Retail Companies and Lease Accounting
Retail companies have traditionally been one of the largest users of real estate in the world. It is common for retail companies to lease out large commercial retail spaces and utilize them in their business. Over the years, the usage of real estate has drastically come down because of the increase in online retailing. However, […]
Volatility in Money Markets
In the previous articles, we have learned about how the money market is just like any other financial market. This means that just like other markets, speculators also form a significant portion of investors in the money market. As a result, the money market also has a certain amount of volatility just like other markets. […]
Self-Control Bias
Investors who have been in the market for a long time know that investing is an emotional activity as much as it is a financial activity. This is the reason that people who have a higher degree of self-control generally tend to do better than their peers. Self-control bias may seem like an obvious and […]
Price to Sales Ratio – Formula, Meaning, Assumptions and Interpretation
Formula Price to Sales Ratio = Current Market Price / Reported Sales Revenue Many companies state their revenue after removing the effects of onetime events whereas others continue to state the revenue without any adjustments. Meaning The price to sales ratio tells an investor how many dollars they are paying for every dollar that the […]
Notional Value: Derivatives Markets
People often say that the size of the derivative markets is exploding. It is over $700 trillion dollars a year now and when we put that number into perspective that is over the GDP of all the countries in the world combined in the last 20 years. How can the value of derivatives in one […]
Most investors do not invest directly in the company i.e. they are not promoters of the company. Rather they invest in the company through the stock market. This means that they buy shares at a certain value and make a profit only when the price of the shares go up or they get regular dividends from their investments or a combination of both. This is the reason why investors are particularly interested in how the current share price of the company compares with its fundamentals. Market related ratios help investors use the numbers stated on the balance sheet to better their understanding of the same.
Market related ratios compare the current stock price of the company which is being quoted on the stock exchange to various balance sheet, income statement and cash flow items. One component of all market related ratios is the current stock price.
It is important to understand that the quoted stock price is not the actual price of the share. The stock price just means the price that you are paying to obtain a fraction of the earnings of the company. So if you are buying 1 share at USD 10 and there are 100 shares, you own 1% of the company. This 1% ownership means you get 1% of the profit, which in our case is let’s say USD 2. Hence the actual price you are paying is USD 10 to buy a future recurring profit stream of USD 2 per share. Of course these profits subject to risks and that is what makes investing challenging.
Since the quoted stock price is not the actual price, market related ratios offer a window to analysts using which they can gauge whether a stock is over or under valued and then act accordingly.
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