P/E ratio P/S P/CF PEG and P/B explained. Stock multiples or financial ratios every investor must know to increase profit in 2023.
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There are a whole range of financial ratios you can compare and the most commonly used and most popular is the P / E ratio. P / E stands for price to earnings and is simply the share price devided by the company earnings per share.
Sometimes the P / E ratio alone is not always so useful when it comes to comparing companies. Especially when you compare more fast-growing companies that can often have very high P / E ratios. So then you can instead look at the PEG ratio or the price earnings to growth, which is simply the P / E ratio divided by the expected growth percentage that you think the company will have.
Most often, you want the PEG number to be less than 1.5 so that the company is not considered overvalued. And it is also usually assumed that the P / E ratio will be roughly the same as the expected growth. That is, the PEG number should be around 1. But if the P / E ratio is less than the expected growth, or if the PEG number is less than 1, you may have found an undervalued stock and a good buy.
An alternative to the P / E ratio that some prefer is price to cash flow the P / CF or simply the share price divided by the cash flow. The cash flow can be interesting to look at instead of the earnings because the earnings can be changed with different accounting tricks while the cash flow, money in minus money out cannot be manipulated in the same way. Like the other stock ratios, this also varies depending on the industry. There is no optimal figure here, but a lower P / CF ratio can mean that the stock is undervalued while a higher figure can mean that it is potentially overvalued. P / E ratios and PEG ratios can be great key ratios, but they don’t work for companies that havn’t made any profit yet. These companies often report losses and the P / E ratio then becomes negative and that tells us nothing.
Then it may be better to look at the P / S ratio or price to sales ration. This is simply the share price divided by the sales per share. A lower P / S ratio may mean that the share is undervalued, but it may also mean that the market does not have such high expectations that this company will be able to increase its profit or even that the earnings will decrease. Maybe there is then potential to earn more if the company manages to turn thigs around, but there is also the risk that the company doesn’t succeed in doing so and the price instead falls. A high P / S ratio can mean that the market has high expectations of the company and therefore there is a risk that the company will not succeed in reaching the market's expectations and the price will fall for this reason.
Another interesting key figure is the price to book P / B or simply the share price divided by book value per share. The book value is simply what would remain if a company sold all its assets and deducted any liabilities. The P / B ratio, like the other key ratios, also varies with industry and therefore it is difficult to say exactly what is a good value here. You may like the P / B ratio especially if you are a value investor. A P / B ratio below 1 can mean that the company is undervalued, but it can also mean that there is something wrong with the company. Most often, however, the value is above 1, not least because the stock market is forward-looking and the price reflects future earnings potential. Things like the brand value or the value of the knowledge that exists within the company is difficult to put a price on and is therefore not included in the book value but is visible on the share price, so it is not really strange that the P / B ratio is over 1.
Reference:
Bodie, Z., Kane, A., & Marcus, A. J. (2020). Investments. New York: McGraw-Hill/Irwin.
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Disclaimer:
This content is for educational and entertainment purposes only. Money with Pennies does not provide investment, tax, or legal advice. Money with Penny may have an ownership interest in stocks or companies mentioned. Do not make buying or selling decisions based on this video. All investment involves risk and the possibility of loss. Past performance is not indicative of future results.
1 окт 2024
