Financial analysis indicators - market value and capital market

Last updated: 10.11.2016

This series follows the series about Group of financial analysis indicators and describes in detail the indicators of market value and capital market.

 

 



Indicators of market value or capital market

Investors give their money into undertakings mainly for the purpose of obtaining:

  • dividends
  • capital gains from sale of business or its shares - if the market value of shares grows, the potential proceeds from their sale increase as well

 

Market value indicators often use data about market value of shares and the amount of dividends in its calculations and as such bring into the financial analysis the point of view of investors who evaluate the company not only based on the current development, but also by expected future situation.

 

Group of indicators of market value and capital market include the following indicators:



Earnings per share (EPS)

Earnings per share (EPS) shows the amount of annual profit per a single share. It is important indicator used during investment decision-making.

 

Calculation formula

 

* Number of share is mostly the average for the period weighted by the number of days.

EAT (PAT) is often reduced by dividends on preferred shares.

 

Some entities preparing financial statements in accordance with IFRS are required by IAS 33 (Earnings Per Share) to state as part of the income statement:

  • basic earnings per share (EPS)
  • diluted earnings per share (EPS) - which adjusts both the numerator and denominator for the effects of contracts (e.g. securities convertible into shares), which  could in the future dilute EPS

 

The disadvantage of the indicator

is in the use of profit that can be manipulated.

 

The appropriate comparison

is with competitors EPS or other comparatives.


Cash-flow per share

The indicator Cash-flow per share shows the amount of operating cash-flow per a single share. It is therefore similar to Earnings per share (EPS), but because it does not have profit, but cash-flow in the nominator, it general disadvantages of EPS resulting from the use of profit (especially easy manipulation).

 

Calculation formula

 

 

Number of shares is often the average for the period weighted by the number of days.

 

Suitable comparison

is with competitors or with other comparatives.



Price to earnings ratio (P/E)

Price to earnings ratio (P/E) is one of the indicators of market value and capital market. It indicates how much are the investors willing to pay per unit of profit.      

The indicator is primary but not the only indicator used when making investment decisions.

 

Calculation formula

 

 

The indicator is uninterpretable if the profit is negative.

 

Useful comparisons are with

  • companies in the same industry
  • industry average

But comparisons with companies in different industries or with past developments can be misleading.

 

Interpretation

  • the higher the values, the better (investors expect earnings growth in the future) (17)
  • lower values may indicate either:
    • the company achieved during the reporting period high profit compared with the trend of the  recent years (17)
    • underestimation of the market price of shares (e.g. the market has still not responded to earnings growth), which makes the shares interesting for the purchase (17)
  • high values ​​can be assessed inversely

 

Recommended values

The average value is usually about 20-25 (17), but it depends on economic conditions and the market in which the company operates.

 

---------------

Sources:

17.  Price-Earnings Ratio - P/E Ratio (online). Citation date: 7.11.2015. Available from www: http://www.investopedia.com/terms/p/price-earningsratio.asp?optm=term_v2


Dividend payout ratio

Indicator Dividend payout ratio expresses what proportion of profit is paid out as a dividend / profit sharing. The rest of the profit may be used by the company for further development.

 

Calculation formula

 

 

Interpretation

  • shareholders favoring  profit will prefer high dividend payout ratio; conversely shareholders favoring the growth in value of shares will prefer lower values
  • companies in the later stages of the life cycle tend to have a higher payout ratio than new companies
  • if profit declines, the company management usually tend to "smooth" the amount of dividends to shareholders in order to avoid any possible speculation about worsening of the company situation.

 

If the company wants to pay a dividend, it must meet certain conditions.

Examples of reasons, when the company pays high or low dividends can be found here.



Dividend yield

Dividend yield is one of the indicators of market value and capital market. It is an important indicator used when making investment decisions. It helps assess what annual yield (dividend) is obtained by shareholders for each unit of share value held.

 

Calculation formula

 

 

Comparison

is usually with other dividend yields of the same investors.


Dividend per share

Financial analysis indicator Dividend per share presents the amount of annual dividends paid per a single share.

 

Calculation formula

 

 

Interpretation and comparison

Important is the comparison of data in time-series. If is the trend increasing, it is expected that this trend will continue well into the future.

However, the reason for the indicator growth may not be only the profit increase, but also higher dividend payments, which was made at the expense of company's growth in the future.



Price to book ratio (P/B) / Market value to book ratio (M/B)

Price to book ratio (P/B) or Market value to book ratio (M/B) is one of the indicators of market value and capital market. It is the ratio of the market value of shares with its carrying value. The carrying value may be measured in various ways, one of which may be shareholders' equity.

 

Calculation formula

 

 

Interpretation, recommended value and comparison

Interpretation:

• > 1 → may indicate that the shares are overvalued

•  <1 → may indicate that the shares are undervalued

The recommended value should be > 1.

Comparison of firms in different industries makes little sense, on the contrary, a comparison in the same industry is recommended.


Pomohl Vám tento článek? Ohodnoťte jej prosím.

1 = nejhorší, 10 = nejlepší

1 2 3 4 5 6 7 8 9 10
Komentář
Tento web používá k poskytování služeb, personalizaci reklam a analýze návštěvnosti soubory cookie. Používáním tohoto webu s tím souhlasíte. Další informace