Advantages of Banking as a Service
In the previous articles, we have already studied open banking as well as banking as a service. Many people tend to get confused between the two and think that both the terms refer to the same business model. However, this is not the case. Open banking is more of a technical term that is used […]
Why Does the Stock Market Crash?
February 2018 has been a bad month for the United States stock market. In just two consecutive trading days, the market crashed by more than 1500 points. As a result, all the incremental gains that were made in January 2018 were simply wiped out within these two days. It would be incorrect to say that […]
Hire Purchase Agreements
Buying Assets on Installments A hire purchase agreement is a particular type of agreement between a buyer and seller. The asset being sold in this case is generally a fixed asset. Also, the amount that has to be paid, is not paid in one single payment. Rather the payment is done in instalments over a […]
Risks Associated with Remote Deposit Capture
The usage of remote deposit capture has been increasing rapidly in the recent past. This is because the technology is convenient and also because check processing became very difficult during the lockdowns which were induced by the coronavirus pandemic. As a result, corporations were forced to deploy remote deposit capture machines in order to continue […]
Why Retail Stores Offer Branded Credit Cards?
The retail industry has become closely intertwined with the finance industry over the years. This is the reason that the availability of better financing options often causes the sales of one store to increase in comparison to other stores. Over the years, retail stores have come up with many financial innovations which has helped them […]
Most investors do not invest directly in the company i.e. they are not promoters of the company. Rather they invest in the company through the stock market. This means that they buy shares at a certain value and make a profit only when the price of the shares go up or they get regular dividends from their investments or a combination of both. This is the reason why investors are particularly interested in how the current share price of the company compares with its fundamentals. Market related ratios help investors use the numbers stated on the balance sheet to better their understanding of the same.
Market related ratios compare the current stock price of the company which is being quoted on the stock exchange to various balance sheet, income statement and cash flow items. One component of all market related ratios is the current stock price.
It is important to understand that the quoted stock price is not the actual price of the share. The stock price just means the price that you are paying to obtain a fraction of the earnings of the company. So if you are buying 1 share at USD 10 and there are 100 shares, you own 1% of the company. This 1% ownership means you get 1% of the profit, which in our case is let’s say USD 2. Hence the actual price you are paying is USD 10 to buy a future recurring profit stream of USD 2 per share. Of course these profits subject to risks and that is what makes investing challenging.
Since the quoted stock price is not the actual price, market related ratios offer a window to analysts using which they can gauge whether a stock is over or under valued and then act accordingly.
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