With all of the fun and games over GameStop and a couple of other shares in the last week or so, and at the request of a few clients I thought I would give you a couple simple value calculations if you are looking at a companies shares. Clearly these are not the only factors to take into account, but they are a good starting point.
Glossary of valuation terms:
Price-to-book value (PBV) ratio: A company’s “book value” is the value of its assets minus its liabilities (net asset value), at a set point in time. If a company’s share price is lower than its net asset value (PBV ratio of less than one) then it might be considered as potentially good value and worthy of further analysis. However, for companies with little in the way of physical assets, such as technology companies, PBV ratios have their limitations.
Price-to-earnings (PE) and price-to-dividends (PD) ratios: The PE ratio compares a company’s share price to its earnings per share. The PD ratio is a company’s dividend per share divided into its share price. Because a PD ratio accounts for cash actually being paid out to investors (dividends) as opposed to earnings, which are an accounting concept, it can be a more reliable valuation metric.
I hope that this makes sense and is of value to you.
So, to the markets.