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**

*ROA*

Return on Assets = (Net Income/ Total Assets).100%

ROA = (832,775/9,974,523).100%

ROA = 8.35%

*ROE*

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**

*M/B*

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*

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.