Online Financial Courses - Evaluating Financial PerformanceProvided by : Matt H. Evans
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Course 1: Evaluating Financial Performance
Chapter 6: Market Value RatiosOne final group of detail ratios that warrants some attention is Market Value Ratios. These ratios attempt to measure the economic status of the organization within the marketplace. Investors use these ratios to evaluate and monitor the progress of their investments.
Earnings Per ShareGrowth in earnings is often monitored with Earnings per Share (EPS). The EPS expresses the earnings of a company on a "per share" basis. A high EPS in comparison to other competing firms is desirable. The EPS is calculated as:
Earnings Available to Common Shareholders / Number of Common Shares Outstanding
EXAMPLE - Earnings are $ 100,000 and preferred stock dividends of $ 20,000 need to be paid. There are a total of 80,000 common shares outstanding. Earnings per Share (EPS) is ($ 100,000 - $ 20,000) / 80,000 shares outstanding or $ 1.00 per share.
P / E RatioThe relationship of the price of the stock in relation to EPS is expressed as the Price to Earnings Ratio or P / E Ratio. Investors often refer to the P / E Ratio as a rough indicator of value for a company. A high P / E Ratio would imply that investors are very optimistic (bullish) about the future of the company since the price (which reflects market value) is selling for well above current earnings. A low P / E Ratio would imply that investors view the company's future as poor and thus, the price the company sells for is relatively low when compared to its earnings. The P / E Ratio is calculated as follows:
Price of Stock / Earnings per Share *
* Earnings per Share are fully diluted to reflect the conversion of securities into common stock.
EXAMPLE - Earnings per share is $ 3.00 and the stock is selling for $ 36.00 per share. The P / E Ratio is $ 36 / $ 3 or 12. The company is selling for 12 times earnings.
Book Value per ShareBook Value per Share expresses the total net assets of a business on a per share basis. This allows us to compare the book values of a business to the stock price and gauge differences in valuations. Net Assets available to shareholders can be calculated as Total Equity less Preferred Equity. Book Value per Share is calculated as follows:
Net Assets Available to Common Shareholders * / Outstanding Common Shares
* Calculated as Total Equity less Preferred Equity.
EXAMPLE - Total Equity is $ 5,000,000 including $ 400,000 of preferred equity. The total number of common shares outstanding is 80,000 shares. Book Value per Share is ($ 5,000,000 - $ 400,000) / 80,000 or $ 57.50
Dividend YieldThe percentage of dividends paid to shareholders in relation to the price of the stock is called the Dividend Yield. For investors interested in a source of income, the dividend yield is important since it gives the investor an indication of how much dividends are paid by the company. Dividend Yield is calculated as follows:
Dividends per Share / Price of Stock
EXAMPLE - Dividends per share are $ 2.10 and the price of the stock is $ 30.00 per share. The Dividend Yield is $ 2.10 / $ 30.00 or 7%
Chapter 6 pointsEarnings Per Share
P / E Ratio
Book Value per Share