E. Market Ratios
1. Price / Earnings (P/E) Ratio (PER)
Price/Earnings (P/E) Ratio (PER) is the ratio used to relatively assess a company’s stock price by comparing it to the earnings per share (EPS) of that company.
The Price/Earnings (P/E) Ratio (PER) formula is as follows:
If it is known that the common stock price of “danieel.id Company” per share at the end of 2019 is $ 24.5, then we can calculate per company = $ 24.5 / $ 1.77 = 13.86
This figure means that investors pay $13.86 for every $1 earnings generated by the Company.
Or in other words, this ratio describes the value that investors are willing to pay for every $1 earnings the Company generates.
This figure will be more meaningful when compared to the PER of similar companies (which we will do soon below). If the value is higher than other companies, then it can be said that the stock price of this company is relatively expensive and vice versa.
2. Market/Book (M/B Ratio) or Price to Book Value (PBV)
Market /Book (M/B Ratio) or Price to Book (P/B) Ratio is the ratio of assessing the relative share price of a company by comparing it to the company’s book value.
The Market/Book (M/B Ratio) or Price to Book Value (PBV) formula is as follows:
The book value of a Company is equal to the value of its common stock equity,
The book value per share is
 = common stock equity / number of share of common stock outstanding.
Note: If the Company goes bankrupt and is then sold, the value of the company is the value of all its assets minus all liabilities of the company.
Remember: Assets – Liabilities = Equity
For the “danieel.id Company” case, the book value per share of common stock in 2019 is: ($7,750,000 – $600,000) / 300,000 = $23.23
If the stock price of “daniel.id Company at the end of 2019 is $ 24.5
So the price to book value of this company in that year was $24.5 / 23.23 = 1.05
This figure means that investors pay $1.05 for every $1 book value of this company.
Or in other words, this ratio describes the value that investors are willing to pay for every $1 of the company’s book value.
Just like the Price to Earnings Ratio (PER), this figure will be more meaningful when compared to the P / B ratio of similar companies (which we will do soon below).Â
If the value is higher than other companies, then it can be said that the stock price of this company is relatively expensive and vice versa.
Summary Market Ratios
The “danieel.id Company” stock price note in 2018 was $25, and in 2019 it was $24.5
From the table above, we can conclude market ratios for the case “danieel.id Company) as follows:
The company’s Price to Earnings Ratio (ER) increased slightly (from 13.83 in 2018 to 13.86% in 2019), this is partly because the company’s share price fell slightly smaller (2%) than the decrease in earnings per share (EPS) (2.2%).
This ratio is also still higher when compared to the average PER of similar industries in 2019.
This indicates the market is reacting not too much with the decline in the Company’s EPS in 2019, because various other parameters of the Company as indicated by the financial statements and various ratios that we have discussed so far show “danieel.id Company” is still good financially and has the potential to grow.
Market/Book (M/B Ratio) or Price to Book (P/B) Ratio “danieel.id Company” decreased compared to the previous year (from 1.15 in 2018 to 1.05) and this figure is also lower than the average of similar industries in 2019 (1.3).
This is partly because the Company’s book value per share in 2019 increased compared to the previous year ($23.33 in 2019 compared to $21.81 in 2018), while the stock market price per share actually fell slightly.
If we look again at the company’s balance sheet, there is an increase in the company’s common equity derived from the release of new shares (20,000 shares in 2019) and the increase in retained earnings used by the Company to finance some of its investments (the purchase of new engine engines) has not been directly reflected in the increase in the company’s profit margin in the year.
Of course, it takes time from the moment the investment begins until the investment results are seen as an increase in sales and profits in the company’s Financial statements (if the investment is successful). Investors who are observant in reading the company’s financial statements and financial ratio ratios, will see this as an opportunity to buy “danieel.id Company” shares when the price is “slightly” lower than its growth potential.
Market ratios [either Price to Book Value (PBV) or Price Earnings Ratio (PER)] are also commonly used methods for valuation of a company’s stock.
Closing
Thus our discussion of the Company’s Financial Ratios,Â
Hopefully useful.
Next you can start practicing by analysing the financial ratio ratio in your company’s Financial Statement, or try to analyse the Financial Statements of companies listed on the Indonesia Stock Exchange.Â
Annual Financial Statements (and also quarterly) of Companies in Indonesia that have gone public, and are listed on the Stock Exchange can be downloaded on the official website of PT Bursa Efek Indonesia: https://www.idx.co.id
Or you can try evaluating the financial statements directly in the form of summary and ratio ratios of various companies listed on the Exchange, both in Indonesia and other countries from several sources that provide such information, including Yahoo Finance, Bloomberg, Reuters, PT RTI Infokom (https://rti.co.id) and Indopremier (https://www.indopremier.com/ipotgo/)
If you have any questions, or suggestions regarding this article, feel free to comment below.
Source :
- Lawrence J Gitman & Chad J.Zutter, “Principles of Managerial Finance” 13th Edition
- Merrill Lynch “How to read a financial report” booklet
- Investopedia.com
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