{"id":17233,"date":"2022-01-21T18:04:54","date_gmt":"2022-01-21T18:04:54","guid":{"rendered":"https://www.5paisa.com/finschool/?post_type=markets\u0026#038;p=17233"},"modified":"2024-08-02T18:50:55","modified_gmt":"2024-08-02T13:20:55","slug":"valuation-ratios","status":"publish","type":"markets","link":"https://www.5paisa.com/finschool/course/fundamental-analysis-course/valuation-ratios/","title":{"rendered":"Understanding Valuation Ratios in Stock Market"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002217233\u0022 class=\u0022elementor elementor-17233\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\u0022 data-id=\u002223ba90b\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container 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margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2 style=\u0022text-align: left\u0022\u003e\u003cstrong\u003e13. Valuation Ratios\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cimg fetchpriority=\u0022high\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-51610 size-full\u0022 src=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Valuation-Ratios.png\u0022 alt=\u0022Valuation Ratios\u0022 width=\u00221080\u0022 height=\u00221004\u0022 srcset=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Valuation-Ratios.png 1080w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-300x279.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-1024x952.png 1024w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-768x714.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-50x46.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-100x93.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Valuation-Ratios-150x139.png 150w\u0022 sizes=\u0022(max-width: 1080px) 100vw, 1080px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cul\u003e\u003cli\u003eValuation ratio is conducted to decide whether the stock of a company is currently selling at attractive (cheap/undervalued), fair (rightly priced) or expensive (overvalued) valuations. It is done post-financial analysis, to select stocks for further analysis.\u003c/li\u003e\u003cli\u003eOnce an investor has found a financially strong company by using the parameters highlighted in \u003cstrong\u003ethe financial analysis guide\u003c/strong\u003e, she should do the valuation analysis to check whether the stock of the company is priced right.\u003c/li\u003e\u003cli\u003eIf the shares of a company are overvalued then the investor should avoid investing in it, however good the company\u0026#8217;s financial position may be. Investing hard-earned money in overvalued stocks exposes the investor to higher levels of risk where the potential of future appreciation is limited but the risk of loss of money is high. Therefore, valuation analysis becomes paramount before taking a decision to buy any stock.\u003c/li\u003e\u003cli\u003eValuation analysis compares the stock market values of the stock of a company with its financial parameters. Stock market values consist of the current market price (CMP), market capitalization (MCap) etc.\u003c/li\u003e\u003c/ul\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide02\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Price-To-Sales-(P/S)-Ratio\u0027 style=\u0027padding:4.9% 4.7%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2 style=\u0022text-align: left\u0022\u003e\u003cstrong\u003e13.1 Price To Sales (P/S) Ratio\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-51611 size-full\u0022 src=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio.png\u0022 alt=\u0022Price to Sales Ratio\u0022 width=\u00221034\u0022 height=\u0022930\u0022 srcset=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio.png 1034w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-300x270.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-1024x921.png 1024w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-768x691.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-50x45.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-100x90.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Sales-Ratio-150x135.png 150w\u0022 sizes=\u0022(max-width: 1034px) 100vw, 1034px\u0022 /\u003e\u003c/p\u003e\u003cul\u003e\u003cli\u003eThe \u003cstrong\u003ePrice-to-Sales Ratio (P/S)\u003c/strong\u003e measures the value of a company in relation to the total amount of annual sales it has recently generated. Often referred to as the “sales multiple”, the P/S ratio is a valuation multiple based on the market value that investors place on the revenue belonging to a company.\u003c/li\u003e\u003cli\u003e\u003cstrong\u003ePrice/Sales Ratio= \u003c/strong\u003eMarket Capitalization/ Annual Revenue\u003c/li\u003e\u003cli\u003eThe price-to-sales ratio indicates how much investors are currently willing to pay for a rupee of sales generated by a company. This ratio tells us how much value the market places on the sales of a specific company, which is determined by the quality of revenue (i.e. customer type, recurring vs. one-time), as well as expected performance.\u003c/li\u003e\u003cli\u003eHigher P/S ratios can often serve as an indication that the market is currently willing to pay a premium for each rupee of sales. A low price-to-sales ratio relative to industry peers could mean that the shares of the company are currently undervalued.