Below are a series of other metrics including market
ratios and valuation multiples. The important thing to note is the
share price used is from a past date, so depending when you’re
looking at the report it may pay to recalculate the figures based on
a more current stock price. In any case these analytics are
important in determining value, for instance you may like a high
dividend yield or earnings yield as a margin of safety, similarly
you may want to filter out companies with low EV/EBITDA multiples.
But of course with all financial analysis you need to look at the
big picture, sure it may have a high earnings yield but then it
could also mean that the market is pricing the company’s earnings
quite low perhaps in recognition that future earnings levels may be
uncertain, or because of any number of potentially negative factors.
Share price
This is simply the market price (last price a transaction
occurred at) of the company, taken on the day indicated.
Therefore any ratios that use this as an input are current as of
the date indicated here.
Market cap
= Number of shares times the share price (this gives the
total value of the company’s equity based on the market price
of the shares, this gives and indication of the market value of
equity (MVE) of the firm – however it is more a tool of
interest than decision making as relying on this figure e.g. for
a purchase of the company ignores the potential premiums one
would have to pay during the process of accumulating stock in
the company)
Enterprise value (EV)
= Total Liabilities plus MVE or market cap (other variations
of this include taking the market value of debt, however we have
opted to simply take the market cap as the MVE and total
liabilities to produce this figure: EV is an alternative figure
to market cap and can be seen as the takeover price as a buyer
would have to also assume the company’s debt, EV is especially
used in buyouts and can be used to produce two valuable ratios;
EBITDA/EV and EV/EBITDA – both of which are explained below.)
EV/EBITDA
=Enterprise value divided by EBITDA (this is a valuation
ratio and is useful in comparing how a company is valued by the
market, but also it can be used to indicate the payback period
(i.e. how many years it would take to payback the initial
investment); meanwhile the reciprocal of this ratio EBITDA/EV
shows the cash return on investment, this can be used to compare
profitability across companies and as a basic decision tool e.g.
if EBITDA/EV is greater than WACC (weighted average cost of
capital) invest etc.)
P/E Ratio
= price per share divided by earnings per share (this is
similar to the previous ratio in that it is a valuation multiple
based on earnings, however it focuses on net profit rather than
cash profit, and only uses MVE – it is a commonly used figure
in investing and can give a quick indication of how expensive
the stock is. Higher P/E means a higher valuation – typically
the market is pricing in the growth prospects of the company;
value investors prefer companies with lower P/E ratios. The
reciprocal of this ratio is the earnings yield, which is also
explained below.)
P/NA ratio
= price per share divided by net assets per share (this
valuation ratio instead values the company based on its net
assets, thus using it you can assess how the market is valuing
the company’s net assets, however in a world where cash is
king this ratio can be somewhat meaningless as valuations are
typically based on cashflows. However this ratio can be used to
install a margin of safety e.g. by only considering companies
that have a P/NA ratio lower than 1 (i.e. the price you pay is
lower than the net asset value, thus in the event of bankruptcy
–if- the NAV figure held true one would in theory have some
net assets to back their shares); this ratio is most useful in
looking at investment companies and property trusts.)
Dividend yield
= dividend per share divided by price per share (gives a
gross return on investment figure based on price paid and
dividends paid – assumes dividend payment will grow with the
share price, this figure gives an indication of return on
investment based on dividends, however it ignores total return,
but can be useful in value investing and filtering – and
decisions at the margin.)
Earnings
yield (E/P)
= Earnings per share divided by price per share (i.e. the
reciprocal of the PE ratio – this figure shows the underlying
return the investor will get based on the price they would have
to pay, however what happens with this return is a completely
different story and relies on the management; the return can be
used to buy back stock, be paid out as dividends, or be
reinvested in the firm (among other things) – so the investor
is at the mercy of the management to put this return to the most
profitable use.)
