Current ratio = ( Current assets ) ( Current liabilities ) , the higher the current ratio, the stronger the solvency of the enterprise (Weng, 2018). But the ratio cannot be too high, the ratio is better controlled at about 2. As can be seen from the data in Table 3, although the flow ratio in the recent three years first dropped and then rose, it basically maintained between 2 - 3. It shows that the enterprise has strong solvency and asset utilization ability.

The multiple of interest safeguard = ( Profit before interest and tax ) ( Interest charges ) , the higher the value, the stronger the ability to pay interest. The company’s interest guarantee multiple varies between 5 and 10, indicating that the company has less pressure to repay the interest and has less investment risk.

Asset-liability ratio = ( The total amount of liabilities ) ( Total assets ) , The ratio of assets to liabilities can be used to reflect the operating risks of an enterprise. The ratio of assets to liabilities of Company Y has been maintained at about 30% in the past three years. Compared with liabilities, assets account for a larger proportion, indicating that there is enough capital to cover liabilities and that the company has certain capital utilization capacity.

Based on the above analysis, it can be seen that the company develops steadily, its financial position and asset liquidity are relatively stable, the cash flow generated from business activities is abundant, its credit standing is good, and its solvency is also strong.

Accounts receivable turnover = ( Operating income ) Average balance of accounts receivable , The company’s accounts receivable turnover was 2.79 times in 2017, 1.38 times in 2018, and 1.79 times in 2019. The accounts receivable turnover showed a trend of first decline and then rise, and remained at about 2, indicating that the enterprise’s accounts receivable risk is very small and the credit risk is relatively low (Xia, 2020).

Inventory turnover = ( Operating cost ) Average balance of inventory , Inventory turnover is used to measure the inventory level of an enterprise. In other words, inventory turnover = sales revenue/inventory. The greater the demand for products, the better the sales status of the enterprise, the faster the product turnover, large sales can be achieved through less inventory, the higher the inventory turnover rate; On the contrary, when the sales situation of the enterprise is poor, the slower the product turnover, the lower the inventory turnover. As can be seen from Table 4, the inventory turnover of the company declined in 2018, but recovered slightly in 2019, and generally maintained at a normal level.

Generally speaking, the company has a low risk of accounts receivable and a low credit risk. There is no situation of inventory accumulation and poor turnover, and the overall operating capacity is good.

There are many indicators to evaluate the profitability of an enterprise. The following three indicators are selected to analyze the profitability of an enterprise.

The growth rate of total operating income is a reflection of the operating conditions of an enterprise in a fiscal year. It can be seen that the growth rate of operating income in 2017 and 2019 is as high as 17.19% and 26.30% respectively, mainly because the company expanded the production scale in this year and the operating income increased accordingly (Yan, 2018). The growth rate of operating income decreased in 2018, mainly because the company did not carry out business in the former local pharmaceutical companies and small hospitals (below Grade A three hospitals) in 2018, because these hospitals had high risks. Therefore, the company has decisively terminated this business for the long-term development of the company. Generally speaking, the growth rate of operating income is positive when there is no major change, and the operating income in 2017 and 2019 is increasing continuously, indicating that the business is in good condition.

INet asset per share = ( Year-end shareholders ’ equity ) ( Total common stock at year-end ) , the higher the index, the greater the wealth per share. As can be seen from the data in Table 5, the highest value in 2019 is 3.25, and it has been on the rise in recent three years, indicating that enterprises have strong ability to create profits and resist the influence of external factors.

Basic earnings per share = ( Current net profit attributable to ordinary shareholders ) ( The weighted average of the number of common shares outstanding during the period ) ,

It reflects the ability of common shareholders to earn profits from shares held by them. The higher this index is, the stronger the company’s profitability is. Observing the above table, the basic earnings per share show a downward trend, indicating that the profitability of the enterprise has declined.

In general, the company has a good annual income, strong ability to create profits and good profitability.

The trend of growth ability index is shown in Figure 2.

As can be seen from Table 6 and Figure 2, the growth rate of total assets

showed a growth trend of first rising and then falling. Operating income declined a lot in 2018 and increased a lot in 2019 (Zhu, 2017). The change trend of net profit growth rate and operating income growth rate were roughly the same, but in general, these three indicators recovered to the normal level or even better in 2019 after the business changes in 2018, and the operating income was accelerating, indicating that the company had strong growth ability and good development prospect and potential.

According to the industry classification of China Securities Regulatory Commission, the company belongs to the pharmaceutical manufacturing industry of Chinese medicinal materials and Chinese patent medicine processing industry (Li, 2019). At present, there are many listed companies with the same main business as the target company in China’s stock market. In this paper, five representative listed companies from the New Third Board are selected as comparable companies, namely: Changxing Pharmaceutical, Zhenghe Pharmaceutical, Kangyuantang, Datang Pharmaceutical and Tianji Caotang. Based on the closing price on May 15, 2020, the dynamic valuation of the above companies is carried out, and the forecast average value of EPS is taken from Wind statistics.

As can be seen from Table 7, the average PE of the five Chinese medicine pharmaceutical enterprises we selected is 23.44, while the company’s expected 2020 net earnings per share is 0.30 yuan, corresponding valuation level is 7.03. Since Company Y has developed steadily and is expanding steadily, has strong strength, good internal management and a high market share, which is in line with the national industrial policy, we will offer a certain premium, which is estimated to be about 7.1 yuan.

The discount cash flow method is used to estimate the stock of the company (Shi, 2015). Specific assumptions and known quantities are shown in Table 8.

· Assume that the risk-free interest rate is 2.5%.

· Assume that the return on equity of the company is the expected return rate of the market, that is, 6.21%.

· The β coefficient of the industry is 0.97.According to the formula: cost of equity = risk-free rate + beta * (market expected rate of return − risk-free rate).That is, cost of equity = 2.5% + 0.97 * (6.21% − 2.5%) = 6.10%.

· It is assumed that the cost of debt is that the company obtains a one-year loan rate of 4.35%.

· According to the company’s financial statements, the debt ratio of the company is 30.49%, so the equity ratio is 1, the debt ratio, i.e. 69.51%.

· The company’s tax rate is 25%.

Weighted Average Cost of Capital:

WACC = Cost of Equity * Equity Ratio + Cost of Debt * Debt Ratio (1 − Tax Rate) = 6.10% * 69.51% + 4.35% * 30.49% * (1% − 25%) = 5.23%.

Assuming that the company’s earnings per share grow at 1% perpetually, according to the perpetually growing dividend discount model, intrinsic value of the stock = next year’s net earnings per share/(WACC − sustainable growth rate).That is, the 2019 stock value of the company = 0.30 * (1% + 1%)/(5.23% − 1%) = 7.16 (Li, 2018).

When WACC and sustainable growth rate change, corporate value is shown in Table 9.

Based on the sensitivity analysis of relative valuation and discounted cash flow model (DCF), the reasonable range of the actual value of the company’s stock in 2020 is 6.79 yuan to 10.15 yuan, and the P/E ratio is 20 to 30 times.