5 Valuation Ratios every investor should know
• Price To Book Value
• Price To Earnings
• Price To Earnings Growth
• EV/EBITDA
• Price To Sales
Let's understand each of them in detail 🧵⤵️
• Price To Book Value
• Price To Earnings
• Price To Earnings Growth
• EV/EBITDA
• Price To Sales
Let's understand each of them in detail 🧵⤵️
Valuation Ratios help us to identify the right price for our potential investments.
So, here are five valuations ratios that every investor should know:
So, here are five valuations ratios that every investor should know:
1️⃣ Price To Book Value Ratio
It expresses a relationship between the market price & a book value of a share.
P/B Ratio = Market price per share/Book value per share
It expresses a relationship between the market price & a book value of a share.
P/B Ratio = Market price per share/Book value per share
Why you should use P/B Ratio:
➡️ It can be an accurate metric to value heavy industries, real-estate-based companies, banks, etc.
➡️ It can be an accurate metric to value heavy industries, real-estate-based companies, banks, etc.
➡️ Used as one of the measures to compare the valuation of peers of the same industry.
A lower ratio than the industry avg would mean an undervaluation of shares.
A lower ratio than the industry avg would mean an undervaluation of shares.
2️⃣ Price To Earning Ratio
It determines the relation between the individual current stock price & earnings of the company per share.
P/E Ratio = Market price per share/Annual earning per share
It determines the relation between the individual current stock price & earnings of the company per share.
P/E Ratio = Market price per share/Annual earning per share
Lower the P/E ratio, lesser the price has to be paid for a particular share with particular earnings per share.
Conversely, lower the P/E ratio, higher will be the earnings per share for a specific share with a particular market price.
Conversely, lower the P/E ratio, higher will be the earnings per share for a specific share with a particular market price.
3️⃣ Price To Earnings Growth
It helps identify whether the stocks are overvalued, undervalued or fairly valued.
It is the ratio of P/E against the growth rate of a company's profit or profit growth rate.
PEG = P/E Ratio/Profit growth over the year
It helps identify whether the stocks are overvalued, undervalued or fairly valued.
It is the ratio of P/E against the growth rate of a company's profit or profit growth rate.
PEG = P/E Ratio/Profit growth over the year
4️⃣ EV/EBITDA
This ratio has two components: EV & EBITDA. Enterprise Value is the total value of a company that someone had to pay if they had to acquire the firm.
Enterprise Value = Market value of equity + Market value of Debt – Cash on hand
This ratio has two components: EV & EBITDA. Enterprise Value is the total value of a company that someone had to pay if they had to acquire the firm.
Enterprise Value = Market value of equity + Market value of Debt – Cash on hand
5️⃣ Price To Sales
This ratio values the company based on its turnover & not profits. This method of valuation effectively assesses stocks with high potential for growth but are currently not able to make profits.
P/S Ratio = Market price per share/Sales per share
This ratio values the company based on its turnover & not profits. This method of valuation effectively assesses stocks with high potential for growth but are currently not able to make profits.
P/S Ratio = Market price per share/Sales per share
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