Assume you work for the financial research unit of an investment bank, and you are responsible for the financial analysis of The Monti Company. The firm has net profits of $12 million, sales of $165 million, and 3.0 million shares of common stock outstanding. The company has total assets of $80 million and total stockholders' equity of $50 million. It pays $1 per share in common dividends, and the stock trades at $25 per share. Given this information, determine the following:
Identify and briefly discuss two potential weaknesses of your analysis and results.
Monti's EPS = ( Net Profit/ Number of shares of common stock o/s ) = $ 12 M / 3 M = $ 4 per share
Book value per share = BV of Equity/ Number of shares o/s = $ 50 M/ 3 M = $ 16.67 per share
Price to BV/share = 25/16.67 = 1.5 times
P/E ratio = Price / EPS = 25/4 = 6.25 times
Net Profit Margin = Net Profit / Sales = 12 / 165 = 7.27%
Dividend payout ratio = Dividend per share/ EPS = 1/4 = 25%
Dividend yield = Dividend per share / Price per share = 1/25 = 4%
PEG ratio = PE/ Growth in earnings = 6.25/7.5% = 83.33 times
a)
All the above ratios are absolute and cannot be used to make a decision on the firm as these can only be compared to an apt comparable in the industry.
b)
The company seems to be growing at a good rate of 7.5% and despite that the PE ratio is low at 6.25 times.
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