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
| 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 : |
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| Other Notes: | This ratio is useful for startup companies that have yet to generate a profit. |
| 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 : |
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| Other Notes: | Needs to be compared with other firms in the industry |
| 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 : |
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| 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. |
S.S.B. is an experienced Decision Support Professional with academic credentials in Applied Mathematics & Statistics, Information Systems [Business Informatics concentration], Accounting and Financial Analysis. He resides in the New York City area and is an avid fan of the New York Knicks.
Can you put up information for activity ratios in the same format?
I’ll send you an email when I post it. Thanks.