How to calculate the market value of equity TUESDAY, NOVEMBER 20, 2012 AT 4:11PM It is useful to k o!

t"e #$%ket &$lue of $ 'o#($ )*s e+uit), si 'e t"is is esse ti$ll) t"e tot$l &$lue ,i&e -) t"e i &est#e t 'o##u it) to $ -usi ess. To '$l'ul$te t"e #$%ket &$lue of e+uit), si#(l) #ulti(l) t"e 'u%%e t #$%ket (%i'e of $ 'o#($ )*s sto'k -) t"e tot$l u#-e% of s"$%es outst$ /i ,. T"e u#-e% of s"$%es outst$ /i , is liste/ i t"e e+uit) se'tio of $ 'o#($ )*s -$l$ 'e s"eet. 0o% e1$#(le, if $ 'o#($ ) "$s o e #illio s"$%es outst$ /i , $ / its sto'k 'u%%e tl) t%$/es $t 213, t"e t"e #$%ket &$lue of its e+uit) is 213,000,000. 4"ile t"e '$l'ul$tio #$) see# si#(le, t"e%e $%e se&e%$l f$'to%s t"$t '$ '$use it to (oo%l) %efle't t"e 5%e$l5 &$lue of $ -usi ess. T"ese f$'to%s $%e:

Illiquid market. U less $ 'o#($ ) is ot o l) (u-li'l) "el/, -ut $lso e1(e%ie 'es $ %o-ust #$%ket fo% its s"$%es, it is +uite likel) t"$t its s"$%es !ill -e t"i l) t%$/e/. T"is #e$ s t"$t e&e $ s#$ll t%$/e '$ $lte% t"e s"$%e (%i'e si, ifi'$ tl), si 'e fe! s"$%es $%e -ei , t%$/e/6 !"e #ulti(lie/ -) t"e tot$l u#-e% of s"$%es outst$ /i ,, t"is s#$ll t%$/e '$ %esult i $ l$%,e '"$ ,e i t"e #$%ket &$lue of e+uit). Control premium. A $'+ui%e% s"oul/ ot %el) u(o t"e #$%ket &$lue of e+uit) !"e /e'i/i , !"$t (%i'e to -i/ fo% $ 'o#($ ), si 'e t"e 'u%%e t s"$%e"ol/e%s !ill !$ t $ (%e#iu# to ,i&e u( 'o t%ol o&e% t"e -usi ess. T"is 'o t%ol (%e#iu# is t)(i'$ll) !o%t" $t le$st $ $//itio $l 207 of t"e #$%ket (%i'e of t"e sto'k. Similar Terms T"e #$%ket &$lue of e+uit) is $lso k o! $s market capitalization.

How to Calculate Price to Cash Flow Ratio P%i'e to 8$s" 0lo! R$tio 9P:80; is $ fi $ 'i$l %$tio use/ to 'o#($%e t"e s"$%e (%i'e !it" '$s" flo! (e% s"$%e. T"e lo!e% t"e %$tio, t"e #o%e likel) t"$t t"e sto'k #$) -e u /e%&$lue/. P:80 is #o%e st$-le t"$ P%i'e<E$% i ,s R$tio 9P:E;, si 'e '$s" flo! is usu$ll) less &ol$tile t"$ e$% i ,s. It '$ -e '$l'ul$te/ $s follo!s: 0o%#ul$: P:80 = M$%ket (%i'e (e% s"$%e : 8$s" flo! (e% s"$%e Note: 8$s" flo! (e% s"$%e is si#(l) '$s" flo! /i&i/e/ -) t"e u#-e% of s"$%es issue/. E1$#(le: T"e sto'k fo% 8o#($ ) >?@ is selli , $t 223 $ s"$%e. T"e tot$l u#-e% of s"$%es issue/ fo% t"e (e%io/ is 10,000. T"e 'o#($ )*s o(e%$ti , '$s" flo! fo% t"e fou% #ost<%e'e t +u$%te%s $%e 2A0,000, 230,000, 2B0,000 $ / 2C0,000. 8$l'ul$te t"e (%i'e:'$s" flo! %$tio. Solutio , T"e o(e%$ti , '$s" flo! fo% t"e ($st 12 #o t"s = A0,000 D 30,000 D B0,000 D C0,000 = 2210,000 8$s" flo! (e% s"$%e = 2210,000 : 10,000 = 221 P:80 = 23 : 21 = 1.1E Inventory Turns / Inventory Turnover The inventory turnover ratio, also known as inventory turn, tells an investor how often a company sells through its inventory. Generally, the faster inventory is turned, the less risk of loss and the more efficient management is handling capital. Before you invest, you are going to have to make an informed decision about how much you think the inventory on the balance sheet is really worth. A major part of this decision should be based on how fast the inventory is "turned" or sold!. Two competing companies may each have "#$ million sitting in inventory, but if one can sell it all every %$ days, and the other takes &' days, you have less of a risk of inventory loss with the %$ day company.

