An Investor’s Guide To Measuring The Market Value Of Companies

Certain tools are created to guide investment into the stock market. The commonest tools are ratios and they seek to show the overall state of the stock market

While measuring the profitability, liquidity, or debt position of a company, is great, they are of no use to the investor as market ratios. These ratios are used to analyze the show the position of companies in relation to their stockholders and also access the overall perception of the investors of the market and future prospects.

It helps in accessing the premiums the investors are willing to pay on the stock as well as if they are over-priced and under-priced. There are various ratios that help you interpret the value of a stock; Each of these ratios are used to measure different things and different directions.

However, these ratios when combined, portray the overall image of the publicly traded companies. Here are the commonest ratios that are used as well as methods of computing them.

Dividend yield: Depending on what your priorities are as an investor, the dividend yield would mean many things to you. Certain investors want to have a consistent flow of income. These people probably depend on proceeds of their investments to survive.

However, some other investors invest with the hope of getting capital gains. The dividend yield shows the exact rate of return the investors would obtain. Therefore, allowing investors to compare the expected benefits of investing in different companies.

This is generally calculated by dividing the market price per share by the Dividends per Share and multiplied by 100.

Price to Earnings: The price to earnings ratio, popularly known as the P/E ratio, simply shows how much investors are willing to per Naira of earnings. It is the primary tool that defines the cost to acquire a Naira of the company's earnings.

It is also relevant in evaluating whether a company’s shares are over-priced or under-priced when compared with the same results for related companies.

The formula for price to earnings ratio is simply: market value per share divided by annual earnings per share.

Book value per share: The Book value of a company is calculated by subtracting a company's assets minus liabilities. This is what shows you exactly what a company is worth. It is referred to as stockholders' equity, shareholders' equity, or simply equity.

To calculate the book value per share, the total book value or shareholders equity is divided by the number of shares outstanding. As a tool of measurement and comparison, the ratio is used as a determinant of whether a company’s market value per share is higher or lower.

It would ultimately help you determine which value is higher or lower in terms of making purchases or selling.

Earnings per share: Ultimately, everything boils down to this. Popularly known as EPS, it indicates the profitability of a company as well as the amount of net income earned per share of stock.

The EPS of a company is computed by dividing the reported earnings of the business by the total number of shares outstanding. The computation would vary depending on what you intend to reflect. For example, the reported earnings can be net income, EBITDA, or EBIT.

While this would not tell you the market shares of the company, it would show you the value of investing in the company.

Market value per share: If you want to know whether an investment in a company is going to be worth it, then the market value per share is a relevant tool. As the name implies, this ratio shows the value that the market assigns every share of a company's stock.

It is calculated as the total market value of the business divided by the total number of shares outstanding.

It is important that when analyzing the market value of the company, likes are to be compared to liked. You need to compare across industries and use relevant benchmarks. Since the Yochaa App is about the stock market, some market analysis tools are already available in usable form.

The ‘Explore’ page shows the dividend yield, the indices employed by the Nigerian stock exchange; while the ‘Prices’ page shows the market prices of shares over a period of time.

In order for you to win in the market, it is important that you stay informed.

Written by Lawretta Egba