Valuation, or market value, ratios are used to determine the value of a stock or security when compared to a certain measure like profits or enterprise value. In this section, we cover the most important valuation ratios you need to know.
What are valuation ratios?
Valuation ratios, sometimes called market value ratios, are measurements of how appropriately shares in a company are valued and what type of return an investor may get. By calculating the market value a potential investor can see if the shares are overvalued, undervalued, or at a fair price. It also helps determine how much a potential investor should buy.
There are several different valuation ratio calculations that can be done to find the market value of a company or stock. Understanding how each ratio works can give you a better evaluation of a company’s financial health.
List of valuation ratios
Below is the complete list of valuation ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
- Dividend Yield
- Capital Asset Pricing Model
- Internal Rate of Return
- Price to Earnings Ratio
- Weighted Average Cost of Capital (WACC)
- Price to Sales Ratio
- Rule of 72
- Free Cash Flow to Equity (FCFE)
- Annual Percentage Yield
- Doubling Time (Rule of 70)
- Dividend Per Share
- Dividend Payout Ratio
- Book Value Per Share
- Price To Book Ratio
- Holding Period Return (HPR)
- Retention Ratio (Plowback Ratio)
- Sortino Ratio
- Sharpe Ratio
- Residual Income (RI)
- Treynor Ratio
- Price to Cash Flow Ratio
- Net Fixed Assets
- Enterprise Value (EV)
- Accumulated Depreciation to Fixed Assets Ratio
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow (FCF)
- PEG Ratio
- Correlation Coefficient
- Free Cash Flow to Sales Ratio
- Cash Reinvestment Ratio
- Price Earnings to Growth and Dividend Yield (PEGY)
More financial ratios
1. What are valuation ratios?
Valuation ratios, or market value ratios, are measurements of how appropriately shares in a company are valued and what type of return an investor may get. By calculating the market value, a potential investor can see if the shares are overvalued, undervalued, or at a fair price. It also helps determine how much a potential investor should buy.
2. How is the valuation ratio calculated?
Each valuation ratio is calculated differently, but all use various measures of a company’s stock value to come up with a ratio. Most ratios use the price of a share, earnings, or assets to determine a fair market value.
3. What do valuation ratios tell you?
Valuation ratios tell you how the market values a company’s stock in comparison to its earnings, assets, or other measures. This can help you determine if a stock is overvalued, undervalued, or at a fair price.
4. Which valuation ratio is better, high or low?
There is no definitive answer as to which valuation ratio is better. It depends on the company and what you are trying to measure. Some ratios are more indicative of a healthy company than others.
5. What are the most well-known valuation ratios?
There are several different valuation ratios that are well-known and used by investors. Some of the most commonly used ratios are the price-to-earnings ratio, dividend yield, and free cash flow to equity.