Ratio Analysis - Financial Characteristics, Analysis of the company, Investing in Stock Markets Video Lecture | Investing in Stock Markets - B Com

market value measures with market value
measures there is information that we
need to obtain that is not readily
available on the financial statements to
calculate these measures we need the
stock price therefore these measures are
for only publicly traded companies for
our example we will just assume that
there are 40,000 outstanding shares and
the market price of the company stock is
$90 earnings per share
also known as EPS this measures exactly
what it says how much income does the
company generate per share the EPS is
calculated as net income divided by
outstanding shares for our example we do
three hundred sixty three thousand
dollars divided by forty thousand giving
us an earnings per share of nine dollars
and eight cents so this company earns
nine dollars and eight cents for every
share of outstanding stock now we can
use the earnings per share to calculate
the p/e ratio which is the price
earnings ratio the p/e ratio is defined
as price per share divided by earnings
per share our price for our stock is $90
and our earnings per share is nine
dollars and eight cents therefore our
p/e ratio is nine point nine one times
what this ratio implies is that the
market is willing to pay nine dollars
and ninety one cents for each dollar of
current earnings a high p/e ratio means
that the market expects the firm to
experience a lot of growth where a lower
p/e ratio indicates that the market
doesn't have a lot of faith in the
growth of the company analyst must be
careful when drawing conclusions from
the p/e ratio if a company experienced
income close to zero then as p/e ratio
would be very large however the market
price of the stock would probably start
to fall therefore ultimately lowering
the p/e ratio the mark
to book ratio the market to book ratio
measures how many times over investors
are willing to pay for stock relative to
the stocks book value the book value is
simple the company's equity divided by
the number of outstanding shares so the
markets a Book value is calculated as
market value per share divided by book
value per share and our case our book
value per share is two point three five
three million divided by forty thousand
shares which comes out to fifty eight
dollars and eighty six cents and our
market value is $90 per share so we do
$90 divided by fifty eight point eight
six cents giving us a market to book
ratio of 1.53 a market to book ratio of
less than one implies that the company
has not been performing well and
investors do not have a lot of faith in
the growth of the company usually value
investors look for low market to book
ratio z' but this does not always mean
that the company's stock is actually at
a good value market capitalization the
market capitalization is equal to the
stocks market value multiplied by the
number of outstanding shares this is an
important figure for any possible buyer
of all the outstanding shares in merger
or acquisition cases because it tells
them the minimum amount of money they
would need to come up with in order to
buy out the company the formula is price
per share times shares outstanding which
is ninety dollars times forty thousand
shares
enterprise value the enterprise value is
very similar to the market
capitalization except it tells a
perspective buyer of the company how
much money they would have to come up
with to buy out the company and pay off
all of its outstanding debt the
enterprise value is calculated as market
capitalization plus a market value of
interest-bearing debt minus cash the
enterprise value multiple analysts to
use valuation multiples in order to
estimate the value of a company's total
business to measure this the enterprise
value is divided by the earnings before
interest and tax depreciation and
amortization because it allows that
comparison of firms with different
capital structures it is calculated as
enterprise value divided by earnings
before interest and tax depreciation and
amortization we would expect a firm with
a high multiple to experience growth in
the future where we might not have much
faith in the growth of a company if they
have a low multiple finally we'll go
over some things just to consider there
are many problems with analyzing
financial statements there's no
underlying theory that gives us guidance
in creating benchmarks and making
judgment about value and risk because of
this we really can't say which ratios
are the most important also many firms
are conglomerates and have their hands
and many different types of businesses
because of this it's difficult to really
find a comparable company they're all
different and therefore they all operate
differently another problem that rises
is the fact that many companies have
spread out all over the world there are
different regulations different laws
different accounting principles across
borders which makes these companies
difficult to compare with each other I
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