Price to Book Ratio and Market to Book Value | P/B Formula | M/B Example

Price to Book Ratio and Market to Book Value

Price to Book Ratio and Market to Book ValueDefine Price to Book Ratio?

The price to book ratio is also known as the P/B ratio or market to book ratio. It is the financial valuation tool that is used to evaluate the stock of the company, whether it is overvalued or undervalued, by comparing the all outstanding share price with the company’s net assets.

In other words for the measuring of difference between book value and total share price of the company, this calculation is used.

What is the difference between Book Value and Market Value?

The difference between the book value of the company and the market value of the company is demonstrated by this comparison.

The current stock price of all outstanding shares of the company is called the market value.

Due to this price, the market considered the company as a worthy company, whereas book value shows the net assets of the company on the balance sheet.

The formula of Price to Book Ratio

The price to book ratio formula can be calculated by dividing the market price per share by the book value per share.

Price to book ratio = Market price per share/Book value per share

Price to Book Ratio Formula

The current stock of the company which company is being trading in the open market is called market price per share. Whereas book value per share is complicated. We can get book value per share by the difference of total liabilities and total assets and divide the result of this by the total number of outstanding shares on that date.

The above equation rephases by most investors to form the book to market ratio formula by the division of the total book value of the company by the total market value.

Market to Book Ratio = Total Book Value/ Total Market Value

PB ratio included the individual share whereas the MB ratio formula compares values on a company-wide basis.

Price to Book Ratio Analysis

Investors used the PB ratio to find that whether the company is overpriced or underpriced. If the ratio of the company is above 1 it means that investors want to invest more as compared to the total assets or worth of the company. It means that for the future projection company is healthy.

If the PB ratio of the company is less than 1 then the company needs to sell its assets below the worth of the assets of the company. So the company is undervalued because of some reasons.

Investors take interest in those companies which have overvalued prices. This calculation does not take the dividend into consideration. Investors invest the share of the company which will regularly issue a dividend.

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Price Earning P/E Ratio | Analysis | Formula | Example

Price Earning P/E Ratio

The price earning ratio is known as the P/E ratio or price to earnings ratio. By comparing the marketing price per share by earnings per share, this ratio is used to calculate the market value of the stock relative to its earnings per share. By predicting the future price per share investors evaluate the fair market value of the stock.

The companies which have higher future earnings can issue higher dividends, such types of companies have appreciating stock in the future.

Investors take help from the PE ratio to analyze that, based on earning how much they need to pay for the stock. Due to this P/E ratio is called the price multiple or earnings multiple. From this ratio investors decided, what multiple of earnings is the worth of a share.

Price Earning P/E Ratio

Formula to find Price Earnings ratio

The price-earnings ratio formula can be calculated by dividing the market value price per share by the earnings per share.

Price-earnings ratio = Market value per share/Earnings per share

The financial statement is issued quarterly then this ratio is used at the end of the quarter of the year. If a financial statement is issued on annual basis then it is also calculated at the end of the year.

Price Earning ratio Analysis and Interpretation

For the indication of the expected price of the share based on the earnings of the share, the price to earnings ratio is used. With the increment in the earning per share of the company, the market value per share of the company increase. If the P/E ratio of the company is high then the company have good future performance because of which investors are willing to pay more for the shares of the company.

If the ratio is low the company have poor current and future performance. Investors do not want to invest in such a company. because it is a poor investment.

The comparison of the companies based on this ratio will be useful under the same industry.

Example of Price Earning ratio

Understand this concept via this simple example of how to calculate the price per earning ratio. A corporation has earning per share for 1 year is 50 dollars. the stock trading is at 50 dollars a share of that corporation. P/E ratio for that corporation is calculated as:

10 = 50/5

From the above ratio, it is clear that the corporation ratio is 10 times. So the investors are willing to pay 10 dollars for each dollar of earning. So the trading of the corporation’ stock at multiple of 10.

Do you want price to earnings ratio to be high or low? It is our advice that focus also on other financial ratios because by doing so you can extract better results.

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PEG Ratio Formula | Example | Calculation

PEG Ratio

Definition of PEG Ratio? 

