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**Series : Ratio Analysis (24 th Post)**

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### Is the share price of the company overvalued or is it undervalued ?

### Or How to Estimate the potential of an attractive investment ?

This ratio helps us to
understand attractiveness
of a potential or existing investment and get an idea of its valuation.

The ratios covered under this
are:

**1. Investment Valuation Ratios: Price/Book Value Ratio**

The Price / Book Value Ratio
Helps us to compare the share price of a company with its Book Value &
helps to analyze whether the share price is Overvalued or undervalued,

**Formula:**Price/Book Value Ratio = Stock Price Per Share / Book Value

**2. Investment Valuation Ratios: Price/Cash Flow Ratio**

The Price /Cash Flow Ration Helps us to compare the share price of a company to the Cash flow
it generates,This is important for investors to evaluate the investment
attarctiveness. Or the amount of cash flow it generates per share

**Formula :Price/Cash Flow Ratio**=

**Price per share / (**

**Cash flow / Shares**

**outstanding)**

**3.**

*Investment Valuation Ratios: Price/Earnings Ratio (P/E)*
The Price / Earnings
ratio or P/E Ratio helps us to understand how much investors are ready to pay for each rupee of profit .For example if an investor buys a stock with
a P/E ratio of 15 he is willing to pay 15 times the Earnings per share. A high P/E ratio tells some investors that the
stock is overvalued, and a low P/E ratio shows it’s undervalued.

This is one of the most popular of Ratios ,this ratio is
further explained in detail with an easy way to interpret or analyse a company How
to Analyse Stocks From PE Ratios

**Formula:**Stock Price Per Share / Earnings Per Share (EPS)

**4.**

*Investment Valuation Ratios: Price/Earnings To Growth Ratio*
What
does the PEG ratio stand for and how will it help us value stocks? The PEG
ratio is simply this: the price to earnings ratio (P/E ratio) divided by
estimated future earnings growth. The future growth generally uses the 5-year
average figure (but you can also use the 3-year figure, your own forecast, or
the “earnings guidance” provided by the company). Using this ratio we can
estimate:

1.
XYZ has a PE of 72.3 and expected growth of 77% per year. The
PEG ratio is 0.94.

2.
ABC has a PE of 11.04 and future growth expectations of 35%
annually. The PEG ratio is 0.32.

3.
FGH has a PE of 166 and future growth expectations of 30%
annually. The PEG ratio is 5.53.

if the
PEG ratio is 1, it is fairly valued. If it is below 1, it is undervalued, and
if the number is above 1, it is overvalued.

**Formula:**

**PEG Ratio = (P/E ratio) / (earnings growth)**

**5. Investment Valuation Ratios: Price/Sales Ratio**

The Price / Sales
ratio or P/S Ratio is similar to a P/E ratio accept for one difference of Sales
per share instead of Earnings per share this helps us to understand how much
investors are ready to pay for each
rupee of Sale. Or The
Price/Sales ratio, also called the "PSR", is a company's stock price
divided by its annual sales per share

Generally Price/Sales ratio
is by assuming that a PSR of 1.0 is right for

*all*companies, and then hunting for "bargains" selling at a PSR of 0.5 or less.**Formula:**

**P/S Ratio = Stock Price Per share / Net Sales (Revenues) Per share**

**6. Investment Valuation Ratios: Dividend Yield**

Dividend yield is the amount that the company pays to its
share holders annually for the investments made; this ratio is expressed in percentage
& indicated the attractiveness of investment in a company. A good
investment opportunity is found in good companies giving increasing or
consistent dividend yield over the years.

**Formula: Annual Dividend per share / Stock Price per Share**

This Valuation ratio’s can be
found online on the website

Example : Go to http://www.moneycontrol.com/financials/hdfcbank/ratios/HDF01 under the Tab “

**Investment Valuation Ratios**”**-----------------------------------------------------------------------------------------------------**

In my quest for learning value investing I came across Ratio Analysis
& the importance of these ratios in analyzing a stock & comparing with
its peers , would like to share this
with the community

Comments / Improvements and
points worth considering are welcome

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