Financial Ratios on Assessing The MARKET VALUE Of A Company

Continued 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.

RatioEARNINGS PER SHARE (EPS)
FormulaEarnings Available to Common Stockholders
Number of Shares Outstanding
UseIndicates the amount of profit that has on average been earned by each share
ValuesA steadily increasing EPS is a hint that management is giving shareholders more for their money.
InterpretationEarnings/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

RatioPRICE EARNINGS RATIO (P/E)
FormulaMarket Price per Share of Common Stock
Earnings Per Share
UseEvaluates 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.
ValuesDifferent 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.
InterpretationOver 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.

RatioNET ASSET BACKING ( NTA )
FormulaOrdinary shareholders’ equity
No of ordinary shares
UseMeasure the assets backing per share
ValuesHigher the better.
InterpretationEnables a comparison between market value of equity ( share price ) and the book value

RatioDIVIDEND YIELD
FormulaDividends per share
Market price per share
UseShare rate of dividend to shareholders based on market price
ValuesHigher ratio is better. Depends on performance of the company itself &objectives of Management as studies show higher yields can increase share prices.
InterpretationIt is the cash rate of return by shareholders through dividend

Leave a Reply

  

  

  

You can use these HTML tags

<a href=""title=""><abbr title=""><acronym title=""><b><blockquote cite=""><cite><code><del datetime=""><em><i><q cite=""><strike><strong>