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Profitability Ratio Essay

(a) Pricing multiples P/E price per earnings ratios, P/S market to book rice to dividends. It helps an investor to evaluate the merits of an investment business and an asset of a company so the investor can determine the investments that are most profitable to invest in order to reduce the risks. The method used in valuation analysis is price to earnings (P/E ration). Price /Earnings Price/Book value, Prices/sales Enterprise value (EB, DTA, Economic value Added and Discounted cash flow Price/Book value Ratio

It is a ratio that is used to determine the amount of money the shareholders pays for using the assets of a company. It is also used to determine the number of times the company’s book value per share. Book value of a company is the value of the company assets as on the balance sheet that is Assets less liabilities. Price/Book value Ratio= Stock Price per share Share holders Equity per share Price /Earnings Ratio It is a ratio that is used to determine the number of times stock is traded per dollar of the earning per shares.

The figure is divided by dividing the current stock prices by the earnings per share Price/earnings = stock price per

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share Earnings per share Price/sales Ratio It is a ratio that is used to measure the price of company’s stock by its annual sales. It determines how many times investors pay for the company’s sales per dollar. Price/sales ratio = Stock price per share Net sales (Revenue) per share Divided Yield The ratio is derived by dividing the company’s annual cash divided per share by the current price per stock.

It is expressed as an annual percentage. Divided yield = Annual Divided per share Stock price per share Discounted cash flow (DCF) This is a valuation method that is used to evaluate an investment opportunity. This method uses future cash flow projection and discounts them using the weighted average cost of capital so as to desire present value of an investment. If its value is higher than the current cost of investment then the investment is good to invest in it.

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