Investment Valuation Ratios

Investment valuation ratios compare current share price to various per-share performance indicators such as earnings, dividends, sales, and operating cash flow to help investors evaluate whether the stock is overvalued, fairly, or undervalued as an investment opportunity. Income, value and growth investors have different investment objectives and thus may have different views on a stock’s value relative to its price.

The relationship between a company's stock price and its per-share metrics is also referred to as a multiple. A multiple can be examined on an absolute basis and used highlight historical trends, but it is more meaningful when compared to competitors and the overall market. As with most ratios, investment value ratios can have many variations and an investment decision should not be made based on a single ratio.

[sidebar] Per Share Data. Any item in a company’s financial statements can be calculated on a per-share basis. For balance sheet items (such as debt or book value per share), the denominator is the period end shares outstanding. For income, expense, and cash flow items, the denominator is the weighted average number of shares outstanding during the period.

Basic and Diluted. Companies with outstanding stock options and other convertible securities report diluted earnings per share in addition to basic earnings per share. This treatment recognizes the potential dilution (an increase in the number of shares outstanding) that would occur if all convertible securities were immediately converted to common shares.

Discontinued Operations. When companies sell off or shut down a component of their operations, earnings per share (both basic and diluted) will be reported with an additional qualification – earning...

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...e latest declared dividend is annualized (multiplied by four for a quarterly dividend, or multiplied by 12 for a monthly dividend) and compared to the current stock price to generate the expected annual yield. For a growth investor, dividend yield (or the lack of one) may be irrelevant. However, for an income investor, a stock's dividend yield and its dividend growth rate might well be the only valuation measures that matter.

Investors use valuation ratios to help determine a company’s investment merit and to find a good entry or exit point in the market. Investor relations professions should be well versed in the basic investment valuation ratios as well as the relevant industry or sub-sector benchmarks and variations. As stock valuation depends on investor sentiment, it is important to understand not only where your company ranks relative to its peers, but why.