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4_Valuation Ratios

2 of 10

Price to Earnings ratio (PE)

  • PE

  • How many times more people pay for the share

  • Gives company a valuation against current earnings

=

Current share price (per share)

EPS

=

$ 4.80

=

6

$0.80

3 of 10

Think about a fruit stall owner

Price to earnings ratio (PE)

  • You want to buy a stall

  • The stall makes $1,000 nett per year

  • You are willing to pay 3 times more (PE = 3)

4 of 10

PE-Growth ratio (PEG)

  • PEG

  • Current price and earnings against future growth

  • Determine if company is expensive or cheap

=

PE

Company’s growth rate

=

6

=

0.50

12%

5 of 10

Think about a fruit stall owner

PE-Growth ratio (PEG)

  • You want to buy a stall

  • You are willing to pay 2X more, grows 20% every year

  • PEG is 0.1

6 of 10

Price to Book ratio (PB)

  • PB

  • Measures company’s market value against book value

  • Determine if company is expensive or cheap

=

Current share price (per share)

Book value (per share)

=

$ 4.80

=

2

$2.40

7 of 10

Think about a fruit stall owner

Price to book ratio (PB)

  • The stall’s market value is $10,000

  • The stall’s book value is $8,000

  • You are paying 1.25X or 25% above book value

8 of 10

Price to Sales ratio (PS)

  • PS

  • How many times more people pay for the share (similar to PE)

  • Gives company a valuation against current revenue

=

Current share price (per share)

Sales/ revenue (per share)

=

$ 4.80

=

1.5

$3.20

9 of 10

Think about a fruit stall owner

Price to Sales ratio (PS)

  • You want to buy a stall

  • The stall makes $1,000 per year in sales

  • You are willing to pay 1.5 times more (PS = 1.5)

10 of 10

Price to Cash Flow ratio (PCF)

  • PCF

  • How many times more people pay for the share (similar to PE)

  • Gives company a valuation against current operating cash flow

=

Current share price (per share)

Operating cash flow (per share)

=

$ 4.80

=

2

$2.40