Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionII. Financial Statements
and Long−Term Financial
Planning- Working with Financial
Statements
(^104) © The McGraw−Hill
Companies, 2002
PE ratios vary substantially across companies, but, in 2001, a typical company in the
United States had a PE in the low 20s. This is on the high side by historical standards,
but not dramatically so. A low point for PEs was about 5 in 1974. PEs also vary across
countries. For example, Japanese PEs have historically been much higher than those of
their U.S. counterparts.
Because the PE ratio measures how much investors are willing to pay per dollar of
current earnings, higher PEs are often taken to mean the firm has significant prospects
for future growth. Of course, if a firm had no or almost no earnings, its PE would prob-
ably be quite large; so, as always, care is needed in interpreting this ratio.
Market-to-Book Ratio A second commonly quoted market value measure is the
market-to-book ratio:
Market-to-book ratio
1.12 times
[3.23]
$88
$78.5
$88
($2,591/33)
Market value per share
Book value per share72 PART TWO Financial Statements and Long-Term Financial Planning
TABLE 3.8
I. Short-term solvency, or liquidity, ratios
Current ratio Quick ratio Cash ratio Net working capital to total assets Interval measure III. Asset utilization, or turnover, ratios
Inventory turnover Days’ sales in inventory Receivables turnover Days’ sales in receivables NWC turnover Fixed asset turnover Total asset turnover II. Long-term solvency, or financial leverage, ratios
Total debt ratio
Debt-equity ratio Total debt/Total equity
Equity multiplier Total assets/Total equity
Long-term debt ratio Times interest earned ratio Cash coverage ratio IV. Profitability ratios
Profit margin Return on assets (ROA) Return on equity (ROE) ROE V. Market value ratios
Price-earnings ratio Market-to-book ratio Market value per share
Book value per sharePrice per share
Earnings per shareAssets
EquitySales
AssetsNet income
SalesNet income
Total equityNet income
Total assetsNet income
SalesEBIT Depreciation
InterestEBIT
InterestLong-term debt
Long-term debt Total equityTotal assetsTotal equity
Total assetsSales
Total assetsSales
Net fixed assetsSales
NWC365 days
Receivables turnoverSales
Accounts receivable365 days
Inventory turnoverCost of goods sold
InventoryCurrent assets
Average daily operating costsNet working capital
Total assetsCash
Current liabilitiesCurrent assetsInventory
Current liabilitiesCurrent assets
Current liabilitiesCommon Financial Ratios