Market value ratios are the financial metrics which are used to evaluate the stocks of publicly traded companies. These ratios are used to check whether the share’s prices are valued correctly in the market. If a share is overpriced, the price might fall in the future.
Types of Market Value Ratios
Conmanly used Market Value Ratios are
- Book Value per share
- Earning per share
- Price to Earnings Ratio
- Price to Book Ratio
- Dividend Yield Ratio
Book Value Per Share
It is the ratio of equity available to common stockholders (shareholders) to the number of shares outstanding. Book value per share can provide information on how a company’s stock is valued.
Book Value Per Share = (Shareholder's Equity - Preferred Stock) / Average Share Outstanding
Average number of shares outstanding is used to avoid skew results. Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.
Earning per Share
Earnings per share represents that portion of company income that is available to the holders of its common stock. It is calculated as company’s net income minus any dividends on preferred shares, divided by the number of common shares outstanding. The number of shares outstanding is commonly expressed as the weighted average number of shares outstanding over the reporting period.
Earnings per share = (Net income - Preferred stock dividends) / Average Shares Outstanding
Price to Earnings Ratio
It is used to check whether the shares are over or underpriced as compared to its earnings potential. It is defined as the ratio of company’s stock price to the company’s earnings per share. The price to earnings ratio is often called as P/E ratio.
P/E Ratio = Market Price per Share / Earnings per Share
Price to Book Ratio
This ratio is used to evaluate a company’s current market value relative to its book value. It is calculated by dividing market capitalization by the most current quarter’s book value per share. The price to book ratio is often called as P/B ratio.
Price to Book = Market Capitalization / Net Book Value
Market Capitalization is the current stock price of all outstanding shares. The book value is the amount that would be left if the company liquidated all of its assets and repaid all of its liabilities. The book value equals the net assets of the company and comes from the balance sheet.
Market Capitalization = Current Market Price of Share x Total outstanding Shares Net Book Value = Total Assets – Total Liabilities
Dividend Yield Ratio
It measures the annual value of dividends received relative to the market value per share of a security. It is defined as the ratio of dividend per share to the market value of single share.
Dividend Yield = Dividend per share / Market value per share
Market value per share is the current share price of the company. Dividend per share allows an investor to determine how much income from the company he or she will receive on a per-share basis. Formula for calculating dividend per share is
Dividend Per Share = Total Dividends Paid / Total Shares Outstanding