Saturday, December 4, 2010

Market Ratios



Market Ratios are useful in measuring investor response to owning a company’s shares and also the cost of issuing shares to the public. Almost all of these ratios can be used to take decisions as to whether we should invest in a company’s stock or not. The ratios that fall under this category are:

1. Earnings Per Share (EPS)
2. Payout Ratio
3. Dividend Cover
4. P/E Ratio
5. Dividend Yield
6. Cash Flow Ratio
7. Price to Book Value Ratio (P/B or PBV)
8. Price to Sales Ratio
9. PEG Ratio

Earnings Per Share:

EPS is a very good indicator of a company's performance. It measures the amount of earnings per each outstanding share of a company’s stock.

Formula:

EPS = Net Profit / Total No. of Common Shares or

EPS = Net Income / Total No. of Common Shares

Here the EPS calculated from the Net Profit would always be lesser than the one calculate from the Net Income but invariably both give us a good measure of the ability of the company to grow and generate additional revenue.

Usually EPS values are compared between companies or between values of the same company over a period of years.

Payout Ratio:

Payout Ratio a.k.a Dividend Payout Ratio is the ratio that tell us the amount of dividend paid by the company to its common stock holders in comparison to its total income for the same time period. This percentage tells us how much dividend is paid by a company in comparison to its total revenues.

Formula:

DPR = Dividends Paid / Net Income for the same time period

A Good DPR is always a sign of a well performing company. If two stocks from the same industry are picked for comparison, the one with the higher DPR always scores more than the one that has little or no DPR.

Dividend Cover:

Dividend Cover is actually the inverse of the Dividend Payout Ratio. It is calculated by comparing the Earnings Per Share (EPS) and the actual dividend paid out per share.

Formula:

DC = EPS / Dividend Paid

P/E Ratio:

P/E Ratio also called Price to Earning Ratio refers to the price paid for a share relative to the annual net income/profit earned by the company per share. The P/E ratio is an indicator of how much investors are willing to pay for a company's share. A higher P/E ratio means that investors are willing to pay a higher premium for a company’s share in comparison to its actual value. A stock with a higher P/E is more expensive than the one with a lesser P/E.

Formula:

P/E = Market Price Per Share / Diluted EPS

The P/E value of a share keeps changing everyday based on the market price fluctuation of the company’s stock.

Dividend Yield:

The Dividend Yield refers to the ratio that helps us identify the dividend income generated by a company for its share holders. A good dividend yield means that the company is doing good business and is also sharing its profits with its investors/share holders.

Formula:

Dividend Yield = Dividend Per Share / Current Market Price per Share

Or

Dividend Yield = Total Dividend Paid / Market Capitalization

Cash Flow Ratio:

The Cash Flow Ratio is used to compare a company's market value to its cash flow.

Formula:

CFR = Market Price per Share / Present Value of Cash Flow per Share

Cash Flow per Share = Total Cash Flow / Total No. of outstanding Shares

Price to Book Value Ratio:

The PBV is a financial ratio that is used to compare a company’s book value to its current market price. Book value denotes the portion of the company held by shareholders.

Formula:

PBV = Market Capitalization / Total Book Value as per the Balance Sheet

Or

PBV = Market Value per Share / Book Value per Share

Book Value per Share = Total Book Value / Total No. of outstanding shares

A point to note here is that, PBV ratios do not directly provide us any information on the company’s ability to generate profits for itself or its shareholders. It gives us some idea of whether an investor is paying too much for what would be left if the company were to go bankrupt immediately.

Price to Sales Ratio:

The Price to Sales Ratio (PSR) is a valuation ratio for stocks that is similar to the EPS ratio we saw earlier in this article. It is used to identify how much of revenue is generated compared to the company’s market price.

Formula:

PSR = Market Capitalization / Total Revenue

Or

PSR = Current Market Price per Share / Revenue per Share

Revenue per Share = Total Revenue / Total No. of Outstanding Shares

PEG Ratio:

Price/Earnings to Growth Ratio is used to determine the relative trade-off between the price of a stock, the EPS and the company’s expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus, using just the P/E ratio would make high growth companies appear to be overvalued in comparison to its peers. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

Formula:

PEG Ratio = PE Ratio / Annual EPS Growth

PEG ratio is a widely employed indicator of a stocks possible true value. Similar to PE ratios, a lower PEG means the stock is undervalued. The PEG is favored by many over the PE ratio because it also considers the company’s growth prospects. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth. A crude analysis suggests that companies with PEG values between 0 to 1 may provide higher returns

3 comments:

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    ReplyDelete
  2. How does one find out P/E ratio of SENSEX or NIFTY over a historical period of time?

    ReplyDelete
    Replies
    1. check out the website of either stock exchange. you can find the info there.

      Delete

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