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Important investment ratios

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For novice investors it can seem strange that a R100 share can be cheaper than a R10 share. The reason is that investors use a number of ratios to determine one share’s value relative to another.

 

Here are four common investment ratios:

  • The price: earnings (p:e) ratio is the most common investment ratio. It tells you how many rand you are paying for each rand of earnings.
  • The price: book ratio shows whether the market has factored a company’s asset value (on its balance sheet) into its share price.
  • The price: sales ratio is the share price divided by sales per share. One share is cheaper than another when its relevant investment ratio is cheaper than that of the second share.
  • The dividend yield is the dividend per share divided by the share price. The share with the highest dividend yield is the cheapest, all other things being equal. Shareholders can compare this to how much money they will earn if they put their cash into a money market account.

You can also watch this webinar, presented by Simon Brown, on important ratios in fundamental analysis:

 

 

 

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