The ratios of a company are very insightful to the true financial situation of the company. Even if there is not information posted, or readily available, it is easy for an analyst to see the inner-workings of a company. Ratios can give you a idea of where to place a company on a comparative basis. Also, ratios such as beta and Price to earnings, give you an idea of how the stock correlates with the market.
Analysts use ratios such as times interest earned, and long term debt to capital, to give you a estimate of a bond rating, even if one is not available. Dreyer?s Grand Ice Cream has had a long term debt to capital ratio at about 37.5 percent for the last two years. Also the times interest earned was 4.3 for 2000, and 2.6 for 1999. These ratios give Dreyer?s an approximate bond rating of Baa.
Beta is an important ratio to see how the stock fluctuates with the market. When finding a beta you may come across a large range of values. It is best to chose one that does not over or underestimate the correlation between the stock and the market. Over the past few years we found that the beta for Dreyer?s has been about .75. This beta is about average for the food industry. This comprehensive view of the ratios and financial data tells us that Dreyer?s is not an outstanding financial company, but does have some bright spots. The good points are that times interest earned has gone up, and that there is room for profit growth in the future.
The Weighted Average Cost of Capital is the amount that the company must receive to actually add value into the company. It is the opportunity cost that the company takes on...