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Market value ratios


Often when you read the business section of newspaper or when you are doing research about particular company on the stock market you come across different ratios. There is so many of them so if you are not accredit investors there is a chance that zou sometimes get confused but these metric are actually helpful if zou know how to interpret them. Bascically they measure quantitive assesments commonly used for comparing and tracking performance. That is why are so widely used by analysts in assesing performance and investing recomendation and by company's mangement also. Depending on the goal of analysts he will choose from range of available data to build metric suitable for that same goal. Company's executive and project managers have differenet goals so they will use different metrics, while the first will concentrate on corporate finance the other will focus on strategec projects.

Following the previous article on due diligence we will primarily focus on the position of prospective investor, using comparable metric in attempt to assess company's posittion in the industry sector and among competition, in other words get a bigger picture. There is no metric cominatioan that will be ideal for investment so we are going to look at some of the ratios that can be helpful in the due diligence research.

Ratio used to determine the value of the company that takes into consideration company's debt and cash level and stock price. It is calculated by dividing enterprise value (cash and cash equivalents subtracted form sum of market capitalization, value of debt, minor interest and preffered shares) with EBITDA (earnings before interest, taxes, depreciationa nad amortization). It is better way to determine if company is undervalued or overvalued than just using market capitalization which makes it valuable informationa for mergers and acquisitions. 

Price-to-earning ratio (P/E) known also as price multiple is used by investors to determine the relative value of company's shares compared to other in the same industry. It is calculated by dividing current share price by earning per share whic is basicaly portion of company's profit allocated to each share. In simple terms it is showing how much investors are willing to pay for the share based on past and future earnings therefor high P/E ratio points that investors are anticipating higher growth in the future. When P/E is divided by the growth rate of its earnings for a specific period PEG (price earning-to-growth) ratio is calculated, considered to be an enhancment for stadard P/E ratio. You may find different PEG ratios for the same company because not everyone use the same growth estimate.

Price-to-sales is another one key financial ratio for investors and analysts. There are two ways to calculate it, by dividinf the compan't market caputalization by its sales for a given period of time, usually twleve months or by dividing the share price by sales per share. What it shows is how much are investors willing to pey per dollar of sales; if company is undervalued or overvalued. Like some other ratios it is most relevant when compared to other companies in the industry sector. Another ratio that you should consider when doing due diligence is P/B (price-to-book value) ratio which measuers market valuation of the company relative to its book value. You can easily calculate it by dividing market price per share by book value per share.  BVPS indicates the dollar value remaining from common shareholders after all assests are liquidated and all debtors are paid.

These ratios are just a fractions of financial metrics that should be taken into consideration when dong researcj on the company. Investing goals and risk tolerance will have major role when choosing the right combination of metrics that you will carefully inspect. Nevertheless be aware that every ratio has its limitation and it represent just one part of wider reasearch about the issuing company.
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