Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 231

shop, you would not only look at the assets (e.g., land, building, equipment), but also you would consider the amount of sales the shop would generate. For example, if you had to put values on two exact sandwich shops, one located in Manhattan and the other in a small village, which one would you think would be worth more? The following is a list of some of valuation ratios:

Price-To-Book - This ratio is the price of the stock divided by the current book value of the company per share. If this value is too high, it may signal an inflated stock. If this value is too low it could indicate an under-valued stock. A value of one means that the company's equity matches its market cap. This would indicate a safe company to invest in since its stock price is theoretically fully supported by the company's equity. Nowadays the price-to-book ratio for many companies is much higher than one, as this ratio has lost some of its significance. This is because the price-to-book ratio may be meaningful for those companies with lots of tangible assets, such as industrial companies, but today many companies should be valued based on their intangible values as well. For example, Microsoft with a price-to-book value of approximately 16, may be viewed by some as fairly priced because while it does not have a lot of factories and equipment, its real assets are its popular products and its ability to innovate. The price-to-book ratio moves higher as the stock price moves up or as the book value decreases. Some examples of price-to-book ratios in early 2000 were: Norfolk Southern with a price-to-book ratio of 1.4 (indicating a safe stock), GE with a price-to-book ratio of 12, and Yahoo with a price-to-book ratio of 105 (certainly a high value, indicating an expensive stock).

Price-To-Sales - This is known as a revenue-based valuation ratio and it is calculated by dividing the stock price by the annual sales per share for a company. Some investors use this ratio to value the stock, and just like many other ratios covered here, the lower this value, the

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Table of Contents
Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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