Top 12 Valuation Ratios (Investment)

ValuationRatios.md

The Top 12 Valuation Ratios

• EV / Revenue: It measures the dollars in Enterprise Value for each dollar of revenue. High-profit margins are highly correlated with higher revenue multiples.

  Formula: EV / Revenue = Enterprise Value / Revenue

• EV / EBITDA: Firms with high growth rates typically trade at higher EBITDA Multiples.

  Formula: EV / EBITDA = Enterprise Value / EBITDA

• EV / EBIT: When capital expenditures are a significant consideration for the business, EBIT multiples may be better at capturing the value of capital efficiency.

  Formula: EV / EBIT = Enterprise Value / EBIT

• EV / Invested Capital: The invested capital multiple is especially useful when capital assets are a key driver of revenue and earnings.

  Formula: Invested Capital = Total Equity + Total Debt EV / Invested Capital = Enterprise Value / Invested Capital

• EV / (EBITDA – CapEx): EBITDA minus CapEx Multiple is similar to the EBIT multiple. EBITDA less CapEx is better at capturing value differences for growing companies since accounting for capital expenditures is less subjective than depreciation.

  Formula: EV / (EBITDA – CapEx) = Enterprise Value / (EBITDA – Capital Expenditures)

• EV / Free Cash Flow: It captures the working capital requirements of a business since cash inflows and outflows related to receivables and payables are reconciled in the cash flow statement.

  Formula: Free Cash Flow = Cash Flows from Operations + Cash Flows from Investing

• P/E Ratio: Price / Earnings ratio is the most popular equity value multiple; it indicates the multiple of earnings that stock investors are willing to pay for one share of the firm.

  Formula: P/E Ratio = Stock Price / Earnings OR P/E Ratio = Market Cap / Net Income

• Price / Sales: It compares a firm’s equity value to the twelve months of booked sales. Like the EV to Sales, the Price to Sales multiple is primarily useful when valuing firms with negative or depressed earnings.

  Formula: Price / Sales = Market Cap / Sales

• Price / Book: or Price / Common Equity compares a firm’s market value of equity to the amount of common equity listed on the balance sheet. The price to Book ratio is commonly used to compare banks because most bank loan assets and deposit liabilities are constantly revalued to reflect their market values. This ratio is also popular with value investors, as it provides a rough indication of downside risk if the firm was to become bankrupt.

  Formula: Price / Book = Market Cap / Common Equity

• Price / Tangible Book Value: or Price / Tangible Common Equity compares a firm’s market value of equity to its book value of tangible common equity value. Tangible common equity subtracts goodwill and intangibles from the listed total common equity since these assets often have little resale value in a bankruptcy.

  Formula: Tangible Common Equity = Common Equity – Goodwill & Intangibles Price / Book = Market Cap / Tangible Common Equity

• Price / Cash Flow: It compares a firm’s equity value to the Cash from Operations (OCF) reported on its Statement of Cash Flows. Investors often prefer to use Cash Flow vs. Net Income as the denominator, since it’s more difficult for management to skew OCF with clever accounting practices.

  Formula: Price / Cash Flow = Market Cap / Cash Flows from Operations

• PEG Ratio: The Price-Earnings to Growth abbreviated as PEG Ratio is a crude heuristic used to measure the level of earnings growth reflected in a stock’s market price. The benchmark for the PEG ratio is 1, and stocks with a PEG under 1 are considered undervalued.

  Formula: PEG Ratio = (Price / EPS) / (% Growth Rate * 100)

Ref: https://finmasters.com/valuation-ratios/