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FINANCIAL STATEMENT ANALYSIS
Market Value Ratios
Market view of
past and future
performance
Market Value Ratios relate the company's stock price data with the
earnings and capital structure of the company. This information gives
the analyst an idea of the view investors have of the company's past
performance and also their view of the firm's future prospects. These
ratios include:
·
Price / Earnings Ratio
·
Market / Book Ratio
Price / Earnings Ratio
Amount investors
will pay per
dollar of profit
Price / Earnings (P/E) Ratio shows how much investors are willing
to pay for every dollar of the company's reported profits. It is calculated
by dividing the market price per share of
Common Stock
by
E
ARNINGS
PER
SHARE
(EPS). The earnings per share calculation is
N
ET
I
NCOME
A
VAILABLE TO
C
OMMON
divided by the
Number of Shares Outstanding
. The
Number of Shares
can be found next to the
C
OMMON
E
QUITY
figure on the
Balance Sheet. Be sure to check the units on the
Number of Shares;
they
may not always be the same as the other figures on the Balance Sheet. On
XYZ Corporation's Balance Sheet, all figures are in millions.
Earnings per share
=
(Net Income to Common) / (Number of shares)
=
($6.2) / (8.0 shares)
=
$0.775 per share
For our XYZ Corporation example, if the price of XYZ stock is
$12.70 per share, the P/E Ratio is:
Price / Earnings = (Market price per share) / (Earnings per share)
= ($12.70) / ($0.775)
= 16.4 times
The P/E Ratio indicates that the common shares are selling for 16.4
times the
E
ARNINGS
of XYZ Corporation.