Calculating Inventory Turns / Inventory Turnover Ratio (ost of Goods )old' * Average +nventory for the ,eriod#
'- This is found on the income statement, not the balance sheet #- Average inventory is calculated by taking the last period.s inventory plus the current period inventory and dividing them by two.

Real World Example of Inventory Turns / Inventory Turnover /et.s look at a real world e0ample. At the bottom on the page, +.ve provided an older e0cerpt from the financial statements of (oca1(ola. The cost of goods sold is "2,#$&,$$$,$$$. The average inventory value between '333 and #$$$ is "',$4',$$$,$$$ average the values from '333 and #$$$!. ,lug them into the formula for inventory turn. (urrent 5ear.s (ost of Goods )old of "2,#$&,$$$,$$$ * Average +nventories of "',$4',$$$,$$$ The answer is the number of inventory turns 1 in (oca1(ola.s case, 6.43#4. 7hat this means is that (oca (ola sells all of its inventory 6.43 times each year. +s this good8 To answer this 9uestion, you must find out the average turn of (oke.s competitors and compare. +f you do the research, you find out that the average turnover of a company in (oke.s industry is :.&. 7hy is (oca1(ola.s turn rate lower8 )hould it affect your investing decision8 The only way you can answer these kinds of 9uestions is if you truly understand the business you are analy;ing. This is why it is important that you read the entire annual report, '$< and '$= of the companies you have taken an interest in. Although (oke.s turn rate is lower, further analysis of the balance sheet will reveal that it is & to 60 financially stronger than its industry averages. 7ith such outstanding economics, you probably don.t need to worry about inventory losing value. Using Inventory Turnover to Calculate Average Days to Sell a roduct /et.s take the inventory analysis a step further. >nce you have the inventory turn rate, calculating the number of days it takes for a business to clear its inventory only takes a few seconds. )ince there %26 days in a year and the (oca (ola clears its inventory 6.43#4 times per year, take %26 * 6.43#4. The answer 2%.$%! is the number of days it takes for (oke to go through its inventory. This is a great trick to use at cocktail parties? grab a copy of an annual report, scribble the formula down

and announce loudly that "7ow@ This company takes 2% days to sell through its inventory@" ,eople will instantly think you are an investing genius. W!at Is a "ormal Inventory Turnover Ratio# The number of days a company should be able to sell through its inventory varies greatly by industry. Aetail stores and grocery chains are going to have a much higher inventory turn rate since they are selling products that generally range between "' and "6$. (ompanies that manufacture heavy machinery such as airplanes, are going to have a much lower turn over rate since each of their products may sell for millions of dollars. Bardware companies may only turn their inventory % or & times a year, while a department store may do twice that, turning at 2 or 4. A useful e0ercise is to compare the inventory turnover rate of a potential investment against that of its competitors to see which management team is more efficient. Inventory in Relation to Current Assets 7hen analy;ing a balance sheet, you also want to look at the percentage of current assets inventory represents. +f 4$C of a company.s current assets are tied up in inventory and the business does not have a relatively low turn rate less than %$ days!, it may be a signal that something is seriously wrong and an inventory write1 down is unavoidable.
D +t

is acceptable to use the total sales instead of the cost of sales when calculating inventory turnover ratios. The

cost of sales is a more accurate reflection of inventory turn and should be used for the truest results. 7hen comparing the company to others in its industry, make sure you use the same number. 5ou cannot value one company using cost of sales, and another using total sales or else you will end up with faulty data.

How to Calculate Inventory Turnover

8$l'ul$ti , inventory turnover %e+ui%es /i&i/i , t"e 'ost of ,oo/s sol/ $t $ -usi ess -) t"e $&e%$,e i &e to%) &$lue. Bot" fi,u%es use/ i t"e e+u$tio '$ -e fou / i $ fi%#Fs fi $ 'i$l st$te#e ts. ? o!i , t"e i &e to%) tu% o&e% %$te is i#(o%t$ t, ($%ti'ul$%l) fo% i &esto%s !is"i , to 'o#($%e t"e %el$ti&e &$lue of i &e to%) $t o e 'o#($ ) to $ ot"e%. It $lso is i#(o%t$ t fo% 'o#($ ) #$ $,e%s, -e'$use $ "i,"e% i &e to%) tu% o&e% %$te '$ #e$ #o%e s$les $t lo!e% 'osts.

