Valuation ratios are the only group of business ratios that are externally and not internally driven. The market dictates valuation ratios. All three core valuation ratios are determined by the market price of the stock. All three have the same numerator, the market share price or market capitalization value of the company.
The price to sales ratio is a marginal valuation ratio at best. It is really an offshoot of an antiquated concept of valuing a business. In the past, one of the more common methods to value a business deal was to use a multiplier of sales. The price to sales ratio used with business ratios is similar. Simply stated, the price to sales ratio is the entire market value of the company (the price) as a function of revenue (sales).
All hard costs are directly assignable to a job. These costs are most often tangible in nature, but there are many intangible costs that can be directly assigned to the job. Thus some intangible costs are ‘Hard’ costs. A contractor must understand the difference between hard and soft costs in order to properly markup assignable costs to determine the final sales price of the project built.
Leverage refers to the ability to lift a heavier load using a fulcrum and a lever. The common image is a board on a triangular pivot point with a heavy weight (M1) on one end and a lighter weight (M2) on the other. As the lever shifts towards the lighter load it starts to lift the heavier weight. In effect, as the distance ‘b’ gets longer, it becomes easier to lift M1. This principle works with finances too. How so?
Value investing is a concept of buying and selling stocks based on business fundamentals and not as a reaction to news or market trends. It is a well accepted principle that often the market overreacts to news causing stocks to plummet in price or escalate in value. Value investors ignore this and use sound business fundamentals to trade stock. Much of historical wealth accumulation is based in value investments. There are no short-cuts or sudden actions taken by value investors. All decisions are derived by business analytics and trendlines.
The price to cash flow ratio is a valuation tool used to assist buyers and sellers of stock in determining timing of purchases or the disposition of shares. Unlike the other valuation ratios, this particular ratio utilizes the cash flows statement in determining the outcome. The formula is simple:
Price to Cash Flow = $Market Price of a Share of Stock/Cash Flow in Dollars Per Share of Stock
The majority of activity ratios measure the ability of the company to turn assets into earnings. All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price. Even service based businesses do this. Labor is purchased for a certain value and then sold for a much higher price. Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit. There isn’t any business out there that doesn’t exercise this basic business principle.
Restoration contractors face a different set of business dynamics than the traditional new home builder or remodeler. Unlike the builder and remodeler, restoration companies deal with a third party in their contract negotiations and performance. The new home builder uses the market to determine the value of their product, whereas the restoration contractor is forced to perform services based on pricing models set by insurance underwriters.