\u003c/li\u003e\u003cli\u003eThe standard acceptable range of the price-to-sales ratio varies across industries. Hence, benchmarking the ratio must be done among similar, comparable companies. Alternatively, a ratio in excess of its peer group could indicate the target company is overvalued.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003eLet us calculate the same for Exide Industries. We will take up the denominator first:\u003c/p\u003e\u003cp style=\u0022padding-left: 120px\u0022\u003e\u003cstrong\u003eSales Per Share\u003c/strong\u003e = Total Revenues / Total number of shares\u003c/p\u003e\u003cp\u003eWe know from Exide Industries statement:\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eTotal Revenue = Rs.10040.84 crs\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eNumber of Shares = 85 Cr\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eRevenue per share = 10040.84 /85\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eTherefore the Revenue per share = Rs. 118.11\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eThis means for every share outstanding, Exide Industries does Rs.118.11 worth of sales.\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003ePrice to Sales Ratio = 171 / 118.11\u003c/p\u003e\u003cp style=\u0022padding-left: 160px\u0022\u003e= 1.45x\u003c/p\u003e\u003cp\u003eP/S ratio of 1.45x times indicates that, for every Rs.1 of sales, the stock is valued Rs.1.45 times higher. Obviously, the higher the P/S ratio, the higher is the valuation of the firm. One has to compare the P/S ratio with its competitors to get a fair sense of how expensive or cheap the stock is.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide03\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Price-To-Book(P/BV)-Ratio\u0027 style=\u0027padding:4.9% 4.7%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2 style=\u0022text-align: left\u0022\u003e\u003cstrong\u003e13.2 Price To Book(P/BV) Ratio\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003ch5\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-51612 size-full\u0022 src=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio.png\u0022 alt=\u0022Price to Book Ratio\u0022 width=\u0022894\u0022 height=\u0022864\u0022 srcset=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio.png 894w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio-300x290.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio-768x742.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio-50x48.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio-100x97.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Book-Ratio-150x145.png 150w\u0022 sizes=\u0022(max-width: 894px) 100vw, 894px\u0022 /\u003e\u003c/h5\u003e\u003cp\u003eThe \u003cstrong\u003ePrice-to-Book Ratio (P/B Ratio)\u003c/strong\u003e measures the market capitalization of a company relative to its book value of equity. Widely used among the value investing crowd, the P/B ratio can be used to identify undervalued stocks in the market.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003ePrice-to-Book Ratio (P/B) Definition\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eOften referred to as the market-to-book value ratio, the P/B ratio compares the current market capitalization (i.e. equity value) to its accounting book value.\u003c/p\u003e\u003cul\u003e\u003cli\u003e\u003cp\u003e\u003cstrong\u003eMarket Capitalization (Price):\u003c/strong\u003eCalculated as the current share price multiplied by the total number of diluted shares outstanding\u003c/p\u003e\u003c/li\u003e\u003cli\u003e\u003cp\u003e\u003cstrong\u003eBook Value (BV):\u003c/strong\u003eThe book value is the net difference between the carrying assetvalue on the balance sheet less the company’s total liabilities\u003c/p\u003e\u003c/li\u003e\u003c/ul\u003e\u003cp\u003eIn short, the market capitalization represents the pricing of a company\u0026#8217;s equity according to the market (i.e. what investors currently believe the company to be worth). The book value, on the other hand, reflects the value of the assets that a company\u0026#8217;s shareholders would receive if the company were hypothetically liquidated.\u003c/p\u003e\u003cp\u003eSince the book value of equity is a levered metric (post-debt), the equity value is used as the point of comparison, rather than the enterprise value, to avoid a mismatch in the represented capital provider(s).\u003c/p\u003e\u003cp\u003eFor the most part, any financially-sound company should expect its market value to be greater than its book value since equities are priced in the open market based on the forward-looking anticipated growth of the company.\u003c/p\u003e\u003cp style=\u0022padding-left: 120px\u0022\u003e\u003cstrong\u003e\u003cem\u003ePrice-to-Book Ratio (P/B) = \u003c/em\u003e\u003c/strong\u003e\u003cem\u003eMarket Capitalization / Book Value of Equity\u003c/em\u003e\u003c/p\u003e\u003cp\u003eThe norm for the P/B varies by industry, but a P/B ratio under 1.0x tends to be viewed favourably and as a potential indication that the company\u0026#8217;s shares are currently undervalued. The P/B ratio is generally more accurate for mature companies, like the P/E ratio, and is especially accurate for those that are asset-heavy (e.g. manufacturing, industrials).