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Market Prospect Ratios

Market prospect ratios help investors analyze publicly traded companies by comparing stock prices to financial metrics like earnings and dividends. These ratios indicate stock trends and a company's current and future market value. Some key ratios include price-earnings, price/cash flow, dividend yield, and market-to-book, which all provide insights into a stock's valuation and the potential returns for investors.

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585 views4 pages

Market Prospect Ratios

Market prospect ratios help investors analyze publicly traded companies by comparing stock prices to financial metrics like earnings and dividends. These ratios indicate stock trends and a company's current and future market value. Some key ratios include price-earnings, price/cash flow, dividend yield, and market-to-book, which all provide insights into a stock's valuation and the potential returns for investors.

Uploaded by

Darlene Sarcino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Market Prospect Ratios

Market Prospect ratios are used to compare publicly traded


companies’ stock prices with other financial measures like
earnings and dividend rates. Investors use market prospect ratios
to analyze stock price trends and help figure out a stock’s current
and future market value.

In other words, market prospect ratios show investors what they


should expect to receive from their investment. They might
receive future dividends, earnings, or just an appreciated stock
value. These ratios are helpful for investors to predict how much
stock prices will be in the future based on current earnings and
dividend measurements. For instance, a downward trend in
earnings per share and dividend yield point to profitability
problems and could even raise going concern issues. All of these
issues point to a lower stock evaluation.

Simply put, market prospect ratios helps investors in providing


estimations as to what would they receive from their investment. They
might receive future dividends, earnings, or just an elevated stock value.
These ratios indicate will the stock prices rise or fall based on current
earnings and dividend measurements which is really helpful for the
investors. For example: a downward trend in earnings per share and
dividend yield point to profitability problems and could even raise going
concern issues. All of these issues point to a lower stock evaluation.
Mentioned below are some market prospect ratios commonly used by
investors.
Market value ratios help evaluate the economic status of publicly traded
companies and can play a role in identifying stocks that may be overvalued,
undervalued, or priced fairly.

Although a wide variety of market value ratios are available, the most popular
include earnings per share, book value per share, and the price-earnings ratio.
Others include the price/cash ratio, dividend yield ratio, market value per
share, and the market/book ratio. Each of these measures is used in a different
way, but when combined, they offer a financial portrait of publicly traded
companies. In addition, market value ratios give management an idea of what a
firm's investors think of its performance and future prospects.

Market value ratios are also used to analyze stock trends. For example, a
company's low price-earnings ratio may indicate the stock is an undervalued
bargain in a stable industry, but it also could indicate the company's earnings
prospects are relatively uncertain, and the stock may be a risky bet.

You should always consider various factors, including a range of market value


ratios, when making a decision about an investment. A stock with one great-
looking measure could be an undiscovered gem, or it could be a dud that's
underpriced for a reason.

Earnings Per Share

Earnings per share measure a company's net income per share of outstanding
stock, indicating a company's profitability to investors. To calculate earnings per
share, divide the company's net income by the number of outstanding shares
(the stock currently held by all shareholders). For example, if a company has $10
million in net income and 4 million outstanding shares, the earnings per share
would be $10 million divided by 4 million, which amounts to $2.50.

Book Value Per Share

The book value is a company's equity (not including preferred stock) divided by


the shares outstanding in the market. For example, if a company's total assets
equal $15 million and its total liabilities equal $5 million, the total equity would be
$10 million. If the company has $2 million in preferred stock, deduct that to get $8
million, the amount available to common shareholders. If there are 1 million
outstanding shares, the book value per share would be $8, or $8 million divided
by 1 million.
Market Value Per Share

Market value per share is the market value of a company divided by the total
number of outstanding shares. This quite simply is the going rate for a share of
common stock. The market value of the company can be determined by
multiplying the price of its common stock by the number of outstanding shares. 

Market/Book (M/B) Ratio

With the market/book ratio, analysts can compare a company's market value to
its book value. The ratio can be calculated by dividing the market value per share
by the book value per share. For example, if a company has a book value per
share of $8 and the stock currently is valued at $10 per share, the M/B ratio
would be calculated by dividing $10 (stock price) by $8 (book value per share).
This would give you a ratio of 1.25. In other words, the market value of a share of
stock is 25% greater than its book value.

A ratio of less than 1 can mean a stock might be undervalued, while a ratio
greater than 1 might mean it's overvalued.

Price-Earnings (P/E) Ratio

The price-earnings ratio is the current price of the stock divided by the earnings
per share. Earnings generally are calculated by looking at the last four quarters
of financial results. For example, if a stock is trading at $25 per share and its
earnings per share are $2.50, the P/E ratio would be $25 divided by $2.50, which
equals a ratio of 10-to-1. Analysts also talk about a forward P/E ratio, which is the
estimated P/E ratio for the next four quarters.

Price/Cash Ratio

The price/cash ratio compares the price of a company's stock to its cash flow. To
calculate this ratio, simply divide the market value of a share by the amount of
cash flow per share. Cash flow per share is the amount of cash a company has
on hand after taking depreciation into account. For example, if the price of a
company's stock is $20 per share and the company has cash flow of $10 per
share, the price/cash ratio would be $20 divided by $10, which equals 2.
Typically, a lower number here is better because that means greater cash flow.

Dividend Yield Ratio

Analysts arrive at the dividend yield ratio by dividing the total


dividend payments paid per year by the market price of the stock. For example, if
a company pays out dividends quarterly in the amounts of $2.25, $2.50, $2.50,
and $2.75, the total dividend payments for the year would be $10. If the price of
the stock is $100, you would divide $10 (dividend payments) by $100 (stock
price). The answer is 0.10, or 10%. Knowing this ratio helps you understand the
return on your investment.

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