In: Finance
According to the financial statements for Global Telecom Inc., the firm has total assets valued at $320 million and total liabilities of $200 million. Last year, the company had a total after tax earnings of $12million. Company records indicate that the firm has issued 2 million shares of stock and it has a current market value of $65 a share.
a. Global Telecom Inc. |
Total assets = 320 mln. |
TotalLiabilities= 200 mln. |
so, Book value of equity= 320-200= 120 mln. |
Market to book ratio=Market Value of Equity/Book Value of equity |
ie.(2 mln*$ 65)/120= |
1.08 |
Will you recommend buying the shares----YES |
Market just adequately reflects the book value of equity & the company seems to perform well , in the eyes of the investor |
b. One more ratio can be |
Price/Earnings Ratio= Market price per share/Earnings per share |
ie. 65/(12 mln./2 mln.) |
65/(12/2)= |
10.833 |
Market price is more than 10 times the Earnings per share , indicating investors' confidence about the company. |
c. 5G is relatively new to the tech-industry |
so, the mood & receptivity of the market needs to be assessed before just the market-to-book ratio |
As global's mkt-to-book is just over 1, it needs to be waited & seen how the advanced technology recieves , acceptance & instills confidence in the minds of the potential investors. |
so, that is the pitfall of this ratio---that it cannot be applied to all businesses , alike. |