These ratios are also called Price ratios and are utilized to find whether the share price is over-valued, under-valued, or reasonably valued. Valuation ratios are comparative and are normally more useful in comparing the companies in the same sector.
A company with a lower PE ratio is believed under-valued compared to another company in the same sector with a higher PE ratio.
P/E ratio = (Market Price per share/ Earnings per share)
The book value is referred to as the net asset value of a company. It is calculated as total assets minus intangible assets (patents, goodwill) and liabilities.
P/B ratio = (Market price per share/ book value per share)
PEG ratio or Price/Earnings to growth ratio is employed to find the value of a stock by taking into reference the company’s earnings growth. A company with PEG < 1 is good for investment.
PEG ratio = (PE ratio/ Projected annual growth in earnings)
This is a turnover valuation ratio. EV/EBITDA is a useful valuation means for companies with lots of debts. A company with a lower EV/EBITDA value ratio indicates that the price is good.
EV = (Market capitalization + debt – Cash) EBITDA = Earnings before interest tax depreciation amortization
The stock’s Price to sales ratio (P/S) ratio calculates the price of a company’s stock against its annual sales. A lower P/S ratio indicates that the business is undervalued.
P/S ratio = (Price per share/ Annual sales per share)
Dividends are the profits that the company shares with its shareholders as determined by the board of directors. A constant and increasing dividend yield over the years should be picked.
Dividend yield = (Dividend per share/ price per share)
Dividend payout tells you the rate of the profit distributed as dividends. A regular dividend payout is good. However, a very high dividend payout like 80-90% may be a little dangerous.
Dividend payout = (Dividend/ net income)
By Chitransh Sharma