## Key Financial Ratios – Market Value There are a number of key financial ratios that can be used to assess a firm’s performance, competitiveness and ability borrow and pay debt. These key financial ratios cover a broad range of performance indicators including: (1) Profitability, (2) Asset Productivity, (3) Liquidity, (4) Solvency / Financial Leverage and (5) Market Value. This tutorial is the last of 5 on key financial ratios. Market Value is covered in this last one.

Utilizing these ratios requires the financial statements of the firm you’re looking to assess. It is highly recommended that this exercise be done for the firm’s competitors within the industry as well so that a relative comparison can be made since there are no universal thresholds for an “optimal” ratio.

These ratios when used with other fundamental techniques, will give you the foundation to perform valuation of a stock.

## Key Financial Ratios :  MARKET VALUE

1. Price to Sales Ratio
Definition : Measures the price per share of stock in relation to Net Sales per share of stock
Notes: Needs to be compared to other firms in the industry.
Financial Statement(s) Needed : Income Statement, Balance Sheet + Market Price of a Share of stock
Formula: Price to Sales Ratio: Price Per Share / Net Sales Per Share
Example :
 Sales = \$1,000; Common Shares Outstanding = 1,000; Net Sales per share = \$1 Market Price of Stock = \$5 per share ; Price to Sales Ratio = \$5/\$1 = 5
Other Notes: This ratio is useful for startup companies that have yet to generate a profit.

2. Price Earnings to Growth (PEG) Ratio
Definition : A stock valuation measure that takes projected earnings per share growth into consideration.
Notes: It measures “potential” value since eps growth projections are just that – projections. High ratios can indicate overvalued stock and vice versa.
Financial Statement(s) Needed : Income Statement, Balance Sheet + Market Price of Stock
Formula: PEG Ratio = P/E Ratio / Projected EPS Growth
Example :
 Net Income = \$100,000; Preferred Stock Dividends = \$10,000 Common Shares Outstanding = 30,000; Market Price of Stock = \$50; Projected Annual Growth Rate = 5% Earnings Per Share = (\$100,000 – \$10,000) / 30,000 = \$3; Price To Earnings Ratio = \$50/\$3 = 16.67x PEG Ratio = 16.67 / 5 = 3.33
Other Notes: Needs to be compared with other firms in the industry
3. Market To Book Value Ratio
Definition : Measure that compares market value per share of stock with book value (accounting number) per share of stock.
Notes: Generally speaking, if the ratio is high (more than 1) that represents an overvalued stock and vice versa.
Financial Statement(s) Needed : Balance Sheet
Formula: Market to Book Value Ratio = Market Value Per Share / Book Value Per Share                                        ** Book Value Per Share = Total Equity (All of it, not just common shares and paid in capital) / Common Shares Outstanding
Example :
 Market Price of Stock = \$22 Common Shares Outstanding = 3,000; Total Equity = \$50,000 Book Value Per Share of Stock = \$50,000 / 3,000 = \$16.67 Market to Book Value Ratio = \$22 / \$16.67 = 1.32x
Other Notes: Considering the fact that Book Value is an accounting measure (utilizing historical cost), a low Market to Book Value Ratio (below 1) would mean that the company is stagnant and not really creating any value.

# Read About Other Key Financial Ratios:

### 2 Responses to Key Financial Ratios – Market Value

1. Kenny says:

Can you put up information for activity ratios in the same format?