enterprise Value (EV)


A measure of a company's value, often used as an alternative to straight forward market capitalization. EV is
calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash
equivalents.

Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have
to take on the company's debt, but would pocket its cash. EV differs significantly from simple market
capitalization in several ways, and many consider it to be a more accurate representation of a firm's value.
The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company,
and thus EV provides a much more accurate takeover valuation because it includes debt in its value
calculation.

Degree Of Financial Leverage (DFL)


A leverage ratio summarizing the affect a particular amount of financial leverage has on a company's
earnings per share (EPS). Financial leverage involves using fixed costs to finance the firm, and will include
higher expenses before interest and taxes (EBIT). The higher the degree of financial leverage, the more
volatile EPS will be, all other things remaining the same. The formula is as follows:

Most likely, the firm under evaluation will be trying to optimize EPS, and this ratio can be used to help
determine the most appropriate level of financial leverage to use to achieve that goal.
Price/Earnings To Growth (PEG Ratio)
Ratio used to determine a stock's value while taking into account earnings growth. The calculation is as
follows:

PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio
because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more
undervalued.

Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are
many variations using earnings from different time periods (i.e. one year vs five year). Be sure to know the
exact definition your source is using.

Enterprise Multiple
A ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential
acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not
include. Enterprise multiple is calculated as:

A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several
reasons:

1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries'
taxation policies.

2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for
takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with
a low enterprise multiple can be viewed as a good takeover candidate.

Keep in mind that enterprise multiples can vary depending on the industry. Therefore, it's important to
compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in
high growth industries (like biotech) and lower multiples in industries with slow growth (like railways).

Price-To-Book Ratio (P/B Ratio)


A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current
closing price of the stock by the latest quarter's book value per share.

Also known as the "price-equity ratio".

Calculated as:

(Numerator of the formula should be replaced with market cap. or multiplied by outstanding shares)
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is
fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.

This ratio also gives some idea of whether you're paying too much for what would be left if the company
went bankrupt immediately.

Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a
whole. Also known as "beta coefficient".

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's
returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the
market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater
than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta
is 1.2, it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a
beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

Weighted Average Cost Of Capital (WACC)


A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All
capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a
WACC calculation.

WACC is calculated by multiplying the cost of each capital component by its proportional weight and then
summing:

(1-tc) = cause interest paid on debt is deductible and tax is affected by an effect of it.

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Broadly speaking, a company’s assets are financed by either debt or equity. WACC is the average of the
costs of these sources of financing, each of which is weighted by its respective use in the given situation. By
taking a weighted average, we can see how much interest the company has to pay for every dollar it
finances.

A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by
company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the
appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.
Capital Expenditure (CAPEX)
Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or
equipment. This type of outlay is made by companies to maintain or increase the scope of their operations.
These expenditures can include everything from repairing a roof to building a brand new factory.

The amount of capital expenditures a company is likely to have depends on the industry it occupies. Some
of the most capital intensive industries include oil, telecom and utilities.

In terms of accounting, an expense is considered to be a capital expenditure when the asset is a newly
purchased capital asset or an investment that improves the useful life of an existing capital asset. If an
expense is a capital expenditure, it needs to be capitalized; this requires the company to spread the cost of
the expenditure over the useful life of the asset. If, however, the expense is one that maintains the asset at
its current condition, the cost is deducted fully in the year of the expense.