Valuation Ratios

Posted in Finance, Accounting and Economics Terms, Total Reads: 1801
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Definition: Valuation Ratios

Valuation ratios are ratios computed on the basis of parameters in the financial statements of a company and used to estimate the value of a company. These can be used to easily compare companies and determine which a better investment is. A particular firm’s valuation ratio can be compared with that of the industry’s or with other companies to determine its investment attractiveness.


Examples:

Price to book value ratio: the ratio of market value of a share to the book value


Price to cash flow ratio: ratio of price paid per stock to the cash flow generated on a per share basis


Price to earnings ratio: ratio of market value of stock to earnings per share.


Enterprise value ratios: Enterprise value ratios assess a company from an acquirer’s perspective; Enterprise value is the sum of market capitalization and total debt of a company. There can be several enterprise value ratios: EV/EBITDA, EV/Sales, EV/ OCF etc.


The ratios used to compare companies are industry specific – only some ratios hold significance for certain industries. Certain non financial parameters can be used: for example for online companies – Revenue/click is calculated.

 

Hence, this concludes the definition of Valuation Ratios along with its overview.

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