Valuing A Fortune 500 Company

The ability to put a value on a business is extremely important, many people and companies use this skill in day to day activities. An individual that is buying or selling stocks may want to understand the value of a company, a fortune 500 company such as AT&T researching a potential merger may need to know the value of the company. There are many methods to valuing a company, one of the more common methods is to analyze financial statements is to review the financial statements and analyze the financial ratios. The most common ratios are liquidity, profitability, efficiency, and leverage ratios. One recurring theme with most ratios is that it is very industry specific, and it’s a fact that must be kept in mind when comparing two companies.

Return on assets is a profitability ratio that is commonly reviewed during the valuation process of a company. The return on asset ratio takes net income and divides it in to total assets. This can be broken down even further to profitability (net income divided by sales) multiplied by productivity (sales divided by average assets). Return on assets shows how profitable a company is relative to its total assets, and how much money is being generated from their assets. Depending on the industry return on assets varies. Industries that are more capital intensive such as cruise lines tend to have a lower return on assets, while lower capital intensive industries such as insurance companies would have a higher return on assets. This view on return on assets is one of the simpiler ways to look at this ratio. Another version of this ratio is to add back interest expense to net income and diving it into average assets during a

Asset turnover is a common efficiency ratio that is commonly reviewed during evaluating the health of a company. The asset turnover gives a good idea of how a company is using its assets to generate revenue. Asset turnover is derived by taking net sales divided by average total assets. If you are comparing the asset turnover of two companies, the company that has the higher asset turnover is generating more revenue per dollar than the other company. Asset turnover is another ratio that must be compared between companies within the same industry. The asset turnover ratio for a big box store such as Costco would be much higher than the asset turnover of AT&T.
Leverage ratios asses financial risk that a company have. The debt ratio is one of the major leverage ratio. The debt ratio is extremely straight forward and tells you how a company is financing their assets. The debt ratio divides liabilities in to assets from the balance sheet. The debt ratio gives insight into the percentage of assets that are financed by debt. A higher debit ratio could mean that a company is financing their assets through equity. When a company has a debt ratio that is higher it typically signifies that the company has a greater financial