Burkenroad Final

Earnings per share (EPS) formula

Net income/Shares outstanding

Earnings per share (EPS) concept

measures profit allocated to each outstanding share

Price-Earnings ratio (P/E) formula

Price per share/EPS

Price-Earnings ratio (P/E) concept

represents how much investors are willing to pay for each dollar of earnings

Cash flow per share (CFPS) formula

Operating CF/Shares outstanding

Cash flow per share (CFPS) concept

measures CFs allocated to each outstanding share

Price per CF per share (P/CFPS) formula

Price per share/CFPS

Price per CF per share (CFPS) concept

represents how much investors are wiling to pay for each dollar generated from core operations

Valuations to use to compare companies

P/E and CFPS

Implication of lower ratios

may suggest undervaluation

Market capitalization formula

Price per share*Shares outstandingMa

Market capitalization concept

Total value of company’s outstanding shares (market value)

Enterprise value (EV) formula

Market cap+ Debt+ Pref. stock- Cash and equivalents

Enterprise value (EV) concept

reflects theoretical cost to acquire whole company

Dividend discount model (DDM)

used for valuing dividend-paying stocks

Required rate of return formula

Risk free rate+Beta*Market sentiment

Required rate of return concept

minimum return investor expects from investment reflecting risk compensation

Risk free rate

interest rate investors can expect to earn on investment carrying zero risk

Beta

measure of volatility against the market

Bullish market sentiment

reflects optimism, rising prices, and increased buying

Bearish market sentiment

reflects pessimism, falling prices, and increased selling

P/E method terminal value (TV) concept

estimates future value of company at end of forecast period

P/E method terminal value (TV) formula

Target P/E*Forecasted EPS

Weighted avg. cost of capital (WACC) formula

Equity weight*Equity cost+Debt weight*Debt cost*(1-Tax rate)

DCF method terminal value (TV) formula

FCF*(1*g)/(r-g)

P/E to growth (PEG) formula

(P/E)/EPS growth rate

P/E to growth (PEG) concept

reflects if P/E is justified based on expected growth; =1 fair valuation, >1 overvaluation, <1 undervaluation

Days sales outstanding (DSO) formula

AR/Sales*365

Days sales outstanding (DSO) concept

measures avg. days it takes to collect payment from a credit sale

Days inventory outstanding (DIO) formula

Inventory/COGS*365

Days inventory outstanding (DIO) concept

measures avg. days company holds inventory before selling it

CFs from changes in Inventory

Inventory increase —> cash outflow; Inventory decrease —> cash inflow

Days payable outstanding (DPO) formula

AP/Cash expenses*365

Days payable outstanding (DPO) concept

measures avg. days it takes to pay bills and invoices to suppliers

Cash expenses formula

COGS+SGA-Depreciation+Taxes and interest

Cash conversion cycle (CCC) concept

reflects how quickly a company turns its investments into cash

Cash conversion cycle (CCC) formula

DIO+DSO-DPO

Depreciation formula

Avg. Depreciable PPE*Depreciation rate

CFs from changes in Debt

New borrowings —> cash inflow; Repayments —> cash outflow

Equity issuance formula

Shares*Issue price (

Dividends formula

Dividend rate*Avg. shares

Retained earnings formula

Beginning retained earnings+Net income-Dividends

Linking Income statement (IS) and Cash flow statement (CFS)

CFS starts with Net income, adjusts for non-cash items on IS and adjusts for NWC changes

Linking Cash flow statement (CFS) and Balance sheet (BS)

Ending cash flows into Cash on BS, and investing/financing activities effect PPE, debt, equity on BS

Linking Income statement (IS) and Balance sheet (BS)

Net income moves into Retained earnings, Depreciation moves into PPE (accumulated depreciation), and Interest expense effects debt projections