Equity analysts use valuation ratio to make investment decisions. The most popular and widely used indicator among those is the P/E ratio.
P/E ratio stands for Price to earnings per share ratio. In other words, the P/E ratio expresses the relationship between the current market price per share and the amount of earnings attributable to a single share. The other two important ratios are price to book value and price to cash flow ratio.
Here are the most important valuation ratios for financial analysts;
| Valuation Ratios | Formula |
| Price earnings ratio (P/E) | Price per share / earnings per share |
| P/CF | Price per share / cash flow per share |
| Price to Sales (P/S) | Price per share / sales per share |
| Price to Book Value (P/B) | Price per share / book value per share |
| Earnings Per Share (EPS) | (Net income – preferred dividends) / weighted average number of ordinary shares outstanding |
| Cash flow per share | Cash flow from operations / average number of shares outstanding |
| Dividends per share | Common dividends declared / weighted average number of ordinary shares outstanding |
| Dividend payout ratio | Common share dividends / net income attributable to common shares |
| Retention rate | (net income attributable to common shares – common shares dividends) / net income attributable to common shares |
The main purpose of valuation ratios is that they serve as indicators of important aspects of a company’s performance and value.