PEG is known as Price Earning to Growth. This ratio is used to calculate the stock-based value on the current earning and the company’s potential future growth. Peg ratio explanation will help you understand well.

PEG Ratio Formula Definition

Definition: What is the Price/Earnings to Growth Ratio?

You can consider this as an improved P/E ratio because it factors in the growth of the company by dividing the P/E by the annual growth rate. P/E tells the company performance for the future and about the stock might look attractive. The growth pattern of the company, in reality, might be stagnant. When we consider P/E, then the stock might be a bad buy actually.

P/E is the improved version of PEG. For different reasons, most of the investors use both calculations. Both the matric give the information, that the investment is good or not. For the best calculation, you need to look at both metrics for the investment information.

What is the Formula of the PEG ratio?

PEG ratio formula can be calculated by dividing the price-earnings by the annual earning per share growth rate.

PEG Ratio = (P/E)/(Annual per share growth rate)

The above equation is so simple for calculation. The numerator of this equation is calculated by dividing the market price per share by the earning price per share.

Peg Ratio formula analysis

PEG ratio used for what?

On the growth pattern of business in its industry, the PEG ratio figure out that the stock price is overvalued or undervalued. It is used to find the actual worth of the company. it does not consider that what stock is currently trading for. A worthless company may have a high stock price because stock prices depend on the demand, speculation, and expectation of the investors.

PEG valued the company it produces and adjusts it for the growth of the company. For the indication of a good or bad investment, there are no specific numbers because it greatly varies among the industries. If the PEG ratio is less than 1 then the company drowned because the stock price of that company is undervalued.

For a better understanding of the PEG calculation now we take the example of the PEG ratio.

Peg Ration Example

Pharm Inc is a Pharmaceutical company. To cure the disease this company start research for new medicines. This company has 10 PE. It has expected EPS growth for the next 5 years is over 12 per cent. this company calculate the PEG as

PEG Ratio

83.33 = 10/12%

So PEG for the above company is 0.83 which indicate the low stock price of the company. It is a good investment by Pharm Inc. Investors need to compare the metrics of this company with other companies’ metrics under the same industry for investment.

You can check more definitions and formulas by visiting Envestopedia.

Preferred Dividend Coverage Ratio | Formula | Example | Calculation

Preferred Dividend Coverage Ratio

The preferred Dividend Coverage ratio is used to calculate the ability of the company to pay the dividend to its preferred shareholders based on the net income of the company.

In other words, this ratio is used by the investors to find the efficiency of the company by comparing profit to the preferred dividend. For the payment of a dividend if the company has sufficient profit then the company has good performance.

Preferred Dividend Coverage Ratio Formula

Definition: What is the preferred dividend coverage ratio?

Are you looking for a Preferred dividend coverage ratio meaning? This ratio is also the name of times preferred dividend earned ratio. It looks at the net income of the company to analyze that this income is sufficient to meet the fixed dividend payable amount on its outstanding preferred shares or not. For the evaluation of the financial health of the company this ratio is useful for current and potential shareholders and also for debt holders.

This ratio is mostly used by the creditors and banks to find how much additional debt the company can handle. This ratio could affect the common stock dividend that’s why common stock shareholders need to be aware of this.

In the ideal condition, the company has more profit to cover the dividend payment of the company. But in the practical, they’re maybe not in the same condition as in ideal. When the coverage of the company is 1 then the company have more profit to meet its preferred dividend obligation. If the coverage ratio is less than 1 then the company has not enough profit to meet its preferred dividend obligation.

The formula of preferred dividend coverage ratio

The preferred dividend coverage (PDC) ratio formula can be calculated by dividing the total profit or net income by the annual preferred dividend amount.

Preferred dividend coverage ratio = net income/annual preferred dividend

The above result for PDC is on the annual basis. PDC ratio can be calculated quarterly. For the quarter bases calculation of PDC, we need to divide the result of PDC by 4.

