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When breaking down a stock’s value, investors use some stock value elements. There are some very common value elements that can tell you a lot about the value of a stock. The following financial ratios are very powerful tools to help summarize financial statements and the health of a company or business.
Price-to-Book Ratio
The price-to-book ratio refers to the value of the company if it is sold at present. Investors find this useful to know because many companies in mature industries weaken in terms of growth, but they can still be a good value based on their assets.
The book value often includes equipment, buildings, land, and any other things that can be sold, such as stock holdings and bonds.
With purely financial businesses, the book value can be volatile as these companies typically have a portfolio of assets that goes up and down in value.
Industrial companies usually have book values that are largely based on their physical assets, which lose their value every year according to the rules of accounting.
Price-to-Earning Ratio
The price-to-earnings ratio is arguably the most scrutinized of all the financial metrics. A stock can go up in value without significant earnings hike. However, the price-to-earnings ratio is what decides whether the stock price can stay up.
In other words, the stock price can fall down without earnings to back up the price. You can also think of the price-to-earnings ratio as the length of time a stock will take to pay back your investment if there is zero change in the business.
Investors also try to predict which stocks will gather progressively larger earnings. An investor will buy a stock with a high ratio if he or she believes that it will double its earnings every day.
An important reminder is that you should only compare the price-to-earnings ratios of companies in similar industries and markets.
PEG Ratio
Sometimes, the price-to-earnings ratio isn’t enough, so investors resort to using the price to earnings growth ratio.
Rather than simply looking at the price and earnings, the PEG ratio incorporates the historical growth rate of the company’s earnings.
The PEG ratio also shows you how the particular stock stands against another stock. The PEG ratio is gotten by taking the price-to-earnings ratio of a company and dividing it by the year-over-year growth rate of its earnings.
With lower PEG ratio comes a better deal that you can get for the stock’s future estimated earnings.
Dividend Yields
Dividend-paying stocks are appealing to many investors because when prices decline, you still get some paycheck.
The dividend yield shows how much of a dividend payment you’ll be getting for your money. You can divide the stock’s annual dividend by the stock’s price to get a percentage, and this percentage is the interest on your money.
You also have the additional chance at growth through the appreciation of the stock.
Even though it’s a simple principle, you still need to watch out for inconsistent or suspended dividend payments in the past. This simply means that the dividend yield of the stock can’t be depended upon.
At ProfitStar we strive to bring the best out of our students, guiding them through the complex world of financial markets.
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