# 7 valuation ratios Every investor should know

Chitransh Sharma

## Valuation Ratios

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.

# 1

A company with a lower PE ratio is believed under-valued compared to another company in the same sector with a higher PE ratio.

## Price to Earnings (PE) ratio

P/E ratio = (Market Price per share/ Earnings per share)

# 2

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.

## Price to Book Value (P/BV) ratio

P/B ratio = (Market price per share/ book value per share)

# 3

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

PEG ratio = (PE ratio/ Projected annual growth in earnings)

# 4

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/EBITDA

EV = (Market capitalization + debt – Cash) EBITDA = Earnings before interest tax depreciation amortization

# 5

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.

## Price to Sales (P/S) ratio

P/S ratio = (Price per share/ Annual sales per share)

# 6

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 yield = (Dividend per share/ price per share)

# 7

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 payout = (Dividend/ net income)