Valuation Ratios — Microsoft Excel
In this article, we will walk you through the core concept of valuation ratio in accounting and finance using microsoft excel, we also understanding how helpful it is for us and how we can identifying the value of our company or business, because it will display our business current situation and value through its past activities of sales, marketing, demanding and so on and it also tells the investors to setup a mind for further investments to this particular business.
Valuation Ratios
These ratios tell us about a company’s worth. Valuation ratios are commonly used in the context of a company’s share price, where we can evaluate the potential of
investment. We calculate the price of earning per share to get the valuation right. The investors depend greatly on these ratios. These ratios are mostly used by stock investor.
These ratios are as follows:
- Price Earning per Share (PE)
- Price to Book Value (PB)
- Price to sales
- Price to Earnings Growth (PEG)
- Enterprises value
- EV/EBITA
- EV/Sales
Before learning about valuation ratios, we should know different terms that will be used in these ratios.
Earnings Per Share (EPS)
This is the amount of profit the company made per share.
It is calculated as the company’s profit divided by the outstanding shares of common stock. The higher the EPS, the more profitable it is to be considered.
Basic EPS vs Diluted EPS
The preceding formula calculates the basic EPS. The major difference between Basic EPS and Diluted EPS is that the former is calculated on all common shares outstanding at the end of the period, while the latter is calculated on all common shares plus all convertible securities, which include convertible
preferred shares, convertible debentures, stock options and warrants.
Convertible Securities
Convertible securities are those stocks, bonds and options
that can be convertible into common stocks.
Dividends Per Share (DPS)
They are not much different from EPS. It is calculated as a company’s dividends paid divided by the outstanding shares of common
stock. Investors take interest in DPS calculation as it is an important indicator of an
investor’s income from the investments.
Dividend Pay-out Ratio
This is the ratio of the total amount of dividend paid out
to shareholders to the net income of the company. It indicates the percentage paid in the form of dividends. It is calculated as DPS divided by EPS.
Dividend Yield
The Dividend Yield is a financial ratio that represents the dividends issued by a company in relation to its current share price. It is calculated by dividing the annual dividends per share by the current share price It gives us an investor’s
returns in the form of dividends. A high dividend yield means a high amount of dividends is received by an investor as compared to the share price and it can be a
good investment opportunity.
Book Value and Book Value Per Share
If a company sells its all assets and pays off all liabilities, the balance will be the book value. Book value is equal to total assets and total liabilities.
Book Value per share is book value divided by the number of outstanding shares of
common stock.
Now, let us move to valuation ratios.
Price Earning Per Share (P/E Ratio)
The more relevant measure for valuation is earning. Every investor has the objective
of earning profit. The P/E is calculated as the market price of a stock divided by the total profit in the previous 12 months.
A high P/E ratio indicates a high expectation of growth and a low P/E indicates low expectation of growth.
Formula:
Price to Book Ratio (P/B Ratio)
The Price to Book (P/B) ratio is a financial metric that is often used to compare a company’s stock price with its book value per share. However, because the book value
of a company can vary depending on its industry and the accounting methods used, the P/B ratio can only be meaningfully compared with those of peer companies in
the same industry. A good P/B ratio for one business may not necessarily be a good P/B ratio for another business in a different industry. Therefore, when evaluating a company’s P/B ratio, it is important to consider the industry norms and the P/B
ratios of other companies in the same sector. This can provide investors with a better understanding of how a company’s P/B ratio compares to that of its competitors and whether it is overvalued or undervalued relative to its industry peers.
Price to Sales Ratio (P/S Ratio)
The price to sales ratio utilizes a company’s market capitalization and revenue to determine whether the stock is valued properly. It measures the total value that
investors invest in the company to the total sales generated by the company. It is calculated as the share price divided by the sales per share or market capitalization
divided by total sales.
If P/S is low, it means the share might be undervalued or investors don’t have faith in the company.
If P/S is high, it means the share might be overvalued or investors have too much faith in the company’s future. We cannot find the P/E ratio for a company that is not in profit, so we need to find
the P/S ratio.
Price Earning to Growth Ratio (PEG Ratio)
The Price/Earnings to Growth (PEG) ratio is a financial metric that is used to determine the relative value of a company’s stock by dividing its Price/Earnings
(P/E) ratio by the projected growth rate of its earnings over a specified period. The PEG ratio provides investors with a more complete picture of a company’s financial
health by adjusting the P/E ratio for the company’s estimated earnings growth rate. The PEG ratio takes into account not only the current earnings of a company but also its potential for future earnings growth. A PEG ratio below 1.0 is generally considered
favorable, as it suggests that the stock is undervalued relative to its earnings growth potential. On the other hand, a PEG ratio above 1.0 may indicate that the stock is
overvalued and may not be a good investment. As such, the PEG ratio is a useful tool for investors who are looking for a more comprehensive assessment of a company’s financial health and growth potential.
Where EPS Growth Rate = Growth percentage of the difference between 2 EPS.
A lower PEG indicates that a stock is undervalued.
Enterprises Value
Enterprise value calculates the potential cost undertaken to acquire a business based
on the company’s capital structure. To buy a company, we need to know the EV, which reflects the market value of claims that equity holders, preferred holders and
debt holders have on the company.
EV/EBITDA Ratio
It is an enterprises multiple that indicates how expensive or cheap the company is.
EV/EBITDA is like P/E. PE is only for equity, while EV/EBITDA is for all capital providers, debt and equity. It is calculated as EV divided by EBITDA of income statement.
It is better than the PE ratio.
EV/Sales Ratio
The Enterprise Value-to-Sales EV/Sales, ratio is a financial metric that compares a company’s enterprise value to its total sales revenue. This ratio can be used to
estimate how much it would cost to acquire a company based on its sales revenue. EV/Sales is like P/S. PS is only for equity, while EV/Sales is for all capital providers,
debt and equity. It is calculated as EV divided by sales of income statement.
It is better than P/S. A low EV/Sales ratio indicates a better opportunity to invest.
Conclusion
Finally, We have learnt various financial ratios in this section, it is beneficial to have knowledge of financial ratios as these are great tools to analyze the financial
statements and stock market. However, only ratios are not enough to analyze the financial statements and investments in depth. It is recommended to have in-depth knowledge of financial ratio to analyze the company’s performance instead of relying
solely on financial ratios.
