Market value ratios helps to determine the financial situation of a company by comparing
financial indicators with market price per share.It is founded on the belief that the market
price of a share represents the sentiment of investors. i.e what investors think about a
company, it is reflected in market price.. If they think that a company will perform better, then
the market price per share will be higher. Contrary to this if they think that a company will not
perform good, then the market price per share will be lower.
Price/Earning Ratio: Price/Earning ratio reveals price the investors are willing to
pay per 1 unit of Earning Per Share. If the value of this ratio is higher, it indicates there
is high optimism among the investors towards the company. Thus they are willing to
pay higher. On the contrast, if the value is lower, it shows there is declining optimism
among investors regarding the company. Also it can be linked to growth prospect. A
higher PE ratio means a company has higher growth prospect and the lower PE ratio
means a company has lower growth prospects.
Mathematically,
Price/Earning Ratio = Price Per Share/ Earning Per Share
Market/Book Ratio:The Market-to-Book (M/B) ratio is a financial metric that compares
a company's current market price per share to its book value per share. The market price
per share reflects the prevailing trading price in the stock market, indicating investor
perception and market sentiment. In contrast, the book value per share is derived by
dividing the company’s total shareholders’ equity by the number of outstanding shares,
representing the accounting value of the firm’s net assets on a per-share basis. Thus, it is
the amount which shareholders will get after deducting all liabilities. Also book value
represents historical costs of shares. Thus, Market/ Book ratio calculates what the present
cost is worth compared to historical costs.
Mathematically,
Market/Book Ratio = Market Value Per Share/ Book Value Per Share
A ratio of more than one indicates that the company is successful in creating value. Whereas
a ratio of less than one indicates that the company is not successful in creating value.
Price/Cash Flow Ratio: Investors commonly consider the Price-to-Cash Flow ratio because
cash flow figures are less susceptible to accounting manipulation compared to earnings Thus
they divide market value with cash flow from operating activities to reach to this ratio. In
comparison, in the PE ratio, the earnings per share can be easily manipulated by factors
like depreciation and others non cash items.
Mathematically,
Price/Cash Flow Ratio= Market Price Per Share/ Cash Flow Per Share
Market price is the price of stock in stock exchange.. Whereas Cash flow per share is the
sum of net income plus depreciation and amortization.
An increasing ratio is seen as favorable, as it suggests the company may be overvalued.
Conversely, a lower ratio implies that the company might be undervalued.
Earning Yield: It is the inverse of P/E ratio. i.e it is calculated by dividing earnings per share
with market value per share.
Mathematically,
Earning Yield = Earnings per share/ Market value per share
Earning per share: It measures the earning generated or attributable to per share of stock.
As a company does its operation, it earns revenue. This revenue deducted by cost factors
represents the net profit after tax. If preference dividend is deducted from net profit after tax
and divided by Number of common shares, it gives the earning per share.
Mathematically,
Earnings per share = (Net profit after tax- Preference dividend)/ Number of common shares
While analyzing, higher earning per share is preferable.
Dividend Per Share: It is generally seen practice that dividend is distributed from the profit
that a company earns. The amount distributed per share is reflected by the Dividend Per
Share (DPS) ratio.
Mathematically,
Dividend per share = Dividend paid to equity shareholders/ Number of equity shares
The higher value of dividend per share is considered excellent because it increases belief in
investors regarding company’s performance.
Dividend Pay Out Ratio: It calculates the ratio of dividend paid in comparison to earning
per share.
Mathematically, it is calculated as:
Dividend Pay Our Ratio = DPS/EPS
Where, DPS = Dividend per share
EPS = Earning Per Share
Investors generally prefer a higher ratio, as it indicates better returns. But usually
companies retain some part of earnings which is called retained earning. This is done usually
for investing activities. I.e Further investment of company to create some extra cash flow as
well as purchasing assets.
Retention Ratio: It is the ratio which shows how much net profit is retained by a company
for purposes such as purchasing assets or investing in business expansion. Higher the value
of retention ratio, the higher will be the amount retained. On contrast, lower ratio means lower
amount has been retained.
Mathematically,
Retention Ratio = (Net Income - Total Cash Dividends) / Net Income
Or,
Retention Ratio = (EPS - DPS)/ EPS
Where, EPS = Earning per share
DPS = Dividend per share
Or,
Retention Ratio = 1- Payout Ratio
Where,
Payout ratio is the Dividend Payout ratio
Dividend Yield Ratio: The ratio of Dividend Per Share to Market Value Per Share is known
as dividend yield ratio.i.e it shows the dividend allocated with respect to per unit of market
value of share.
Mathematically,
Dividend Yield Ratio = Dividend Per Share/ Market Value Per share
Higher the value of this ratio, higher will be the dividend distributed and vice versa.
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