Calculating Common Market Ratios
This calculator provides an estimate of the four most common market ratios, including earnings per share (EPS), PEG ratio, and dividend yield. The calculator requires a total of four inputs, including:
- The security’s current market price per share
- The company’s earnings per share in terms of the trailing twelve months, or ttm
- A projection of the earnings per share growth rate, typically over the next three to five years
- The dividends paid per share of stock
Using this information, the calculator then provides the user with four outputs, including:
- The security’s price to earnings ratio over the trailing / past twelve months (ttm)
- A forecast of the security’s forward price to earnings ratio
- The security’s price to earnings growth rate, or PEG ratio
- The security’s dividend yield
What are Market Ratios?
This calculator provides the user with the four most common market ratios. Also known as market value ratios, these financial metrics allow analysts to make fair comparisons of market prices between competing businesses. Understanding a company’s market ratios allows you to decide if a stock’s price appears to be undervalued, overvalued or appropriately valued. To that end, this calculator provides the following four metrics:
- Price to Earnings, or PE Ratio: this metric is determined by dividing the company’s current market price per share by earnings per share. This provides the analyst with a normalized value that can be compared to the PE ratio of other companies. For example, a PE ratio of 90 tells us the price per share of common stock is ninety times greater than the earnings per share for that same company. Generally, lower PE ratios are associated with undervalued companies, those with very slow growth rates, or companies that are financially struggling. Relatively high PE ratios are associated with overvalued companies, those with high growth rates, or companies that are significantly outperforming their peers.
- PEG Ratio, or price to earnings growth: this metric is calculated by dividing the company’s PE ratio by the earnings growth rate. The PEG ratio helps the analyst to figure out if a stock is overvalued based on its relatively high PE ratio. For example, a stock with a relatively high PE ratio and relatively high growth rate will have a lower PEG ratio than a stock with a high PE ratio and low growth rate.
- Dividend Yield: this last market ratio metric provides the analysis with the return of the investment in a stock based only on the dividend payment. If we hold dividend constant, the yield will go up as the price of the stock falls and the yield falls as the price of the stock goes up.
Interpreting the Results of Our Calculator
Market ratios are typically used as benchmark values, meaning the ratios are compared to similar companies to understand relative performance. The PE ratio labeled as ttm (or trailing twelve months) tells us how well the company performed in the recent past. But as the saying goes, historical performance is not indicative of future results. That’s where the forward PE ratio comes into play, since this calculation uses the earnings growth rate. This projection of earnings per share is usually published by industry analysts that study the company’s growth plan to understand how quickly earnings will grow too since the PE ratio is a function of both earnings and the market price of the stock. As mentioned earlier, the PEG ratio normalizes the PE ratio to help reveal if the stock is over or under valued.
Dividend yield is a completely different metric in that it tells us how much of the earnings company leadership is willing to return to shareholders relative to the market price per share. Investors looking for a steady stream of income from their equities will seek out stocks with higher dividend yields. Market analysts can argue that when management returns a high proportion of earnings to shareholders, it’s indicative of the lack of investment opportunities within the company since companies have the option of using earnings to create additional value for shareholders. So, high dividend yields is not a good sign for anyone looking for growth.