Market Value Ratio

Market value ratios are used to evaluate the share price of a company’s stock. Common market value ratios include the following:

Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common shares outstanding
The book value per share ratio calculates the per-share value of a company based on the equity available to shareholders.

Dividend yield ratio = Dividend per share / Share price
The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the market value per share.

Earnings per share ratio = Net earnings / Total shares outstanding
The earnings per share ratio measures the amount of net income earned for each share outstanding.

Price-earnings ratio = Share price / Earnings per share
The price-earnings ratio compares a company’s share price to its earnings per share. It measures how many times the earnings per share (EPS) has been covered by current market price of an ordinary share. It is computed by dividing the current market price of an ordinary share by earnings per share.

Examples

1. The market price of an ordinary share of a company is $50. The earnings per share is $5. Compute price earnings ratio.

Solution:

=$50 / $5
= 10

The price earnings ratio of the company is 10. It means the earnings per share of the company is covered 10 times by the market price of its share. In other words, $1 of earnings has a market value of $10.

2. Hello Ltd. has a net income of $1 million in the third quarter. The company announces dividends of $250,000. Total shares outstanding is at 11,000,000.

The EPS of Hello Ltd. would be:

​EPS = ($1,000,000 – $250,000) / 11,000,000
EPS = $0.068

Since every share receives an equal slice of the pie of net income, they would each receive $0.068.

4. EPS computation with cumulative preferred stock:
Following data has been extracted from the financial statements of Peter Electronics Limited. You are required to compute the earnings per share ratio of the company for the year 2020.

Net income for the year 2020: $1,500,000
6% cumulative preferred stock outstanding on December 31, 2020: $3,000,000
$15 par value common stock outstanding on December 31, 2020: $2,376,000
The number of shares of both types of stock are same as they were on January 01, 2020 because the company has not issued any new shares of common or preferred stock during the year 2020.

Solution:
From the above data, we can compute the earnings per share (EPS) ratio as follows:

= ($1,500,000 – $180,000*)/158,400
= $1,320,000/158,400
= 8.33 per share

The EPS ratio of Peter Electronics is 8.33 which means every share of company’s common stock has earned 8.33 dollars of net income during the year 2020.

* Dividend on preferred stock: $3000,000 × 0.06 = $180,000

5.  EPS computation without preferred stock:
Hello Company had a net income of $600,000 for the year 2020. The weighted average number of shares of common stock outstanding for the year were 200,000. What was the earnings per share ratio of Hello Company?

Solution
Earnings per share = Net income/Weighted average number of shares outstanding
=$600,000/200,000
= $3.00 per share

Sources: PinterPandai, The Balance Small Business, Accounting Tools, Corporate Finance Institute