How to value a business or stock
Download the free financial ratio ebook and find out which four ratios to use to value any business.
Valuation, or market value, ratios are used to determine the value of a stock or security when compared to a certain measure like profits or enterprise value. In this section, we cover the most important valuation ratios you need to know.
What are valuation ratios?
Valuation ratios, sometimes called market value ratios, are measurements of how appropriately shares in a company are valued and what type of return an investor may get. By calculating the market value a potential investor can see if the shares are overvalued, undervalued, or at a fair price. It also helps determine how much a potential investor should buy.
There are several different valuation ratio calculations that can be done to find the market value of a company or stock. Understanding how each ratio works can give you a better evaluation of a company’s financial health.
List of valuation ratios
Below is the complete list of valuation ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
- Accumulated Depreciation to Fixed Assets RatioThe accumulated depreciation to fixed assets ratio is a measurement to compare the amount of depreciation for a physical asset with its total value.
- Annual Percentage YieldThe annual percentage yield (APY) helps a business or investor to understand how much they are earning from the money they have invested with compounded interest.
- Book Value Per ShareBook value per share (BVPS) is the minimum cash value of a company and its equity.
- Capital Asset Pricing ModelThe Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset.
- Cash Reinvestment RatioThe cash reinvestment ratio, also known as the cash flow reinvestment ratio, is a valuation ratio used to measure the percentage of annual cash flow that the company invests back into the business as a new investment.
- Correlation CoefficientThe correlation coefficient, also called the Pearson correlation, is a metric that reflects the relationship between two numbers.
- Dividend Payout RatioThe dividend payout ratio (DPR) is the amount of money that a company pays in dividends to its shareholders in comparison to its net income.
- Dividend Per ShareDividend per share (DPS) is an amount of money paid by a company to its shareholders.
- Dividend YieldDividend yields are the financial ratio measuring the dividend paid out by a company relative to the current market value of the shares owned.
- Doubling Time (Rule of 70)Doubling time (also known as the rule of 70) is the amount of time that it takes for a quantity of something to duplicate in size.
- Enterprise Value (EV)Enterprise value (EV), also known as firm value, is a measure of the total value of a company.
- Free Cash Flow (FCF)Free Cash Flow (FCF) is a methodology of calculating the amount of cash available for a company to pay its securities holders such as equity holders, preferred stockholders, debt holders, and convertible securities holders.
- Free Cash Flow to Equity (FCFE)Free Cash Flow to Equity (FCFE) is a valuation metric that determines the amount of cash that is potentially available to equity shareholders after all the expenses of the company have been taken care of.
- Free Cash Flow to Firm (FCFF)Free cash flow to the firm (FCFF) is the amount of cash flow left from operations for distribution after paying all other expenses.
- Free Cash Flow to Sales RatioFree cash flow-to-sales is a performance ratio that looks into a company’s operating cash flows after subtracting all sales-relative capital expenditures.
- Holding Period Return (HPR)Holding period return (HPR), also known as holding period yield, is the total return earned by an investment throughout its entire holding period.
- Internal Rate of ReturnInternal Rate of Return (IRR) is a discount rate that is used to identify potential/future investments that may be profitable.
- Net Fixed AssetsNet fixed assets is a metric that evaluates the net value of a company’s fixed assets.
- PEG RatioThe PEG ratio (price-earnings to growth) is a valuation metric that describes the relationship between the price of a stock, the earnings generated per share and the growth rate.
- Price Earnings to Growth and Dividend Yield (PEGY)Price earning to growth and dividend yield (PEGY) is a metric used in stock analysis that measures a stock’s potential for future earnings growth and dividend payments.
- Price To Book RatioThe price to book ratio (P/B ratio) determines how over or undervalued a company stock is.
- Price to Cash Flow RatioThe price to cash flow ratio (P/CF) is a stock valuation metric for a company’s stock price value with respect to its per-share operating cash flow.
- Price to Earnings RatioThe price to earnings ratio (P/E Ratio), also known as the Price Multiple or Earnings Multiple, is a ratio used for measuring the value of a company.
- Price to Sales RatioPrice-to-sales ratio (P/S ratio or PSR), also known as the sales multiple or the revenue multiple, is a valuation ratio that measures the price an investor is willing to pay for a company’s stock relative to its revenue.
- Residual Income (RI)Residual income (RI), also known as economic profit, is income earned beyond the minimum rate of return.
- Retention Ratio (Plowback Ratio)The retention ratio, also called the plowback ratio, is the portion of company earnings that stays within its coffers as opposed to earnings distributed among shareholders.
- Rule of 72The rule of 72 is a formula that is used to assess how long it will take a venture to double its initial investment amount based on a certain interest rate.
- Sharpe RatioThe Sharpe ratio measures an investment’s risk-adjusted returns within a certain period, and it was originally developed by the American economist, William F.
- Sortino RatioThe Sortino ratio is a measurement of an asset’s rate of return, adjusted for risk.
- Treynor RatioThe Treynor ratio, also called the reward-to-volatility ratio, measures how much excess return is produced by a portfolio per unit of risk that comes with it.
- Weighted Average Cost of Capital (WACC)The weighted average cost of capital (WACC) is a calculation of a company or firm’s cost of capital that weighs each category of capital (common stock, preferred stock, bonds, long-term debts, etc.