What is Valuation Ratio? Valuation Ratio Definition and Example

valuation ratio definition

Valuation Ratio Definition and Example

Valuation Ratio Definition

It refers to the ratios that assess the value of the equity. Meaning thereby, the ratios indicates whether the equity is cheap or expensive.

These ratios  are most comprehensive measure of a firm’s performance. The market value of an equity comprises of both risk and return. The important valuation ratios are –  Price-earning ratio, EV-EBITDA ratio, and market value to book value ratio.

Valuation Ratio Examples

To get a better understanding of Valuation ratio definition, let’s discuss examples of Valuation ratio.

1. Price Earning Ratio

The price earning ratio refers to the ratio of market per share to the earnings per share.

Formula of Price earning ratio is –

Market price per share
Earning per share

The market price per share may be the price prevailing on a certain day. The earning per share is simply: profit after tax less preference dividend divided by number of out standing equity shares. This ratio primarily reflects growth prospects, risk, shareholders orientation, and degree of liquidity.

2. EV-EBITDA

The EV-EBITDA ratio is defined as:

                                              Enterprises Value (EV)____________________
                          Earnings before interest, taxes, depreciation, and amortization (EBITDA)

EV is sum of market value of equity and market value of debt. EV-EBITDA  supposed to reflect the profitability, growth, risk, liquidity and corporate image.

3. Market value to Book value Ratio

It is the ratio of market value per share to the book value per share.

Market value per share
Book value per share

 

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