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Financial Ratios Question.

Financial Ratios Question

What are some examples of Valuation Concepts?

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Some examples are:

Valuation Ratios
Many valuation ratios exist to judge the value the stock market places on any given company. Three such ratios used in this work are the price/earnings ratio (p/e), the price/sales ratio (p/s), and the price/free cash flow ratio (p/fcf). Other examples not used at his time are price/book and price/cash flow. The three chosen are easily understood and described below. Others can be added later as we become more sophisticated in analyzing valuations. (Much of the following description/definition of terms is cut from yahoo.marketguide and is quoted.)

P/E Ratio
"The Price-to-Earnings (P/E) ratio is the single most widely used measure of a stock's value. That's because the key to stock ownership is the shareholder's stake in a portion of the company's profit stream." The p/e is the price per share divided by the earnings per share.

Price/Sales Ratio
"Price-to-Sales is generally used to evaluate companies that don't have earnings and don't pay dividends. For these companies, you may consider that high multiples of sales and high growth rates suggest optimistic future earnings expectations on the part of investors. Also, earnings can vary widely from one year to the next due to temporary issues, such as reserves or gains and losses on asset divestitures. Sales trends tend to be less volatile. Hence the Price-to-Sales ratio can be useful in situations where the P/E is distorted by unusual swings ...

Solution Summary

This solution discusses nine valuation concepts/ratios.