Straight Through Processing in Commercial Lending
Commercial banks all over the world have been forced to adapt to increasing changes in technology. This is because technological changes are shaking the very foundation of the commercial banking industry. However, since commercial banks have been reactive i.e. they have been responding to changes in the environment instead of proactively accepting them, a lot […]
Proof of Importance in Cryptocurrency
In the previous articles, we studied proof of work as well as proof of stake. We learned that the proof of stake mechanism was created in order to overcome the shortcomings of the proof of work mechanism. However, proof of stake itself has several shortcomings which have become increasingly visible over the years. In order […]
Risks Involved in Derivative Contracts
Derivatives are considered to be extremely risky. The market is divided in two fronts when it comes to the opinion about risks involved in a derivative contract. Some people are of the opinion that since derivatives are not new securities by themselves, how can they introduce new risk in the market? The opposing camp agrees […]
How Variable Lease Works in Retail?
Leasing has traditionally been one of the biggest expenses related to the retail industry. This expense is incurred by almost every retail company across the world. However, over the years, retail companies have found it problematic to pay a fixed lease to landlords. This is because such lease agreements create operational leverage on their balance […]
Problems in Comparing Pension Fund Returns
Pension funds are present in some form in almost every country of the world. Hence, ideally, there should be comparisons between the returns provided by pension funds in different parts of the world. However, this does not generally happen. This is because pension funds are not like mutual funds or other investments. There are certain […]
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.
Your email address will not be published. Required fields are marked *
