Market value ratios

Market value ratios are used to evaluate the current share price of a publicly-held company's stock. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or under-priced. The most common market value ratios are as follows:

  • Book value per share. Calculated as the aggregate amount of stockholders' equity, divided by the number of shares outstanding. This measure is used as a benchmark to see if the market value per share is higher or lower, which can be used as the basis for decisions to buy or sell shares.

  • Dividend yield. Calculated as the total dividends paid per year, divided by the market price of the stock. This is the return on investment to investors if they were to buy the shares at the current market price.

  • Earnings per share. Calculated as the reported earnings of the business, divided by the total number of shares outstanding (there are several variations on this calculation). This measurement does not reflect the market price of a company's shares in any way, but can be used by investors to derive the price they think the shares are worth.

  • Market value per share. Calculated as the total market value of the business, divided by the total number of shares outstanding. This reveals the value that the market currently assigns to each share of a company's stock.

  • Price/earnings ratio. Calculated as the current market price of a share, divided by the reported earnings per share. The resulting multiple is used to evaluate whether the shares are over-priced or under-priced in comparison to the same ratio results for competing companies.

These ratios are not closely watched by the managers of a business, since these individuals are more concerned with operational issues. The main exception is the investor relations officer, who must be able to see the company's performance from the perspective of investors, and so is much more likely to track these measurements closely.

Market value ratios are not applied to the shares of privately-held entities, since there is no accurate way to assign a market value to their shares.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements