Market value ratios

Market value ratios
See also
Free cash flow yield Book-to-Market Ratio Fundamental analysis Appraisal right Money-weighted rate of return Return on common equity Swap Ratio Gordon Growth Model Earnings Multiplier

The market value ratios indicate the current company's value and, for publicly traded companies, its share price. These set of ratios is used commonly by investors to evaluate the attractiveness of a firm from the investment standpoint. The most well know ratios are as following:

1) Price / Earnings ratio (P/E) - shows the market price in relation to companies earnings. Simply saying how many of dollars investor has to pay per each dollar of firms earning.

${\mbox{Price to Earnings ratio}}={\dfrac {\mbox{Market share price}}{\mbox{Earning per Share}}}$

2) Earnings per Share - Represents what portion of profit the company has generated per each issued share. The ratio does not reflect any current market price, but it is used by investors to measure the profitability of the firm and derive the share price according to what they think the company is worth. ${\mbox{Earnings per share}}={\dfrac {\mbox{Net Income}}{\mbox{Number of shares outstanding}}}$

3) Market-book ratio. The market-book ratio shows how a firm is regarded by investors in terms of its stock's market price to its book value .

${\mbox{Market-book ratio}}={\dfrac {\mbox{Market share price}}{\mbox{[[Book value per share]]}}}$

Implementation of market value ratios

In financial management, structured and scientific decisions based on analysis of financial statements whereas market value ratios play the critical part. Applying value ratios investors attempts to calculate an accurate estimation of a company's future earnings stream in order to link security value with a current price and decide whether to purchase or liquidate an asset. Usage of ratios, by comparison of the performance of various firms within the same industry help investors to identify companies most suitable for their investment goals and evaluate trends in the firm's financial position over time.

On another hand, a firm's creditors are rarely concerned about the firm's capitalization, but rather care about the ability to cover a firm's debts and payout the debt on time. In this case, market value ratios are hardly applicable and debt or liquidity ratios would be more helpful.

References

• Çam, Alper & Tosunoglu, Busra & Gürtay, Enes & Gurtay, Enes. (2015). The Role Of Financial Ratios To Determine The Value Of Stock: A Application In Bist The Role Of Financial Ratios On Evaluation Of Stock Values.
• Brigham, E. and Ehrhardt, M. (2011). Financial management. Mason, OH: South-Western Cengage Learning.
• Frase, L., & Ormiston, A. (2004). Understanding Financial Statements. New Jersey: Pearson Prentice Hall.
• Nissim, D. and Penman, S. (2001). Ratio Analysis and Equity Valuation: From Research to Practice. Review of Accounting Studies, 6.
• Ohlson, J. A. (1995).Earnings, Book Values, and Dividends in Equity Valuation.Contemporary Accounting Research 11, 661–687.
• Tugas, F. (2012). A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011. International Journal of Business and Social Science, 3(21), pp.173-190.

Author: Mariia Gordiyenko