Market value ratios

chapter 4 finance,

1. Market value ratios: evaluate the economic status of your company in the wider marketplace.
Market value ratios give management an idea of what the firm's investors think of the firm's
performance and future prospects.
 If the rest of the company's ratios are good, then the market value ratios should reflect that and
the stock price of the firm should be high.

1. The price earnings ratio: It is a very important ratio for publicly traded businesses
because it tells investors how much they are paying per share (price) for each dollar of earnings
(net income) by the company. In other words, shows how much investors are willing to pay for
shares of stock of the company per dollar of reported profit.


P/E Ratio =
Market price per share
Earnings per Share = Net income /number of common shares outstanding


 A low Price earnings ratio can be good because it means that the stock is welling for cheap and the
stock is good value for investors
 A low P/E can be bad because the company might expect bad news in the future or bad news in the
near future and the company has problems.
 A high Price Earnings ratio can be bad because e its expensive and not good value for investors, but a
high price earnings ratio can be good cuz we c ppl paying high prices and expect good news in the
future or good news in the near future and the company or ppl are expecting their profit to go up
 The best is to buy a stock with low price earnings ratio with good forecast and it selling cheap cuz its
not hot in the news right now
 If your P/E is higher than last year then it indicate that your company is “more expensive” than b4. This
could indicate poor value invertors or it could indicate good earnings estimation.
 If your P/E is lower than last year then it indicates that your company is “cheaper” than b4. This could
indicate better value invertors or it could indicate bad earnings anticipate.

2. 1. Market to book ratio: measures the market value of a company relative to its
book or accounting value. The market value of the company is its value at any point in
time as determined by the financial marketplace. The book value, or historical value,
is almost always lower than the market value since some assets may be off-balance
sheet items.

 The market value and book value of liabilities tend to be closer in value than the market value and
book value of assets. This is because liabilities that are due in one year, or current liabilities, usually
retain their book value
 Conversely, the market and book value of equity tends to be widely diverse since equity is not due in
one year

 Every share earns a $... a year in profit.
 A low EPS is bad because it mean less earrings / money for shareholders
 A high EPS is good because it mean more earrings / money for shareholders
 If your EPS is higher now than last year’s then it indicates that your company is more
profitable than before and the opposite less profitable than b4.

Market to book
Ratio =
Market price per share
Book value per Share = total common stockholder’ equity/number of
common shares outstanding