Valuation Ratios

Valuation ratios are derivatives of the share price. The ratios compare the existing price per share of stock against certain business financial values. These include share price against 1) earnings, 2) sales and 3) cash flow.

Valuation Ratios

Valuation Ratios

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. 

Price to Sales Ratio: A Poor Indicator of Value

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).

Business Ratios (Introduction)

Percentage of Completion

Ratios are used in business to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase. Business ratios essentially equalize different size companies within the same industry. A common mistake is to compare two different industries within the same sector (explained below).

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