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

value of a company's equity, since this is essentially the total value given by the investment community to a business. To calculate the market value of equity, simply multiply the current market price of a company's stock by the total number of shares outstanding. The number of shares outstanding is listed in the equity section of a company's balance sheet. For example, if a company has one million shares outstanding and its stock currently trades at $15, then the market value of its equity is $15,000,000. While the calculation may seem simple, there are several factors that can cause it to poorly reflect the "real" value of a business. These factors are:

Illiquid market. Unless a company is not only publicly held, but also experiences a robust market for its shares, it is quite likely that its shares will be thinly traded. This means that even a small trade can alter the share price significantly, since few shares are being traded; when multiplied by the total number of shares outstanding, this small trade can result in a large change in the market value of equity. Control premium. An acquirer should not rely upon the market value of equity when deciding what price to bid for a company, since the current shareholders will want a premium to give up control over the business. This control premium is typically worth at least an additional 20% of the market price of the stock. Similar Terms The market value of equity is also known as market capitalization.

How to Calculate Price to Cash Flow Ratio Price to Cash Flow Ratio (P/CF) is a financial ratio used to compare the share price with cash flow per share. The lower the ratio, the more likely that the stock may be undervalued. P/CF is more stable than Price-Earnings Ratio (P/E), since cash flow is usually less volatile than earnings. It can be calculated as follows: Formula: P/CF = Market price per share / Cash flow per share Note: Cash flow per share is simply cash flow divided by the number of shares issued. Example: The stock for Company JKL is selling at $25 a share. The total number of shares issued for the period is 10,000. The company's operating cash flow for the four most-recent quarters are $30,000, $50,000, $60,000 and $70,000. Calculate the price/cash flow ratio. Solution, The operating cash flow for the past 12 months = 30,000 + 50,000 + 60,000 + 70,000 = $210,000 Cash flow per share = $210,000 / 10,000 = $21 P/CF = 25 / 21 = 1.19 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 $20 million sitting in inventory, but if one can sell it all every 30 days, and the other takes 41 days, you have less of a risk of inventory loss with the 30 day company.

Calculating Inventory Turns / Inventory Turnover Ratio Cost of Goods Sold1 Average Inventory for the Period2
1: This is found on the income statement, not the balance sheet 2: 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 Let's look at a real world example. At the bottom on the page, I've provided an older excerpt from the financial statements of CocaCola. The cost of goods sold is $6,204,000,000. The average inventory value between 1999 and 2000 is $1,071,000,000 (average the values from 1999 and 2000). Plug them into the formula for inventory turn. Current Year's Cost of Goods Sold of $6,204,000,000 Average Inventories of $1,071,000,000 The answer is the number of inventory turns - in Coca-Cola's case, 5.7927. What this means is that Coca Cola sells all of its inventory 5.79 times each year. Is this good? To answer this question, you must find out the average turn of Coke's competitors and compare. If you do the research, you find out that the average turnover of a company in Coke's industry is 8.4. Why is CocaCola's turn rate lower? Should it affect your investing decision? The only way you can answer these kinds of questions is if you truly understand the business you are analyzing. This is why it is important that you read the entire annual report, 10K and 10Q of the companies you have taken an interest in. Although Coke's turn rate is lower, further analysis of the balance sheet will reveal that it is 4 to 5x financially stronger than its industry averages. With such outstanding economics, you probably don't need to worry about inventory losing value.

Using Inventory Turnover to Calculate Average Days to Sell a Product Let's take the inventory analysis a step further. Once 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. Since there 365 days in a year and the Coca Cola clears its inventory 5.7927 times per year, take 365 5.7927. The answer (63.03) is the number of days it takes for Coke 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 "Wow! This company takes 63 days to sell through its inventory!" People will instantly think you are an investing genius. What Is a Normal Inventory Turnover Ratio? The number of days a company should be able to sell through its inventory varies greatly by industry. Retail stores and grocery chains are going to have a much higher inventory turn rate since they are selling products that generally range between $1 and $50. Companies 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. Hardware companies may only turn their inventory 3 or 4 times a year, while a department store may do twice that, turning at 6 or 7. A useful exercise 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 When analyzing a balance sheet, you also want to look at the percentage of current assets inventory represents. If 70% of a company's current assets are tied up in inventory and the business does not have a relatively low turn rate (less than 30 days), it may be a signal that something is seriously wrong and an inventory write-down is unavoidable.

It 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. When comparing the company to others in its industry, make sure you use the same number. You 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

Calculating inventory turnover requires dividing the cost of goods sold at a business by the average inventory value. Both figures used in the equation can be found in a firms financial statements. Knowing the inventory turnover rate is important, particularly for investors wishing to compare the relative value of inventory at one company to another. It also is important for company managers, because a higher inventory turnover rate can mean more sales at lower costs. Finding Cost of Goods Sold The cost of goods sold is a figure used on business financial statements. It represents the entire cost to a business for acquiring raw materials and manufacturing those materials into a product for sale, or for acquiring a product for sale. The cost of goods sold figure is found as a line item on a companys income statement. It typically is between the top line item of total sales revenue and the line for gross profit. Gross profit is calculated as revenue minus cost of goods sold. Average Inventory Value Determining the average inventory value, which is one of two variables needed to calculate inventory turnover, requires an initial calculation. Inventory values are listed as a dollar amount on a companys balance sheet. To calculate the average inventory value, take the inventory value on the most recent financial report and add it to the inventory value of a previous financial report and divide that number by two. Inventory Turnover To complete the inventory turnover calculation, take the cost of goods sold from the income statement and divide it by the average inventory value from the calculation of inventory numbers on the balance sheet. The calculation is:

Inventory Turnover = Cost of Goods Sold/Average Inventory Average Inventory = Beginning Period Inventory + Ending Period Inventory/2 Inventory turnover is typically expressed as a number related to a particular time period, months, quarters or years. That time period is determined by the time covered in the average inventory calculation. If using current inventory, and adding

it to the inventory value from one year ago, the resulting inventory turnover calculation will yield the number of times the company sells its inventory in a year. Importance of Inventory Turnover For investors, the inventory turnover figure offers insight. Two companies in similar industries could have inventories of similar value. However, if one company is turning its inventory over at a faster pace, it is assumed the company is operating more efficiently and possibly more profitably. Average Days to Sale The inventory turnover calculation can also be used to quickly determine the days in inventory products spend with a particular company and that can yield the average time a company takes to sell a product. To calculate this figure, take the time period covered by the inventory turnover calculation, for example one year. Then divide that by the inventory turnover figure. In this case, it would 365, for the number of days in a year, divided by inventory turnover. The resulting answer is the average number of days it takes a firm to sell a product.