Stock Investments and Ratios

Investment Ratios

Financial ratios play an important role in guiding investors into making investment decisions. Financial ratios provide a quick snapshot into the analysis of financial statements. Ratios will therefore provide a quick guide into understanding information relating Cash flows, income statements and balance sheet.

The main ratios that are relevant in the valuation of stock investments include Price To Earnings Ratio, Price to Book Value and Price to Sales ratio.

Price to Earnings Ratio

This is one of the most commonly used ratios to evaluate the attractiveness of company shares for possible investment. Price to earnings ratio or commonly referred to as P/E ratio is the price that a potential investor will pay for each dollar of earnings the firm has realized and it works well when comparing peer group of companies. Investors will generally prefer a higher P/E ratio as this is an indication that investors will be expecting higher earnings in the future. It should however be noted that P/E ratio varies across industries and as such some industries will always record higher P/E ratio while others will record lower P/E ratio.

Place your order

P/E ratio=Market Value per Share/Earnings per Share

Price to Sales Ratio

Most companies are also evaluated on their revenue generation abilities and as such the price to Sales ratio provides a perfect measure of the company’s revenue generation abilities from shareholder funds.

Price to Sales ratio is calculated as follows:

Price to sales ratio=Total Market Capitalisation/Total sales (Revenues)

The most perfect ratio is 1 as it shows that the company revenue generation abilities is consistent with the current value but it’s important to check if the ratio makes sense.

Price to book value ratio

This is another measure of looking at how successful in growing the initial assets of the business. A high figure of price to book value would be desirable to investors as this indicates that the business has seen growth and therefore a sign of better future prospects.

Based on the above three ratios an investor with $10,000 would be in a perfect position to decide whether to invest in a company or not but its important to note that ratios will work best when there are a number of options in terms of companies to invest in and they must belong to the same sector to provide a better comparison.


Damodaran,A.(2012). Investment Valuation: Tools and Techniques for Determining

the Value of any Asset, University Edition. John Wiley and Sons.

Order My Essay

The life of a management student is replete with many challenges and writing an excellent essay is one of them. If you are looking for the best custom essay writing service, then you have reached your destination. At Lifesaver Essays, our talented team of essay writers will ensure that you get a well-drafted, unique, and 100% plagiarism-free management essay well ahead of the deadline. And you all these amazing benefits at extremely low prices. All you need to do is place an order and be assured of a stellar college essay delivered to you by us.

Write My Essay Now
$ 0 .00


Be Awesome - Share Awesome