Stock Analysis – Price to Book Ratio, Beta, & Price to Sales Ratio

Stock Analysis Series

We covered price to earnings growth, debt to asset ratio, and dividend yield in the last edition of the stock analysis series.  In this installment we’ll look at the measurements of price to book ratio, beta, and price to sales ratio when evalutating a company’s stock.

Price to Book Ratio (P/B)

Also know as the price-equity ratio, the P/B is used to compare the market value of a particular stock to its book value (value of each share of the company’s stock after the company’s liabilities have been subtracted from the company’s assets).

Price to Book Ratio = Current Share Price/Book Value Per Share

Value investors use this analysis to find hidden gems. Low P/B numbers can indicate that the stock is undervalued. It could also mean that the company has some serious problems. This ratio also puts a value on what would be left if the company immediately went under.

Beta

Beta is used to measure the volatility of an investment compared to the market. Usually the investment is compared to an index. The most popular index used is the S&P.

If the Beta is 1, it means the volatility of the investment is the same as the index. If the number is higher than 1, the security is more volatile than the index and if it’s lower than 1 then it’s less volatile than the index. If the number happens to be negative, it means the security typically does the opposite of market.

Beta can be used to build a portfolio of diversified investments. Financial planners use Beta to put together portfolios of stocks, both domestic and international, bonds, cash products and commodities such as oil and gold.

Price to Sales Ratio (P/S)

What do you do when you want to analyze a stock, but it is so new that there is limited earnings history. You use the P/S!!! The Price to Sales Ratio compares a stock’s performance to itself or similar companies.

Price to Sales Ratio = Stock Price/Sales Price Per Share

Like many of the other measurements, the lower the number, the better. Expenses or debt are not involved in this calculation, so this measurement only tells part of the story. Just like all the other analytical tools, this one should not be used alone to decide whether to buy or sell an investment.

Financial Accounting

Hopefully this series on stock analysis has been useful to you. If you find yourself struggling with some of the terms and concepts that have been covered (like earnings per share) and would like to be able to do fundamental analysis on a company’s stock, it might be worth while to take a class or read a book on financial accounting.

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