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Excel Finance Class 20: Growth Ratios and Market Value Ratios - YouTube
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welcome to excel in finance video number
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20 hey if you want to download this
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workbook or the PDFs just click on the
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link below the video this is chapter 3
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so you can download the chapter 3
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workbook and PDFs hey we have just a few
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more ratios to talk about we want to
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talk about the internal growth rate the
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sustainable growth rate and then a few
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other market value ratios now the
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internal growth wait is the maximum that
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the Corp can it the corporation can
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achieve in growth with no external
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financing no issuing debt our equity we
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take our o a times B what's B
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Oh B we saw this when we did our income
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statements last chapter chapter 2
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addition to retain earnings that just
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means if we have net income we pay some
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out as dividends in the rest we plow
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back into the company so this is in
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essence internal financing so the way we
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calculate this B is addition to retain
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earning divided by net income right if
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it's all going back all net income no
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dividends are being paid out then this
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is one right so we do that this is for
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internal if we're not going to get any
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external financing the sustainable
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growth rate this means you're not going
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to get this calculation you're not going
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to get any external financing except to
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maintain a constant debt to equity ratio
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now if you have you know good ideas and
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you're expanding a lot then of course
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you want to go out and get debt or
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equity finally we're going to look at
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the price to earnings ratio simply the
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price per share and you go out and you
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can see that in the for publicly traded
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companies and you divide it by earnings
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per share earnings per share just says
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hey all the net income available for
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earn for this particular period divided
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by the number of shares earnings per
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share says if we gave all the profit for
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this period out to the stockholders how
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much would each one get so make this
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calculation
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and this is called the p/e ratio and
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it's a surrogate for growth people
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interpret a high p/e ratio as the
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market's thinking that the stock has a
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lot of growth potential finally we have
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market to book ratio you take the price
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per share that's out in the market right
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Tice per share price per share and you
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divided by equity per share so we
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actually look on the balance sheet and
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figure out the total equity divide it by
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the number of shares and get what the
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book value per share would be so this is
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for one share the book value and this is
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the market value per one share when we
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do that division if we get a number
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greater than one it means the financial
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markets think the corp is worth more
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than the book value and that's just
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mostly the case most often the case not
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not always but and less than one means
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the financial markets think the corp is
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worth less the corporations work less
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than the book value let's go over to
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excel all right here's our workbook and
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we're on the growth market ratio so
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growth and then market ratio sheet here
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we have our net income for 2006 we have
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a few numbers that we've been working
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with throughout this whole chapter
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dividends paid in 2006 book value of
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equity in 2006 here's our return for on
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assets we calculated that last video
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return on equity and there's our B this
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is simply if we go over here and look
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this is 2 5 2005 calculations so right
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here here's our net income here's the
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dividend so the calculation for amount
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we get to plow back into the company hey
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our net income minus our dividends now
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that's sitting in cell c-17 so I went
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ahead and calculated this that amount
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you can see the blue box right there
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divided by the income now this is the
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internal growth wait if we're not going
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to issue any debt or equity so in
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parentheses we're going to say actually
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we don't have to equals the ROA return
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on assets times our B and then we're
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going to divide it by 1 minus that same
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thing or turn on assets times B 4.52
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now if we're going to keep a constant
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debt to equity ratio which some firms
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like to do it's the same calculation
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except for we're going to be doing
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instead of a turn on assets return on
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equity equals o return on equity times
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that B divided by in parentheses 1 minus
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return on equity times the B close
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parentheses
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so those are the that's internal growth
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rates sustainable growth rate we now
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want to look at some those market values
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now here we went out this is all for
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2006 our financial statements were
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ending on September 26 or something like
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that
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Oh September 24th and in 2006 so I went
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out and got the number of shares from
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Yahoo Finance or Google Finance or one
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of those and we got our market value of
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stock now this is 2006 I'm shooting this
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video in 2010 stock prices come down
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quite a bit and you got to expect that
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right what does wholefoods do they sell
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high-end goods at least according to the
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perception of customers their high-end
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goods they actually do a pretty good job
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of keeping prices low for organic and
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natural items and they do it because
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they have the economies of scales they
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are the biggest chain that sells that
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kind of food alright so let's do our
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earnings per share okay we got this from
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you know the markets that so we go up
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and we get equals our net income for
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2006 divided by earnings per share so
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this is if we were going to pay out all
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of tonight yeah net income OOP each
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stockholder would get $1 and 46 cents
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now this surrogate for growth our p/e
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ratio we say equals whatever the price
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is divided by this earnings per share
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wow that's huge
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40 so in 2006 the markets absolutely had
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a well they believe that Whole Foods was
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expanding and if you looked at their
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financial statements read their the
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notes of the financial statements read
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their blogs at their website read their
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manager statements they were and they
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they were expanding a lot when the
