## Basic Ratios of Stocks

To analyze the value of an action must analyze three basic ratios.

P/E Ratio. It is defined as market price  per share divided by annual earnings per share.

Various interpretations of a particular P/E ratio are possible, and the historical table below is just indicative and cannot be a guide, as current P/E ratios should be compared to current real interest rates:

N/A A company with no earnings has an undefined P/E ratio. By convention, companies with losses (negative earnings) are usually treated as having an undefined P/E ratio, even though a negative P/E ratio can be mathematically determined. Either the stock is undervalued, or the company’s earnings are thought to be in decline. Alternatively, current earnings may be substantially above historic trends or the company may have profited from selling assets. For many companies a P/E ratio in this range may be considered fair value. Either the stock is overvalued or the company’s earnings have increased since the last earnings figure was published. The stock may also be a growth stock with earnings expected to increase substantially in the future. A company whose shares have a very high P/E may have high expected future growth in earnings, or this year’s earnings may be considered exceptionally low, or the stock may be the subject of a speculative bubble.

Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.

Price-To-Book Value (P/BV): This ratio tells you how much you’re paying for every dollar of assets owned by the company, and you calculate it by dividing the market capitalization by the difference between total assets and total liabilities. The idea is to approximate how much money you could put your hands on if you shut down the business and sold off everything. As with most price multiple metrics, price-to-book is best used by comparing present multiples to historical averages. A value of 150% or less tells us that it may be a good buy. A value greater than 700 % indicates that the value may be a bubble.

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