armember-membership domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114ARMember domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114Valuation ratios are the only group of business ratios<\/strong><\/span><\/a> that are externally and not internally driven. The market dictates valuation ratios. All three core valuation ratios are determined by the market price of the stock. All three have the same numerator, the market share price or market capitalization value of the company.\u00a0<\/span><\/p>\n The denominator for each ratio is the particular ratio\u2019s namesake. For example, the price to earnings ratio is the entire market capitalization of the company divided by the most recent 12 months of earnings. Here is the actual Price to Earnings Ratio on 05\/01\/19 for Microsoft:<\/span><\/p>\n Microsoft\u2019s P\/E Ratio = Market Capitalization on 05\/01\/19<\/u> = $1,000,000,000,000 (1.0T)<\/u> = 28.57<\/span> The Wall Street Journal has the trailing twelve months PE as 28.42 on 05\/01\/19.<\/span><\/p>\n The other two core valuation ratios are:<\/span><\/p>\n This section of the book explains these three ratios and their respective nuances. For the reader, there are two important attributes of valuation ratios that must be grasped to be a good investor.<\/span><\/p>\n First off, valuation ratios are market indicators and as such, investors rely heavily on their values in their respective decision models. The first section below explores this in more detail and how the reader must use some common sense when using valuation ratios in their respective decision models.<\/span><\/p>\n Secondly, valuation ratios are easily distorted due to the respective underlying elements in their equations. The second section below will explain this and how important it is for the user to ascertain the driver of value related to the respective ratio.<\/span><\/p>\n Finally, an illustration of how unreliable the ratios are is presented. With greater knowledge of the valuation ratios, a user can properly equate their results into their decision model on whether to buy or sell a stock investment.<\/span><\/p>\n The most important attribute of valuation ratios is this: valuation ratios are determined by the market, not by the company\u2019s performance. As stated before, the numerator is an outside value and is not a function of any of the five financial sections of the company. The numerator is always the price per share or market capitalization. A user of valuation ratios understands that either the per share price or the market capitalization is used and they both mean the same. Market capitalization is merely the price per share times the number of shares in the market (shares outstanding). To assist you in understanding this relationship, look at the following table:<\/span><\/p>\n Company<\/u><\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Price\/SH (05\/03\/19)<\/u><\/strong>\u00a0 \u00a0#of Shares Outstanding<\/u><\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0 Market Capitalization<\/u><\/strong><\/span> Market capitalization is merely the value of all shares. Thus, when using any valuation ratio, the denominator may either be as a single share or for all shares. The key is that the denominator must match the relationship.<\/span><\/p>\n Most importantly, the price is determined by buyers and sellers in the market conducting transactions based on the principle of greed, i.e. getting the most out of the transaction. Since most activity, via volume, is conducted by institutional buyers (retirement plans, mutual funds, insurance companies, governmental agencies and holding companies), it is assumed that the value or current trading price is the going true worth of the stock. Why does it fluctuate throughout the day and throughout the share\u2019s lifetime?<\/span><\/p>\n The answer is expectations. Most buyers are convinced that the stock will improve in value over time and that they have seen something in the financial statements, government reports, news releases and social media that the company will perform better in the future.\u00a0 Whereas, sellers believe otherwise.\u00a0\u00a0<\/span><\/p>\n Many of these buyers and sellers use business ratios to assist them in understanding the company\u2019s overall performance. Thus, valuation ratios are really the resulting outcome of the other four categories of business ratios. This leads into the second attribute of valuation ratios, they are easily distorted by the financial results.<\/span><\/p>\n The three primary valuation ratios are:<\/span><\/p>\n Each valuation ratio\u2019s denominator is easily manipulated, even under Generally Accepted Accounting Principles (GAAP). This is why it is important for the user to understand each valuation ratio\u2019s business elements. Each section below explains each ratio\u2019s underlying elements and some tools used in accounting to manipulate the results thus affecting the outcomes.<\/span><\/p>\n Every publicly traded company issue financial statements. One of the financial sections is a set of \u2018Notes\u2019. Usually within the first five notes is a statement by the company that they use estimates to determine certain values on the income statement and balance sheet. Estimates are customarily determined for:<\/span><\/p>\n Historically, the estimates are reasonable and reliable. However, the fact is they are used. Often, estimates are so extreme, the value is unreliable and affects the stock price negatively. A good example is the estimate made by PG&E related to the cause of the famous \u2018Camp Fire\u2019 from November\/December 2018. Here is the actual note:<\/span><\/p>\n (3) The Utility incurred costs, net of insurance, of $9.5 billion (before the tax impact of $2.7 billion) during the twelve months ended December 31, 2018 associated with the 2018 Camp fire. This includes accrued charges of $10.5 billion (before the tax impact of $2.9 billion) during the twelve months ended December 31, 2018 related to estimated third-party claims.<\/span><\/p>\n
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Past 12 Months of Earnings\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $35,000,000,000 (35.0B)<\/span>
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0(Approximate Values)<\/span><\/p>\n\n
Valuation Ratios are Market Indicators<\/strong><\/span><\/h2>\n
\nMicrosoft\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $128.90\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a07.67 Billion\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $988.66 Billion<\/span>
\nVerizon\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$57.54\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a04.14 Billion\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $238.22 Billion<\/span>
\nApple\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $211.75\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 4.70 Billion\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $995.23 Billion<\/span>
\nKroger\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $25.74\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 798 Million\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$20.54 Billion<\/span><\/p>\nDistortion by the Underlying Elements of Valuation Ratios<\/strong><\/span><\/h2>\n
\n
Earnings<\/strong><\/span><\/h3>\n
\n