1. What is the company\'s current ratio? 2. ... Days Sales Outstanding? 3. …Earn
ID: 454045 • Letter: 1
Question
1. What is the company's current ratio? 2. ... Days Sales Outstanding? 3. …Earnings Per Share? 4. ...Return on Assets? 5. …Debt Ratio? 6. …Gross Margin % 7. ...Inventory Turns 8. …Times Interest Earned Ratio? 9. …Net Income per Employee? 10. …PE Ratio 4.58 $24.33 $3 $0.40 0.427 60% $7.50 16 $150 $5 Do you think this stock is relatively cheap or relatively expensive? Please discuss why. 1. What is the company's current ratio? 2. ... Days Sales Outstanding? 3. …Earnings Per Share? 4. ...Return on Assets? 5. …Debt Ratio? 6. …Gross Margin % 7. ...Inventory Turns 8. …Times Interest Earned Ratio? 9. …Net Income per Employee? 10. …PE Ratio 4.58 $24.33 $3 $0.40 0.427 60% $7.50 16 $150 $5Explanation / Answer
Price of the stock = EPS * P/E ratio
Where EPS is earning per share = $ 3
P/E ratio is price to earnings ratio of the stock = 5
Therefore price of the stock = $ 3 * 5 = $ 15
Now we know the stock price and we have various ratios which is quite good like company's current ratio is above 4, show that it liquidity position is good. Debt equity ratio is below 1, indicates that the company have less debt in comparison of its shareholders equity. Gross margin is 60%, indicates that cost of goods sold in only 40 % of its sales value and the company is in strong position to make higher net profit. Times Interest Earned Ratio is 16 times means company earning 16 times of its interest payment before paying the taxes that is also very good indicator of the companies health and Net Income per Employee is $ 150, higher the number is always better.
We have, 1 – (Debt/Assets) = Equity/Assets
Therefore 1- (0.427/1.427)
The equity multiplier is equal to Assets/Equity = 1.427 /1
equation gives the rate of return on assets (ROA)
ROA = Profit margin × Total assets turnover.
0.4 = 60% * total asset turnover
Total asset turnover = 0.24
The ROA times the equity multiplier (total assets divided by common equity) yields the return on equity (ROE).
ROE = Profit margin × Total assets turnover × Equity multiplier.
ROE = 0.6 * 0.24 * 1.427 = 0.205 = 20.5 %
But we don’t have any relevant data to compare that the stock price is cheap or expensive we can only assume based of some reasonable facts that the stock is a good investment.
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