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Stocks 402: Using Ratios and Multiples

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1.
The formula for cash return is free cash flow plus net interest expense, the sum of which is then divided by _______.
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Enterprise value. Enterprise value is the figure that goes into the denominator.
2.
An advantage to using the price/sales ratio is that sales are cut-and-dried.
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True. Sales are more straightforward and harder to manipulate than earnings.
3.
A stock with a high dividend yield is a good bargain for an income investor to buy.
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Maybe. A dividend yield can be high for many reasons, either good or bad. On the bad side, the stock price might be dropping deeply due to financial troubles; that could proportionately raise the dividend yield. Caution is always key.
4.
A company's price/earnings growth ratio uses _______.
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Future estimates. The price/earnings growth ratio is used to get a sense of what a company will be like in the future.
5.
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.
6.
The price/book ratio would be most useful for valuing which of the following?
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A utility company. The price/book ratio is most useful for valuing a utility company. A utility firm has mostly tangible assets that are accurately measured by its book value. On the other hand, a pharmaceutical or software company has a lot of intangible assets, such as patents, that are not accurately reflected in its book value.
7.
The value of a stock's price/earnings ratio could be described as _______.
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How much you are willing to pay for the company's earnings. This is what P/E boils down to, practically speaking. The higher the P/E ratio, the more that you are generally willing to pay for the earnings that the company generates.