## Wednesday, September 3, 2014

### Investment Valuation Ratios

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Series : Ratio Analysis    (24 th Post)
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### Or How to Estimate the potential of an attractive investment ?

This ratio helps us to understand  attractiveness  of a potential or existing investment and get an idea of its valuation.

The ratios covered under this are:

1. Investment Valuation Ratios: Price/Book Value Ratio
The Price / Book Value Ratio Helps us to compare the share price of a company with its Book Value & helps to analyze whether the share price is Overvalued or undervalued,

Formula: Price/Book Value Ratio = Stock Price Per Share / Book Value

2. Investment Valuation Ratios: Price/Cash Flow Ratio
The Price /Cash Flow  Ration Helps us to compare  the share price of a company to the Cash flow it generates,This is important for investors to evaluate the investment attarctiveness. Or the amount of cash flow it generates per share

Formula :Price/Cash Flow Ratio= Price per share / (Cash flow / Shares outstanding)

3. Investment Valuation Ratios: Price/Earnings Ratio (P/E)
The Price / Earnings ratio or P/E Ratio helps us to understand how much investors are ready to pay for each rupee of profit  .For example if an investor buys a stock with a P/E ratio of 15 he is willing to pay 15 times the Earnings per share. A high P/E ratio tells some investors that the stock is overvalued, and a low P/E ratio shows it’s undervalued.
This is one of the most popular of Ratios ,this ratio is further explained in detail with an easy way to interpret or analyse a company  How to Analyse  Stocks From PE Ratios

Formula: Stock Price Per Share / Earnings Per Share (EPS)

4. Investment Valuation Ratios: Price/Earnings To Growth Ratio
What does the PEG ratio stand for and how will it help us value stocks? The PEG ratio is simply this: the price to earnings ratio (P/E ratio) divided by estimated future earnings growth. The future growth generally uses the 5-year average figure (but you can also use the 3-year figure, your own forecast, or the “earnings guidance” provided by the company). Using this ratio we can estimate:
1.    XYZ has a PE of 72.3 and expected growth of 77% per year. The PEG ratio is 0.94.
2.    ABC has a PE of 11.04 and future growth expectations of 35% annually. The PEG ratio is 0.32.
3.    FGH has a PE of 166 and future growth expectations of 30% annually. The PEG ratio is 5.53.

if the PEG ratio is 1, it is fairly valued. If it is below 1, it is undervalued, and if the number is above 1, it is overvalued.

Formula: PEG Ratio =  (P/E ratio) /  (earnings growth)

5. Investment Valuation Ratios: Price/Sales Ratio
The Price / Sales ratio or P/S Ratio is similar to a P/E ratio accept for one difference of Sales per share instead of Earnings per share this helps us to understand how much investors are ready to pay for each rupee of Sale.  Or  The Price/Sales ratio, also called the "PSR", is a company's stock price divided by its annual sales per share
Generally Price/Sales ratio is by assuming that a PSR of 1.0 is right for all companies, and then hunting for "bargains" selling at a PSR of 0.5 or less.

Formula: P/S Ratio =  Stock Price Per share / Net Sales (Revenues) Per share

6. Investment Valuation Ratios: Dividend Yield
Dividend yield is the amount that the company pays to its share holders annually for the investments made; this ratio is expressed in percentage & indicated the attractiveness of investment in a company. A good investment opportunity is found in good companies giving increasing or consistent dividend yield over the years.

Formula:  Annual Dividend per share / Stock Price per Share

This Valuation ratio’s can be found online on the website
Example : Go to http://www.moneycontrol.com/financials/hdfcbank/ratios/HDF01  under the Tab “ Investment Valuation Ratios
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In my quest for learning value investing I came across Ratio Analysis & the importance of these ratios in analyzing a stock & comparing with its peers  , would like to share this with the community
Comments  /  Improvements and points worth considering are welcome

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