3.7 Market Ratios

  1. LG5

Market ratios relate the firm’s market value, as measured by its current share price, to certain accounting values. These ratios give insight into how investors in the marketplace believe the firm is doing in terms of risk and return. An interesting aspect of these ratios is that they combine backward-looking and forward-looking perspectives. A firm’s stock price is intrinsically forward looking because what investors are willing to pay for a stock is based much more on how they think a company will perform in the future than on how it has performed in the past. Accounting values, in contrast, have an inherently historical perspective. Here we consider two widely quoted market ratios, one that focuses on earnings and ...

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