Examples of PDC ratio Formula

Now we take the preferred dividend coverage ratio example of Lee’s company A. The net income of his company is 20M dollars. Preferred issued for the total par value of 10,000,000 dollars at 5%. The preferred dividend coverage ratio for this company calculated as

40 times = $20,000,000/($10,000,000 x 0.05)

From the above result, it is clear that the financial health of the company of Lee is very good. Because with his profit he can cover 40 times their annual preferred dividend obligations.

Analysis and Interpretation of Preferred dividend coverage ratio

The number shows if the company make a sufficient amount of income to cover its obligations. If we take the example of the owner of the home. Net income of the homeowner supporting his mortgage payment every month. To meet his mortgage obligation if he spent most of his money, then a small change in the net income can’t make the mortgage payment for the homeowner.

Just like the homeowner it same for the company. The company which issued preferred stock and make enough to cover its preferred dividend payment, can not pay a dividend to the common shareholder.

 

Present Value (PV) Formula | Example | Calculator | Analysis

Present Value (PV)

What is Present Value?

Definition: Present value is also known as discounted value. The financial formula calculates the worth of the received amount on a future that is in today’s dollars.

Based on the time value of the money principle this concept work. It dictates that the worth of today’s 1 dollar is more than the worth of tomorrow’s one dollar. The worth of today dollar is more than the worth of tomorrow dollars because of the three-component which are interest, inflation, and opportunity cost.

Present Value (PV) Formula

Accumulated Present Value formula

Present Value Formula can be calculated by dividing the one-period cash flow by the one plus return to the nth power. This formula is looking confused but simple to solve and calculate present value formula.

  • C1 = Cashflow from 1period
  • r = Rate of return
  • n = Number of period

The above equation uses the annual interest. So the rate and the number of periods are in years. For the calculation of semi-annual interest, you need to divide the numbers in half.

For the future value of a lump-sum payment, the PV formula is reformated as

  • FV = Future value of cash received at the later date
  • r = Rate of return
  • n = Numbers of period

Analysis

How to use present value formula? Here is the analysis. For the evaluation of potential investment and the measurement of return on the current project, investors and creditors use the present value calculator. In the PV time value of the money is the important concept because through this investors measure the worth of investment return today and whether there are better options available.

If we take the example of the lottery it allows the 2 options of the payment form. The winner can receive the smaller lump sum today or a winner can receive equal payment from the full amount of the rest of his life.

For the expansion of the project and investing in other projects management of any company use this theory. Management uses the net present value formula to estimate whether the potential project is worth pursuing and whether the company will make money on the deal or not.

Examples of net present value formula

This example example of present value formula help you to understand well. Tim has a shop of machines. Tim wants to expand his shop with new equipment. H needs a 100,000 dollars loan to buy the new machinery. He secures the zero interest, and zero principal loans with a single balloon payment of 150,000 dollars. Actually, how much interest-paying by Tim.

Now we calculate the interest, which Tim pay with the balloon loan. The time for the loan is 10 years so we need to figure out, what the PV of 150,000 dollars is lump sum from now.

 

From the above result, it is clear that the present value of balloon payment is 57,831.49 dollars. It means that if today Tim invested 57,000 dollars at 10% interest. He would have enough to pay off these loans when it is due. As an interest, he pays 93,000 dollars.

The above example is the assumption of the single payment in future. Continuous annuity payment is different from this.

PV of an Annuity

If we go back to the example of the lottery. Let us assume that Jerry won 1,000,000 dollars in the state lottery. There or 2 choices for Jerry from the lottery commission. He can either collect 425,000 dollars now or receive 50,000 dollars per year for the next 20 years. Assuming the interest rate of 10% which is the best choice.

Based on the time value of money, both choices are the same in the PV annuity formula calculation. With payment option he received (50,000 x 20 = 1,000,000) dollars. Interest rate discounts these payments overtime of 426,000 dollars approximately.

Most of the winners of the lottery choose lump sum payments.

Present Value Tables

To compute these numbers people typically use the PV calculator. To compute these numbers people can also use the present value table. For the calculation of the discount rate, these charts are used in the PV calculation. So for the calculation of PV, there is no need for complicated equations.

In the below table on the x-axis interest rate is listed and the number of periods is listed at the y-axis and multiply by payment.