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Stocks 402: Using Ratios and Multiples

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1.
A company has an enterprise value of $225 million, free cash flow of $15 million, and zero net interest expense. What is its cash return?
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6.7%. Cash return is equal to free cash flow divided by enterprise value. In this case, that's $15 million/$225 million, or 6.7%.
2.
What would a stock dividend yield of 0% tell you?
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The company is not paying any dividend at all. If you have a zero on the top half the formula, where the annual dividends per share go, then no dividend is being paid.
3.
In a typical price/book ratio, what exactly is the book value part of it?
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The total equity divided by the number of shares outstanding. Altogether, this is the "book value" that purports to show what a share of stock is objectively worth.
4.
How would you turn a price/earnings ratio into an earnings yield?
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Invert it. Earnings yield can be gotten by inverting the price/earnings ratio.
5.
A company's price/earnings ratio is most meaningful when it is compared with which of the following?
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Its historical P/E ratio. A company's P/E ratio is most meaningful when it is compared with its historical P/E ratio. The most useful way to use a P/E ratio is to compare it with a certain benchmark. Good benchmarks are the P/E of another company in the same industry, the P/E of the entire market, or the P/E of the same company at a different point in time. It would not be very meaningful to compare a company's P/E ratio with its P/S ratio or historical P/B ratio, because the latter two metrics are used to measure different aspects of the company's performance (sales and book value) relative to its stock price.
6.
A company's price/earnings growth ratio uses its stock's current price in the calculation.
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False. The ratio uses forward price/earnings ratio, which is a future estimate.
7.
A firm's price/sales ratio is found by dividing its stock price by its _______.
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Sales per share. Since we are using stock price, we must also use sales per share.