High Price to Book Ratios – Proper Interpretation and Evaluation
With stock investing, one of the valuation ratios used is the price to book ratio. It identifies the spread between book value and market value for a share of stock.
Business Ratios
Business ratios are tools used to compare similar businesses within the same industry. They are financial metrics evaluating market valuation, performance, liquidity, leverage and activity. In general, business ratios are an excellent tool to value stocks.
Valuation Ratios
Valuation ratios are the only group of business ratios that are externally and not internally driven. The market dictates valuation ratios.
Price to Sales Ratio: A Poor Indicator of Value
The price to sales ratio is a marginal valuation ratio at best. It is really an offshoot of an antiquated concept of valuing a business.
Performance Ratios
The most common thought among business owners, consultants, investors and students is the ‘bottom line’. The proper word is of course ‘PROFIT’.
Leverage Ratios
Leverage ratios refers to the use of borrowed funds to increase the profits of the company.
Price to Cash Flow
The price to cash flow ratio is a valuation tool used to assist buyers and sellers of stock in determining timing of purchases or the disposition of shares.
Activity Ratios
The majority of activity ratios measure the ability of the company to turn assets into earnings.
20 Private Industry Sectors
The gross domestic product comprises 20 private industry sectors and two government groups. All together 22 distinct sectors contribute to the gross domestic product (GDP).
Liquidity Ratios
Liquidity ratios are a group of ratios used to measure the ability of a business operation to meets its current obligations.
Return on Equity
Another performance ratio used in business is return on equity. It is similar to return on assets except return on equity uses one section of the bottom half of the balance sheet.