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Earnings to Price Price to Earnings Ratio The multiple is the ratio of a stock’s share price to its earnings per share (EPS). One of the most widely used stock valuation metrics is the PE ratio. It indicates whether a stock is expensive or cheap at its current market price. Let’s look at what a PE ratio is, how it differs, and how it can be used to make investment decisions . Earnings per share (EPS) can be distributed to shareholders as dividends or reinvested in the business to increase future revenues and EPS, resulting in capital appreciation. The PE ratio is the price that investors are willing to pay for one rupee of earnings per share (EPS) of a company. When earnings are expected to rise in the future, the share price rises, and vice versa. When the share price grows much faster than earnings, the PE ratio rises. When the share price falls much faster than earnings, the PE ratio falls to a low level. A high PE ratio indicates that a stock is overpriced and that its price may fall in the future. A low PE ratio indicates that a stock is inexpensive and that its price may rise in the future.
The price-to-sales ratio, abbreviated as the P/S ratio, is one of several metrics used by investors to determine the value of a company. This metric compares the stock price to the revenue of the company. It shows the average amount of money investors are willing to spend per dollar of sales. A lower P/S ratio is preferable in general.
The price to book value ratio, or PBV ratio, compares the market and book value of a company. Assume that a business is about to be dissolved. It liquidates all of its assets and discharges all of its debts. The remainder is the company’s book value. Divide the market price per share by the book value per share to get the PBV ratio. For example, a stock with a PBV ratio of 2 means that we pay Rs 2 for every Rs 1 of book value. The higher the PBV, the higher the stock price.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a number that is used to evaluate a company’s operating performance. It can be thought of as a proxy for the cash flow created by the company’s complete operations. In its most basic form, EBITDA is a measure of a company’s financial performance that can be used in place of other metrics such as revenue, earnings, or net income. Many people use EBITDA to determine business value because it focuses on the financial outcome of operating decisions. This is accomplished by removing the effects of non-operational decisions made by the current management, such as interest expenses, tax rates, or significant intangible assets. This results in a figure that more accurately reflects a company’s operating profitability and can be effectively compared between companies by owners, buyers, and investors.
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