Investment Ratios

It is the quotient between the price quotation and the last benefit per share of the company.

It gives us fundamentally two pieces of information:

When indicating the number of times the share has earned is contained in the price, it also gives us the number of years necessary to recuperate the investment done on this share, always that the benefits of the company are maintained.

It reflects the expectancy of the investors on the company.

As for the interpretation of the PER:

In occasions it might be that the PER obtained doesn’t result at all as significant as it should. This happens in cases in which the declared benefits of the company are not in a strict sense. The company may offer benefits that, presented under that party, have obtained, not as results of the normal activities of the company, but from the variations on the reserves or well thanks to valuation criterions of the assets of the same.

With respect to the value of the PER, there exist discrepancies between the financial analysts. First, the shares are suppose to be more attractive when lower is the PER, because when it is high it means that the investors are paying more with respect to the benefits obtained by the company. If on the contrary, if the per is low it indicates that the quotation of the share can easily rise higher.

However, you must have in mind that when the PER of a company is high, its because the investors of the same are ready to pay more, depending on what they expect as future profits. In this sense a high value of the per will not be negative.

Finally, to emphasize that the most commendable is to buy the PER at the medium price of the sector in which the company in question belongs.

At any case, the per is the most important ratio that you can calculated starting from a quotation and, it indicates us how much are investors willing to pay for each dollar of profit of a determined company.

For example, if a company has a profit of 100 per share and its shares are traded at 1000, this means that they are trading those shares at a profit of 10 times the PER.

Price/Cash flow or multiplier of the cash flow ratio: it’s the existing relation between the cash flow of a company (net profit + amortization of the exercise) and its market value. It is obtained by dividing the quotation of the share by the cash flow of the same. As the cash flow gathers more than profits, this ratio gets better or outlines the information obtained by the PER, avoiding the possible distortions that could be produced in function of the politics of a company about amortizations and provisions.

As with the PER, the lower is its value, the cheaper will the corresponding share be.

Price/accounting value ratio: it’s the existing relation between the price of the share (quotation) and the accounting value with which it is presented on the balance sheet of the company. If the ratio is superior to the unit, the market will be paying for the share more than its accounting value, for which the share will be overvalued. In this case the share will have difficulties to keep on rising.

If ratio value is inferior to 1, then the contrary happens. To invest in determined shares a criterion is established, that they must be at minimum at an accounting value. The criterions is interpret this ratio are:

To have in account that this ratio doesn’t take in consideration the future expectations of a company. It simply

It must be compared with other ratios, due that, for example, if a share quotes double its accounting value, it would still seem cheap if you take in account other factors such as: the commercial value of the brand of the company on the market, being holders of a very important patent, etc.

It is recommended to examine the price/accounting value ratio of a determined company in function of the same ratios obtained in past exercises, and not in comparison to the same ratios obtained in past exercises, and not in comparison to the ratios of companies in the same economic sectors, because each one of them can have different results.

Profitability ratio by dividends (yields): you divide the dividend per share and its last quotation in the market.

From a shareholders perspective it is convenient that it is as high as possible.

As a conclusion of the exposed investment ratios, we could affirm that it is convenient to buy a share when:

The PER is low, or lower than the average of the other shares of the same sector.

The quotation of the share is not very much superior to the accounting value of the same.

The interests per share increases when the profit per share also rises, the cash flow per share, the profit per share and its accounting value.