Valuation Ratios

Then on the Reuters page we find the Valuation Ratios as shown in the image:


Beta is a measure of the volatility of a stock (or any asset) with respect to how variable the market is.

The beta coefficient is equal to 1.0 when it is in line with the market. Otherwise, higher values indicate higher volatility of the asset relative to the market, and lower values indicate lower volatility.

If beta is greater than 1, the asset shows greater volatility than the market or the index to which it belongs, so its movements will be larger, either upwards or downwards. For example, if our beta is 1.5, and the market rises by 10%, then our asset would rise by 15%. (1.5 * 10=15).

Which indicates that beta greater than 1 is very used for short term investments such as daytrading or scalping, as there are larger movements in less time.

If beta is less than 1 the asset shows less volatility than the market or index it belongs to, therefore its movements will be less abrupt, either upwards or downwards. For example, if our beta is 0.5, and the market rises by 10%, then our asset would rise by 5%. (0.5 * 10=5). That is, half of what the market does.

This indicates that beta less than 1 is widely used for long term investments, as there are smaller movements.

Beta can also be interpreted as a percentage. Continuing with the example above, a beta of 1.5 indicates that the asset is 50% more variable than its market or index. This arises from subtracting (1.5-1)= 0.5 multiplied by 100, we have the percentage: 0.5*100=50% and in the case of lower betas, 0.5*100=50%.

and in the case of lower betas, for example one of 0.90 would be 0.9-1=-0.1 multiplied by 100 is -0.1*100= -10%, which means that the stock or asset is 10% less volatile than the market.

So, you must take into account the beta of an asset to analyse how volatile it is.

P/E Price/Earning method

This ratio shows the relationship between a company’s share price and its earnings. Investors often use this ratio to analyse and judge a company’s value prospects, as a high P/E means that more is being paid for each dollar of profit.

Its formula is:

P/E= $ of the stock/EPS

For example, if the share of the company abc is worth U$S15 and its EPS is 0,30 the P/E would be: 15/0,30= 50

P/S Price/Sales method

P/S relates the price of a share to the sales of a company. It is a way of measuring the number of times the price represents sales per share. This ratio is widely observed as it is an indicator of a company’s size and growth.

Its formula is:

P/E= $ of the share/ (sales/shares outstanding).

If it is 1, it means that it is in equilibrium, i.e. the investor is paying US$1 for every US$1 of sales made by the company.

If it is less than 1, for example 0.80, then the investor is paying US$0.80 for every US$1 of sales made by the company.

P/CF Price/Cash flow method

This ratio relates the price and the cash flow (the cash) able to be generated by the company.

What it shows is: how much is the ratio between what the company is worth and what it has in cash. By this we mean, for example, in the face of a crisis, whether it can get through it and sustain itself or not. In other words, if it has money to face critical moments, otherwise the company would go bankrupt. Therefore, it indicates whether the company’s business model is strong and sustainable over time.

Its formula is:

P/CF= $ per share/ (cash generation/shares outstanding).

The lower the ratio, the cheaper the share, the more liquid it is considered to be. And the higher the ratio, the more expensive the share is in relation to what it should be according to its fundamentals. In this case it does not have enough liquidity to stay in a critical situation.

Price/book method

This ratio, which in English translates as price/book, relates the market capitalisation to the net worth of the company, i.e. its resources (in accounting terms they are known as assets).

Its formula is:

P/B= $ of the share/(net worth/shares outstanding).

What interests us about this ratio is how far it is from the value 1. It represents the probability that a company will generate profits. So, when expectations of generating higher earnings are high, the ratio tends to move away from 1. That is, it is a good indicator when it is higher than 1 but lower than 3 or at least up to 3.

When the ratio gives 3 or more, it attracts the attention of investors as it can mean:

  • That the stock is selling cheap, therefore it can be an excellent buying opportunity.
  • That there is something that may be wrong with the company, such as lawsuits, sales problems, job cuts, etc.

Therefore, to do the fundamental analysis we must look at this ratio and in case it is equal or greater than 3, look for information about the company to see if it is in trouble, or just cheap.

If P/B is less than 1, it is considered that the company has a low probability of generating profits.