Investment Valuation Ratios

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Investment Valuation Ratios
Investment Valuation Ratios are used by investors to estimate the attractiveness of a
potential or existing investment and get an idea of its valuation.
Investment valuation ratios compare relevant data that help users gain an estimate of
valuation.
Investment Valuation Ratios
1. Per Share Ratios
 Dividend Per Share (DPS)
 Earnings Per Share (EPS)
2. Dividend Payout Ratio (DPR)
3. Dividend Yield Ratio
4. Price / Earnings ratio (PER)
5. Price to Cash Flow
6. Price to Book Value
7. Price to Earnings Growth (PEG)
8. Enterprise Value (EV) multiple

Per Share Ratios
Dividend per Share (DPS)
 Total dividends paid out over an entire year (including interim dividends but not
special dividends) divided by the number of outstanding ordinary shares issued.
DPS = (Sum of total dividends – special dividends) / number of outstanding
shares
Earnings per Share (EPS)
 Portion of a company's profit allocated to each outstanding share of common stock.
 EPS serves as an indicator of a company's profitability.
 Diluted EPS expands on basic EPS by including the shares of convertibles or
warrants outstanding in the outstanding shares number.
 Single most important variable in determining a share's price.
 Also a major component used to calculate the price-to-earnings valuation ratio.
EPS = (Net Profit – Preference dividends) / Average outstanding shares
Avg outstanding shares = (Shares outstanding at end of previous year + Shares
outstanding at end of current year) / 2

Dividend Payout Ratio
 It calculates the percentage of earnings paid out to shareholders as dividends.
 A stable dividend payout ratio indicates strong financial position and a solid dividend
policy by the board of directors.
 A reduction in the dividends paid out by the company is generally not well taken by
investors and could have an adverse impact on the stock price.
 Mature companies would tend to have a higher payout ratio.
Dividend Payout Ratio = Dividend per Share / Earnings per Share

Dividend Yield Ratio
 A stock's dividend yield is expressed as an annual percentage and is calculated as
the company's annual cash dividend per share divided by the current price of the
stock.
 It is a way to measure how much cash flow you are getting for every rupee invested.
 Income investors value a dividend-paying stock, while growth investors have little
interest in dividends, preferring to get large capital gains.
 It is a matter of historical record that dividend-paying stocks have performed better
than non -dividend paying stocks over the long term.
Dividend Yield Ratio = Annual dividend per share / Current Stock price

Price to Earnings Ratio (PER)
 Defined as market price per share divided by annual earnings per share.
 P/E multiples vary across industries and also depends on company’s growth path.
 A stock with a high P/E ratio tells that investors are expecting higher earnings growth
in the future compared to the overall market, as investors are paying more for today's
earnings in anticipation of future earnings growth, these are called growth stocks.
 Conversely, a stock with a low P/E ratio suggests that investors have more modest
expectations for its future growth compared to the market as a whole.
 The growth investor views high P/E ratio stocks as attractive buys and low P/E stocks
as unattractive prospects.
 Value investors are not inclined to buy growth stocks as they consider them to be
overpriced so they buy what they see as underappreciated and undervalued stocks,
at a bargain price, which, over time, will hopefully perform well.

PER & P/CF
 One should look at the current P/E ratio for the overall market (Benchmark Index like
Sensex or Nifty), the company's industry segment (Sectoral Index), and two or three
direct competitor companies.
 This comparative exercise can help investors evaluate the P/E of their prospective
stock purchase as being in a high, low or moderate price range.
PER = Current stock price / Earnings per share (EPS)
Price to Cash Flow Ratio (P/CF)
 This ratio compares the stock's market price to the amount of cash flow the company
generates on a per-share basis.
Price / Cash Flow = Current Stock Price / Operating cash flow per share

Price to Book Value (P/BV)
 This ratio compares the company’s stock price to its book value per share. It shows
how much the shareholders are paying for the net assets of a company.
 Generally expressed as a multiple (how many times the stock is trading compared to
its net assets value).
 If a company’s price is less than its book value it could indicate a good buying
opportunity assuming that the company’s fundamentals are in place.
 The low valuation could be due to some transitory circumstances or an indication of
poor fundamentals and hence the low opinion and valuation of the company would be
right, in which case it would mean a bad investment option.
 Used by investors to look at capital-intensive or finance-related businesses like
banks.
Price to Book Value = Current stock price / Shareholder’s equity per share

Price to Earnings Growth
 PEG ratio is a refinement of the P/E ratio and factors in a stock's estimated earnings
growth into its current valuation. The PEG ratio helps investors to test the reliability of
that assumption
 If the PEG ratio indicates a value of 1, it means that the market is correctly valuing
(the current P/E ratio) a stock in accordance with the stock's current estimated
earnings per share growth.
 If the PEG ratio is less than 1, it means that EPS growth is potentially able to surpass
the market's current valuation. In other words, the stock's price is being undervalued.
 Stocks with high PEG ratios indicate - that the stock is currently overvalued.
 This method is most helpful in case of high P/E stocks. These stocks tells that
investors are willing to buy at a higher price today in anticipation of strong growth.
PEG = PER / EPS Growth

Limitations to PEG
 Although the PEG ratio is a more refined version of the P/E ratio, it still suffers from
the same limitations as the latter.
 Both use forecasted numbers which involve human judgement (hence there could be
errors while making projections).
 Investor sentiments during a bullish market are always optimistic and vice versa
during a bearish market.

Enterprise Value Multiple
 Enterprise Value Multiple is calculated by dividing a company's "Enterprise
Value (EV)" by its (EBITDA) Earnings Before Interest, Taxes, Depreciation
Amortization.
 This measurement allows investors to assess a company on the same basis as
that of an acquirer.
 As a rough calculation, Enterprise Value multiple serves as a proxy for how long
it would take for an acquisition to earn enough to pay off its costs (assuming no
change in EBITDA).
 Enterprise Value is calculated as a total of Market Capitalisation, Debt, Preferred
Stock holding, Minority Interest less Cash and Cash equivalents.
Enterprise Value Multiple (x) = Enterprise Value / EBITDA

Investment Valuation Ratios

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