\u003c/p\u003e\u003cp\u003eIn addition, the P/B ratio is typically avoided for companies comprised mostly of intangible assets (e.g. software companies). In reality, very rarely is a company\u0026#8217;s book value of equity lower than its market value of equity.\u003c/p\u003e\u003cp\u003eIf the market valuation of a company is less than its book value of equity, that means the market does not believe the company is worth the value on its accounting books.\u003c/p\u003e\u003cp\u003eLet us calculate the same for Exide Industries: From Exide Industries balance sheet, we know:\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eShare Capital = Rs.6893.51crs\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eNumber of shares: 85crs\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eHence the Book Value per share = 6893.51/85\u003c/p\u003e\u003cp style=\u0022padding-left: 280px\u0022\u003e= Rs 81.1 per share\u003c/p\u003e\u003cp\u003eThis means if Exide Industries were to liquidate all its assets and pay off its debt, Rs.81.1 per shares is what the shareholders can expect.\u003c/p\u003e\u003cp\u003ePrice per share is Rs.171\u003c/p\u003e\u003cp style=\u0022padding-left: 80px\u0022\u003eP/BV = 171/81.1\u003c/p\u003e\u003cp style=\u0022padding-left: 120px\u0022\u003e\u003cstrong\u003e= 2.10\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eThis means Exide Industries is trading over 2.10 times its book value.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide04\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Price-To-Earnings-Ratio\u0027 style=\u0027padding:4.9% 4.7%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2 style=\u0022text-align: left\u0022\u003e\u003cstrong\u003e13.3 Price To Earnings Ratio\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003ch5\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-51613 size-full\u0022 src=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio.png\u0022 alt=\u0022Price to Earning Ratio\u0022 width=\u00221058\u0022 height=\u0022806\u0022 srcset=\u0022https://www.5paisa.com/gujarati/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio.png 1058w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-300x229.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-1024x780.png 1024w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-768x585.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-50x38.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-100x76.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Price-to-Earning-Ratio-150x114.png 150w\u0022 sizes=\u0022(max-width: 1058px) 100vw, 1058px\u0022 /\u003e\u003c/h5\u003e\u003cp\u003eThe price-to-earnings ratio is a measure that reflects an organization\u0026#8217;s potential to make money. This potential is measured in terms of the value paid by equity holders for each stock unit. Thus, it indicates if a particular stock is cheaper or costlier than its competitors within the same industry. Additionally, the current price-to-earnings ratio can be compared to the company\u0026#8217;s past ratios to track its growth.\u003c/p\u003e\u003cp\u003eThe formula for the P/E ratio involves dividing the latest closing share price by its earnings per share, with the EPS calculation consisting of the company\u0026#8217;s net income (\u0026#8220;bottom line\u0026#8221;) divided by its total number of shares outstanding.\u003c/p\u003e\u003cp style=\u0022padding-left: 120px\u0022\u003e\u003cstrong\u003eP/E Ratio = \u003c/strong\u003eShare Price/Earnings Per Share\u003c/p\u003e\u003cp\u003eHigh \u0026amp; Low P/E Ratio \u0026#8211; A lower P/E ratio means that companies are using their resources to produce the maximum amount of profit possible \u0026#8211; which ultimately benefits investors. Investors are always looking for companies that increase in value due to their scrupulous use of shareholders money. A high P/E ratio could mean that a stock price is high compared to earnings and might be overvalued.\u003c/p\u003e\u003cp\u003eFor Example- for Exide Industries-\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003ePAT= Rs.758.28crs\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eTotal Number of Shares = 85 Cr\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003eEPS= 758.28/85= Rs.8.92\u003c/p\u003e\u003cp style=\u0022padding-left: 40px\u0022\u003e\u003cstrong\u003eP/E= 171/8.92= 14.1x\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eThis means investors are willing to pay 14.1 times for purchasing the equity shares of Exide Industries\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003cscript type=\u0027text/javascript\u0027\u003ejQuery(document).ready(function()  {jQuery(\u0027#text_slider\u0027).owlCarousel({items  :  1,smartSpeed  :  400,autoplay  :  false,autoplayHoverPause  :  false,smartSpeed  :  400,fluidSpeed  :  400,autoplaySpeed  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Valuation Ratios Valuation ratio is conducted to decide whether the stock of a company is currently selling at attractive (cheap/undervalued), fair (rightly priced) or expensive (overvalued) valuations. It is done post-financial analysis, to select stocks for further analysis. 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