Using Ratios in Analysis
You will hear and read a lot about ratios, or multiples, as they are sometimes called. A quick glance at a stock on Morningstar will reveal many different ratios: price earnings ratio, price to sales ratio, price to book ratio, and so on. While some ratios provide a hint about the company’s intrinsic value, most of them are based on the stock’s current price. That price can be overstated in the case of a hot growth stock or understated for stocks in languishing sectors. While they have some value to the long-term investors, they reflect the market’s view of the stock today or for the short term. They tell us little or nothing about the future value of the company.
Earnings Per Share (EPS)
Earnings per share is a popular ...