Question

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:

1. Monti's EPS
2. Monti's book value per share and price-to-book-value ratio
3. Monti's P/E ratio
4. The company's net profit margin
5. The stock's dividend payout ratio and its dividend yield
6. The stock's PEG ratio, given that the company's earnings have been growing at an average annual rate of 7.5%

Identify and briefly discuss two potential weaknesses of your analysis and results.

Answer 1

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.