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Financial Ratios on Assessing The MARKET VALUE Of A Company
Published by slang April 5th, 2006 in Ratio AnalysisContinued from my last article, we will now look at the financial ratio for assessing the market value of a company. Essentially, these market-based financial ratios are able to relate the company’s performance to the market for its shares.
| Ratio | EARNINGS PER SHARE (EPS) |
| Formula | Earnings Available to Common Stockholders Number of Shares Outstanding |
| Use | Indicates the amount of profit that has on average been earned by each share |
| Values | A steadily increasing EPS is a hint that management is giving shareholders more for their money. |
| Interpretation | • Earnings/net profit after deducting any profits owed to preference shareholders or minority interest. Re : the level of profit used is that profit that actually belongs to the ordinary shareholders |
| Ratio | PRICE EARNINGS RATIO (P/E) |
| Formula | Market Price per Share of Common Stock Earnings Per Share |
| Use | Evaluates the relative attractiveness of a company’s stock price. One of the quickest and easiest ways to determine if a stock is trading on an investment or speculative basis. |
| Values | Different industries –different P/E ranges- technologies sell at 40 P/E while textile at 8 P/E. Varies due to different expectations for different businesses ; tech stocks sell higher because expect a much higher growth rate and earn high returns on equity while textile mill – dismal margin & low growth prospects which will then trade at a much smaller P/E multiple. |
| Interpretation | Over priced when the average P/E ratio of all of the companies in the industry/sector is far above the historical average. E.g. dot-com frenzy of the late 1990’s. Thus the investors could have avoided the hugh declines in the technology stocks by selling the stocks when realizing the entire industry was dangerous expensive. |
| Ratio | NET ASSET BACKING ( NTA ) |
| Formula | Ordinary shareholders’ equity No of ordinary shares |
| Use | Measure the assets backing per share |
| Values | Higher the better. |
| Interpretation | • Enables a comparison between market value of equity ( share price ) and the book value |
| Ratio | DIVIDEND YIELD |
| Formula | Dividends per share Market price per share |
| Use | Share rate of dividend to shareholders based on market price |
| Values | • Higher ratio is better. Depends on performance of the company itself & objectives of Management as studies show higher yields can increase share prices. |
| Interpretation | • It is the cash rate of return by shareholders through dividend |
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