Top 3 Valuation Metrics that You Should Know While Investing

Want to know the financial health of your business in this ever-changing market world? Ask a consultant to do a business valuation and find your company’s worth in no time. Valuation metrics are used to know your company’s market value. The metrics help to measure the outcome of your investment. One can measure a company’s performance and prospects of future earning with the help of metrics. The most common metrics are based on the following factors and they are sales or revenue and profits. The metrics reveal a lot about the key business processes like customer relationship management, procurement, supply chain management, human capital management and financial management.

The three important valuation metrics are as follows:

Price-to-Earnings Ratio

It is otherwise known as Earnings Multiple and is commonly used valuation metric. P/E ratio is calculated by dividing the share price by its annual earnings per share. The investors will tend to seek stocks with low P/Es whereas high-growth industry will have high P/Es. P/E ratio is important as the consultant can compare valuation across companies. An investor would know how much to shell out for stock with a lower P/E costs less per share when compared with a higher P/E. P/E ratio offers a value based on earnings.

Price to Book Ratio

P/B ratio is calculated by dividing a stock’s share price by its net assets. Firstly, the book value per common share is calculated and then the market price of the common stock is divided by the book value per common share. P/B ratio offers a value which is based on assets.

Earnings Yield

Though it is uncommon it is one of the important metrics to calculate the value of a company. Earnings yield is calculated as earnings per share divided by market price. It is also called as payout ratio.

Business valuation is more of an art than a science. The most common financial value adders are profitability and growth. The real value of your company is typically based on size, growth and profitability. Implement one of these valuation metrics while investing!

Leave a Reply

Your email address will not be published. Required fields are marked *