Page 120 - Finance for Non-Financial Managers

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Critical Performance Factors
Price/Earnings Ratio
An investor follows a stock’s price/earnings (PE) ratio, which
is a CPF of the stock’s price performance. 101
If you’ve ever bought one of those investment newsletters, the ones
that charge you to tell you how to invest what you have left after pay-
ing their subscription fees, you’ve heard the term PE ratio many times.
It’s the relationship between the price of a share of stock and the slice
of the earnings of the company attributable to that same share of
stock.This is a favorite way of estimating if the price of the stock is
too high in relation to the amount of money the company is earning.
You might read that Wal-Mart carries a PE ratio of 32 and the analyst
considers it overpriced at anything over 20. In this example, the metric
is PE ratio, the current reading is 32, and the benchmark is 20.You
quickly have a lot of information about the company’s earnings that
didn’t appear on its income statement.That’s the power of a CPF.

Measures of Financial Condition and Net Worth
These metrics are related to the company’s balance sheet. They
calculate the company’s financial strength as of a point in time
(remember the “freeze frame”?) to give us a sense of how well
the company has used its resources to build stockholder value.

Current Ratio
This is perhaps the most commonly known CPF in business
today, after the price/earnings ratio. The current ratio is usually
presented as two numbers separated by a colon. Using the data
from Wonder Widget’s balance sheet in Figure 3-1, the arith-
metic to arrive at the numbers goes like this:
Current Assets 1,667,000
= = 2:1
Current Liabilities 819,000
This metric is the relationship between current assets (which
are cash or will become cash within the next 12 months) and cur-
rent liabilities (debts that must be paid within the same 12
months). (You’ll recognize these terms, “current assets” and “cur-
rent liabilities,” from in the discussion of balance sheets in Chap-
ter 3.) The purpose is to assess the liquidity of the enterprise, its
ability to generate cash as needed to maintain operations.