2012 Adobe Company and Stock Valuation Essay
- Key Financial Ratios:
In this analysis, the 10K report for the financial year ended November 30, 2012 will be used as the full year 10K report for the year 2013 is not yet available at the moment. The key financial ratios to be calculated in this first part include: leverage ratios, asset utilization ratios, liquidity ratios, profitability ratios, and market ratios.
- Leverage ratios
- Interest burden
Interest burden = EBT/EBIT
Interest burden = 1,118,794/1,180,191
Interest burden = 0.95
The interest burden is 0.95 meaning that the interest expense for the company is just 5% of the earnings before interest and tax. Therefore, the company is not highly leveraged.
- Interest coverage ratio
Interest coverage ratio = EBIT / Interest Expense
Interest coverage ratio = 1,180,191,000/67,487,000
Interest coverage ratio = 17.49
The interest coverage ratio is 17.49 indicating that the company is not burden by the debt expense. While the ideal ratio should be above 1.5, the company has 17.49 meaning that the interest expense is not a major expense for the company.
- Leverage ratio
Leverage ratio =1 + [total liabilities / total stockholders’ equity]
Leverage ratio =1 + [3,309,341/6,665,182]
Leverage ratio = 1.5
The company has been financed by 50% equity and 50% debt. This means that the company can generate more earnings that if it just used equity. The shareholders are likely to benefit if the debt increases earnings.
- Compound leverage factor
Compound leverage factor = interest burden * leverage
Compound leverage = 0.95 * 1.5
Compound leverage = 1.425
ROE will increase with increase in debt-to-equity ratio as the compound leverage factor is more than 1 for the company.
- Asset utilization ratios
- Asset turnover
Asset turnover = revenue / assets
Asset turnover = 4,403,677/ 9,974,523
Asset turnover = 0.44
The company has high profit margins based on this result.
- Fixed asset turnover
Fixed asset turnover = Net Sales/ [net property, plant and equipment]
Fixed asset turnover = 4,403, 677/ 664,302
Fixed asset turnover = 6.63
- Inventory turnover
Inventory turnover = sales / inventory
Inventory turnover = 4,403,677/ 483,782
Inventory turnover = 9.1
- Liquidity ratios
- Current ratio
Current ratio = total current assets/ total current liabilities
Current ratio = 4,331,360/ 1,271,752
Current ratio = 3.4
The ratio is very high meaning the company can be able to effectively pay its current liabilities and remain with very high current assets.
- Quick ratio
Quick ratio = (cash and cash equivalents + marketable securities + accounts receivables)/ current liabilities
Quick ratio = (1,425,052 + 2,113, 301 + 617,233)/ 1,271,752
Quick ratio = 4,155,586 / 1,271,752
Quick ratio = 3.27.
The company can pay its current assets from the available cash and cash equivalents, and marketable securities.
- Cash ratio
Cash ratio = (total cash and cash equivalents)/ current liabilities
Cash ratio = 1,425,052 / 1,271,752
Cash ratio = 1.12
The company can be able to effectively cover for its liabilities using cash and cash equivalents
- Profitability ratios
Return on Assets = (Net Income/ Total Assets).100%
ROA = (832,775/9,974,523).100%
ROA = 8.35%
Return on Equity = (net income – preferred dividends)/ common stock
Return on equity = (832,775 – 0)/ 600,824
Return on equity = $1.39 per share
The company is a high growth since the ROE is more than $1
- Return on sales
Return on sales = Net Income (before interest and tax)/ sales
Return on sales = (1,180,191/ 4,403,677)
Return on sales = 26.8%
- Market Ratios
Market to Book = Book value of the firm/ Market value of the firm
Market to Book = $34.70/$13.5
Market to Book = 2.57
The ratio attempts to analyze undervaluation of overvaluation. The stock is undervalued as the ratio is more than 1. Thus it is a buy stock.
P/E Ratio = Market Value per share/ Earnings per share (EPS)
P/E Ratio = $34.7/ $1.68
P/E Ratio = 20.65
The P/E ratio is high meaning that an investor is willing to pay $20.65 dollars for $1 of current earnings.
- Earnings yield
Earnings Yield =EPS/ Market price
Earnings Yield = $1.68/$34.7
Earnings Yield = 4.84%
Therefore, each dollar invested in the company earned 4.84% returns.