Market Value to Book Value ratio

It is also referred to as the Price to Book ratio (PB ratio) and measures a company’s worth compared to the amount of capital invested by its shareholders. Similar to the PE ratio, the market to book value ratio is also used to judge if a company is undervalued or overvalued. An undervalued company represents an attractive investment opportunity. It is calculated as follows:

Market Value to Book Value = (Market Price per share * Number of Outstanding Shares) / (Total Assets – External Liabilities)

Book value is the value of the company if all the assets were sold off and receipts were used to pay off all the external liabilities. A PB ratio less than one would mean that the company is undervalued and is worth investing in. In an ideal world, if a company’s book value is more than market value (.i.e. PB ratio is less than one), the owner would be better off in selling off the business assets.

However, how a PB ratio is judged depends on the characteristics of the industry the company belongs to. For example, a software company may have a few intangible assets in the form of intellectual property which are not accounted for in the financial statements. In this case, the book value of assets will be low, making the PB ratio seem very high. However, this does not necessarily indicate that the company is overpriced.

Dividend Yield

The dividend yield measures the amount of cash flow an investor receives on a per dollar investment in a share. The trend of a dividend yield ratio provides insight into the dividend policy of a company. Equity investors receive profits in the form of capital appreciation and dividends. Some investors prefer receiving dividends over capital appreciation. The dividend yield ratio helps investors screen stocks which pay consistent and high dividends. It is calculated as follows:

Dividend Yield = Annual Dividends per Share / Price per Share

 Dividends are paid out of net profit after tax. A company may either choose to pay out dividends or accumulate this profit in the form of reserves for future expansion plans. New and growing companies prefer to accumulate their profits to take advantage of future growth opportunities. Hence, companies with further growth prospects offer a low dividend yield. In contrast to this, mature companies have lower growth prospects offer a higher dividend yield.  Just because a company has paid a dividend in the past does not gaurantee that they will continue to pay it in the future, they can choose to cut the dividend in times of financial difficulty.

Profitability Ratios
Asset Ratios
Liquidity Ratios
Financial Leverage Ratios
Valuation Ratios
The Limitations of Financial Ratios

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