Valuation Ratios

Question 1

Price-to-Earnings Ratio – P/E Ratio

Answer 1

P/E Ratio = Market value per share / Earnings per share

• Relates a company’s share price to its earnings per share.
• A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.
• If you want to get a general idea of whether a particular P/E ratio is high or low, you can compare it to the average P/E of the competitors within its industry.
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Question 2

Price-To-Book (P/B Ratio)

Answer 2

P/B Ratio= Market Price per Share / Book Value per Share

​- Measures the market’s valuation of a company relative to its book value.

• The market value of equity is typically higher than the book value of a company
• Can help investors understand whether the market price of a company seems reasonable when compared to its balance sheet.
• Any value under 1.0 is considered a good P/B value, indicating a potentially undervalued stock. However, value investors often consider stocks with a P/B value under 3.0.

Question 3

Price-to-Sales Ratio (P/S Ratio)

Answer 3

P/S Ratio = MVS / SPS
where:
MVS = Market Value per Share
SPS = Sales per Share

• Shows how much investors are willing to pay per dollar of sales for a stock.
• Ratios between one and two are generally considered good, while a P/S ratio of less than one is considered excellent.

Question 4

Price-to-Cash Flow (P/CF) Ratio

Answer 4

Price to Cash Flow Ratio = Share Price / Operating Cash Flow per Share
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- Is a multiple that compares a company’s market value to its operating cash flow or its stock price per share to operating cash flow per share.