Finding Cost of Goods Sold T"e 'ost of ,oo/s sol/ is $ fi,u%e use/ o -usi ess fi $ 'i$l st$te#e ts. It %e(%ese ts t"e e ti%e 'ost to $ -usi ess fo% $'+ui%i , %$! #$te%i$ls $ / #$ uf$'tu%i , t"ose #$te%i$ls i to $ (%o/u't fo% s$le, o% fo% $'+ui%i , $ (%o/u't fo% s$le. T"e 'ost of ,oo/s sol/ fi,u%e is fou / $s $ li e ite# o $ 'o#($ )Fs i 'o#e st$te#e t. It t)(i'$ll) is -et!ee t"e to( li e ite# of tot$l s$les %e&e ue $ / t"e li e fo% ,%oss (%ofit. G%oss (%ofit is '$l'ul$te/ $s %e&e ue #i us 'ost of ,oo/s sol/. Average Inventory Value Dete%#i i , t"e $&e%$,e i &e to%) &$lue, !"i'" is o e of t!o &$%i$-les ee/e/ to '$l'ul$te i &e to%) tu% o&e%, %e+ui%es $ i iti$l '$l'ul$tio . I &e to%) &$lues $%e liste/ $s $ /oll$% $#ou t o $ 'o#($ )Fs -$l$ 'e s"eet. To '$l'ul$te t"e $&e%$,e i &e to%) &$lue, t$ke t"e i &e to%) &$lue o t"e #ost %e'e t fi $ 'i$l %e(o%t $ / $// it to t"e i &e to%) &$lue of $ (%e&ious fi $ 'i$l %e(o%t $ / /i&i/e t"$t u#-e% -) t!o. Inventory Turnover To 'o#(lete t"e i &e to%) tu% o&e% '$l'ul$tio , t$ke t"e 'ost of ,oo/s sol/ f%o# t"e i 'o#e st$te#e t $ / /i&i/e it -) t"e $&e%$,e i &e to%) &$lue f%o# t"e '$l'ul$tio of i &e to%) u#-e%s o t"e -$l$ 'e s"eet. T"e '$l'ul$tio is:

I &e to%) Tu% o&e% = 8ost of Goo/s Sol/:A&e%$,e I &e to%) A&e%$,e I &e to%) = Be,i i , Pe%io/ I &e to%) D E /i , Pe%io/ I &e to%):2 I &e to%) tu% o&e% is t)(i'$ll) e1(%esse/ $s $ u#-e% %el$te/ to $ ($%ti'ul$% ti#e (e%io/, #o t"s, +u$%te%s o% )e$%s. T"$t ti#e (e%io/ is /ete%#i e/ -) t"e ti#e 'o&e%e/ i t"e $&e%$,e i &e to%) '$l'ul$tio . If usi , 'u%%e t i &e to%), $ / $//i , it to t"e i &e to%) &$lue f%o# o e )e$% $,o, t"e %esulti , i &e to%) tu% o&e% '$l'ul$tio !ill )iel/ t"e u#-e% of ti#es t"e 'o#($ ) sells its i &e to%) i $ )e$%. Importance of Inventory Turnover 0o% i &esto%s, t"e i &e to%) tu% o&e% fi,u%e offe%s i si,"t. T!o 'o#($ ies i si#il$% i /ust%ies 'oul/ "$&e i &e to%ies of si#il$% &$lue. Ho!e&e%, if o e 'o#($ ) is tu% i , its i &e to%) o&e% $t $ f$ste% ($'e, it is $ssu#e/ t"e 'o#($ ) is o(e%$ti , #o%e effi'ie tl) $ / (ossi-l) #o%e (%ofit$-l). Average Days to Sale T"e i &e to%) tu% o&e% '$l'ul$tio '$ $lso -e use/ to +ui'kl) /ete%#i e t"e /$)s i i &e to%) (%o/u'ts s(e / !it" $ ($%ti'ul$% 'o#($ ) $ / t"$t '$ )iel/ t"e $&e%$,e ti#e $ 'o#($ ) t$kes to sell $ (%o/u't. To '$l'ul$te t"is fi,u%e, t$ke t"e ti#e (e%io/ 'o&e%e/ -) t"e i &e to%) tu% o&e% '$l'ul$tio , fo% e1$#(le o e )e$%. T"e /i&i/e t"$t -) t"e i &e to%) tu% o&e% fi,u%e. I t"is '$se, it !oul/ AB3, fo% t"e u#-e% of /$)s i $ )e$%, /i&i/e/ -) i &e to%) tu% o&e%. T"e %esulti , $ s!e% is t"e $&e%$,e u#-e% of /$)s it t$kes $ fi%# to sell $ (%o/u't.