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financial crisis hit and I had to stop
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some of that and people bought less of
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the high-end items so this was this was
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high back in 2006 but maybe somewhat
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just
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two-five they were expanding now
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dividends per share that's just a
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straight calculation we need to know
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what the dividends are so dividends
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divided by our number of outstanding
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shares that tells you the cash that each
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stockholder got this year two dollars
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and 56 cents finally our last ratio
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we're going to look at its market to
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book and if we know the market value of
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the stock and the book value of the
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stock we do this ratio and if it's
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bigger that means the markets are
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valuing the company more than the actual
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company is on the book so let's go ahead
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and do it there's our stock price that's
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the stock price for one stock divided by
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and now we're going to have to do a
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calculation so we don't have book value
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per stock but no problem we take our
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equity divided by in parentheses our
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shares outstanding and so five point
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eight nine that means that for every $1
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a book value there's five dollars and 89
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cents of a market value
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let's look at some of these numbers in
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comparison this sheet over here there's
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industry averages in more industry let's
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look at industry average again this is
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back in 2006 price to earning for
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grocery stores in this injury industry
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were 17 Wow look at that again if price
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for earnings is a surrogate for growth
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the markets absolutely thought that
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Whole Foods was going to expand a lot
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faster than Safeway and it was there in
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the aughts 2002 2006 the demand for
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organic and natural foods was increasing
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dramatically and in fact Safeway and
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Walmart and Fred Meyers and qfc and many
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other
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food chains were trying to catch up
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right because they saw that the demand
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was increasing so and let's see a
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price-to-book not much difference profit
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margin you expect this I have a
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percentage format here if I click here
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and go and then increase the decimal you
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can see it in percentage right but
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that's to be expected because they had
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sell high-end the grocery chains are
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usually low profit margin high turnover
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they go through they sell a lot sell a
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lot but you expect that this high-end
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Whole Foods would have a higher profit
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margin and they do return on equity just
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a little bit higher and look at this so
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remember when we looked at the DuPont
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analysis you can increase return on
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equity when you have more debt or if you
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can meet your debt payments of course so
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this is lower than for the industry the
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return on equity is lower than it is for
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Whole Foods but in part they increase
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this so this would be even lower if they
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had the same debt equity to ratio as
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whole food so Whole Foods is getting a
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good return on equity with not so much
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debt they the less debt you have the
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less chance you have of going defaulting
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on debt and getting into trouble
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alright now these are averages and that
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is very useful but sometimes you you
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don't want to look at averages you want
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to look at a little bit more data now an
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average says what's in the middle this
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is the middle value you look at all of
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the numbers for the industry addemup
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divided by the count but we also
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sometimes can look at what are called
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quartiles let's go over here and that
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our textbook talks about this median is
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the one in the middle
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so p/e ratio 17.4 so I got 17.5 a little
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a little bit different rounding here but
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that's the one in the middle median
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means you line them all out and actually
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the one that is
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ashlee in the middle it's a type of
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average quartile well what is the median
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mean it means that 50% of the values are
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below and 50% of the values are above I
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tip I did the motion wrong this is below
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this is above but this one when you say
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lowest quartile it means 25% of the
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values are below and 75 above the
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highest quartile the third says 25%
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above 75% below so it's in essence we're
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getting a range of values we can look at
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right so the lowest quartile that's
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fifteen point three then one in the
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middle is 17 and the highest amongst all
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of the grocer's and people who sell food
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is 20 you can see for PE we are way
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above the highest quartile here return
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on equity we're in between the middle
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and the highest quartile so that means
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there's some people in this industry
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that are earning you know more than our
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14.5 percent or a decimal long-term
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equity yeah we're way down here we're in
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the lowest or near the lowest quartile
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which you know when you leverage up you
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can buy more assets and if you have a
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good idea that can be good but the more
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debt you have the more risks you have
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part of the reason you know Whole Foods
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could have really had big trouble in
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when the financial crisis hit because
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they're selling high-end items and what
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do people do when they're in a recession
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they don't buy high-end items but they
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didn't have a lot of a debt at least not
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in 2006 which probably helped them a lot
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you know remember what happened in the
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financial crisis some of the some big
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retailers went bankrupt and it was
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because they had too much debt all right
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so when people stopped buying things and
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you have a lot of debt you can't meet
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your interest payments and you're in big
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trouble
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price-to-earnings yeah we're way above
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that's similar to this right price to
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earnings so the market is valuing them
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very highly and then finally net profit
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margin well look at this we're Whole
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Foods is way above and you would expect
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that because there are
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I and the seller alright that's it for
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chapter three chapter four and five
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comes up next and then we'll start there
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to start talking about cash flows and
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actually making an investment like into
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a bank account with an interest rate and
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figure out what the value of that
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investment will be alright see you next
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chapter
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