Stock market ratios

economic-dictionary

Stock ratios are relationships between variables of a publicly traded company that face stock market data with data present in the company's accounting.

The listing price or market capitalization of a company are examples of some stock market data.

However, they must be interpreted critically to avoid falling into a limited vision that leads to investment mistakes.

Main stock market ratios

Next, we will see the most popular and followed stock market ratios among investors:

PER or price to earnings ratio

Indicates how many times the listing price is contained in the company's profits. Therefore, if the PER is high, the stock is possibly expensive, and vice versa. However, to confirm this, it is necessary to put it in relation to the PER of the sector, in addition to studying the business in depth. The PER of the company is divided by the PER of the sector. It is the most popular ratio and very easy to calculate:

PER = Price / profit

An interpretation of this ratio would be to see it as the number of years estimated to recover the investment.

Price to Book Value or price / book value

It is equivalent to dividing the price the price of a share by its theoretical book value or, which is the same, dividing the market capitalization by the company's own funds.

Actually, it is a theoretical ratio with an inflection point at 1, which can be a sign of two things: a high probability of bankruptcy or a cheap price bargain. Hence the need to study the business and other companies in the same sector well.

Price to book value = price / book value

EV / EBITDA

EV is equivalent to “company value” or Enterprise value and relates the company's value against its EBITDA or gross operating result (earnings before interests, tax, depreciation and amortization). The ratio shows the multiplier of the company's value over the resources it generates, regardless of its financial structure, tax rate and amortization policy.

As advantages, this ratio not only takes into account the market value, but also the debt and compares the core business excluding others. However, as disadvantages, it does not include extraordinary results, financial results or amortizations.

EV / EBITDA = (Capitalization + Net Debt) / EBITDA

PSR, Price to sales ratio or sales price

Compare the listing price of various companies against their turnover or sales, showing how much the market values ​​each euro of the company's sales. If the ratio is lower than that of its peers, the company will be undervalued, and vice versa. It also allows you to detect recovery situations or confirm that your growth is overrated.

P / V = ​​Price / Sales

Price / cash flow

It relates the listed price to the cash generated by it. In other words, it is a measure of the company's valuation according to the expectations of the cash flow generation market. The higher the ratio, the more optimism the market shows towards the company, and vice versa.

P / CF = Quoted price / cash flow

Dividend yield or dividend yield

It indicates what percentage of the listed price of a share reaches the hands of its shareholders through dividends. More stable companies are more likely to pay dividends, compared to those that are growing, as they will prefer to reinvest it in new projects or acquisitions to continue growing.

Dividend yield = dividend per share / price per share * 100

Interpretation of stock market ratios

Stock market ratios are good indicators of the financial health of a company, but they do not conceive a complete analysis of a company or its valuation. They usually reveal whether a company is priced expensive or cheap, but ignoring the qualitative profile of the business. For this reason and to have a complete vision, it is essential to complement them with an in-depth study of the business model and operation of the company.

In addition, although they can anticipate good investment opportunities, they can also be red flags, if we know how to read them well. They can indicate value traps in which the investor is trapped dragging losses. That is, a company that appears to be cheap according to its ratios, but ultimately its intrinsic value is equal to or even lower than its listed price. So it ends up being a bad investment.

The stock market ratios of a company must be compared with those of its peers or comparable companies, in the same sector. There are sectors that, due to their characteristics, have very different ratios from other activities. This does not mean that they are expensive or cheap companies compared to other sectors. Rather, each sector yields different results.

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