What is a market value ratio?
Market value ratios[i], also referred to as market-related ratios, are used to evaluate the current share (stock) price of a publicly-traded company, enabling analysts and investors to determine the company’s economic status.
Market value ratios compare a company’s current share price to different line items on its balance sheet, income statement, and cash flow statements, determining whether the company’s shares are overvalued, undervalued, or reasonably priced.
The market value, also called fair market value, refers to the price that a share of a publicly-traded company can be readily be bought for or sold at in the open marketplace (stock exchanges). The market value per share is commonly referred to as the ‘going price’ of a company’s shares.
In addition, market value is also commonly referred to as the market capitalisation of a publicly-traded company. Market capitalisation is calculated by multiplying a company’s current share price by the number of its outstanding shares. The market capitalisation of a company varies from day to day.
Types of market value ratios
Market value ratios include, inter alia, the following types of ratios:
- Price-to-earnings (P/E) ratio
- Book value per share (BVPS) ratio
- Price-to-cash-flow (P/CF) ratio
- Price-to-book (P/B) ratio/Market-to-book (M/B) ratio
- Dividend yield ratio
- Dividend coverage ratio (DCR)
- Dividend payout ratio (DPR)
As with all accounting ratios, the comparison of market value ratios should only be done for companies operating in the same industry
Price-to-earnings (P/E) ratio
- What the price-to-earnings (P/E) ratio evaluates
The price-to-earnings (P/E) ratio, also called the price-earnings ratio, evaluates a company’s performance by comparing its current share price with its earnings per share (EPS). In other words, the ratio indicates how much investors are willing to pay for a company’s shares per rand (ZAR) of profits.
The P/E ratio is also sometimes referred to as earnings multiple or price multiple.
The ratio is the most basic of all the market value ratios and almost all the other market-related ratios are a variation of the price-earnings ratio. A significant high multiple shows that investors expect a company will improve considerably, and vice versa.
The P/E ratio depends on economic and stock market conditions and may also vary between different industries and types of companies.
Earnings per share (EPS) represents that portion of a company’s net income that is available to its ordinary shareholders. It is a metric used by investors to evaluate the performance of a company.
EPS is calculated by dividing the net income of a company by the number of its outstanding ordinary shares. When a company’s shareholders’ equity comprises preference shares (preferred stock) and ordinary shares (common stock), preference dividends (preferred dividends) are subtracted from the net income.
Ordinary shares outstanding are the number reported at the end of an accounting period and are expressed as the weighted average number of shares outstanding.
A high EPS is an indication that a company is in a favourable position to distribute more profits to shareholders.
- Formula
P/E ratio = Company’s current share price/ Earnings per share (EPS)
The current share price is obtained from a stock exchange where the company’s shares are traded. The other information needed to calculate the earnings per share (EPS) can be obtained from the following statements.
- Income statement – Net income.
- Balance sheet – Outstanding ordinary shares.
- Example of price-to-earnings ratio
Company VVV has 1 000 outstanding ordinary shares and reported a net income of R20 000 for Q4 of 2025. Its shares are currently traded at R50 per share.
The company’s P/E ratio will be calculated in the following way:
Earnings per share = R20 000/1 000 ordinary shares
= R20 per share
P/E ratio = R50/R20
= R2.50
VVV’s P/E ratio of R2.50 indicates what an investor is paying against every rand (ZAR)
of earnings.
Book value per share (BVPS) ratio
- What the BVPS ratio indicates
Book value per share (BVPS), also called book value of equity per share, compares a company’s ordinary shareholders’ equity to the number of ordinary shares outstanding. Put in other words, the ratio represents the minimum value of the company’s equity available to ordinary shareholders.
Basically, book value of equity per share denotes a company’s net asset value (total assets – total liabilities) on a per-share basis.
The BVPS enables investors to determine if shares of a company are undervalued or overvalued. If the book value per share (BVPS) is higher than the market value per share, then a company’s shares are undervalued, and vice versa.
There is almost always a difference between book value and market value. The market value (price) of a company’s share is the price determined by the supply and demand for the shares on the open stock market (stock exchange). A company’s book value is the amount of cash that all shareholders would receive if all the assets of a company were liquidated and all its liabilities were paid off.
- Formulas
BVPS = (Total shareholders’ equity – Preference shareholders’ equity)/Total shares outstanding
or,
BVPS = (Ordinary shareholders’ equity)/Total shares outstanding
All the information required for the BPVS calculation can be found on a company’s balance sheet.
- Example of the book value per share (BVPS) ratio
The following data was obtained from firm XYZ’s financial statements.
- Preference shareholders’ equity: R500 000.
- Total assets: R12 million.
- Total liabilities: R5 million.
- Total shares outstanding: R1 million.
XYZ’s current share price is R5.50
Firm XYZ’s BVPS will be calculated as follows:
Total shareholders’ equity = Total assets – total liabilities
= R12 million – R5 million
= R7 million
Book value per share (BVPS) ratio = (R7 million – R500 000)/R1 million
= R6 500 000/R1 million
= R6.50 per share
XYZ’s BVPS of R6.50 is R1.00 less than its current share price, which means that the company’s shares are undervalued.
Price-to-cash-flow (P/CF) ratio
- What the P/CF ratio tells you
The price-to-cash-flow (P/CF) ratio, also known as the price/cash flow ratio, measures the value of a company’s current share price relative to the amount of cash generated by the company.
The price cash/cash flow ratio is an alternative method to the P/E ratio. Some investors prefer to use the P/CF ratio because it is difficult to manipulate cash figures compared to earnings, which can be manipulated more easily. In addition, the P/CF ratio negates the effect of non-cash items like depreciation and amortisation.
The ratio is specifically useful when a company has positive cash flows but is not profitable due to large non-cash expenses such as depreciation and amortisation.
Typically, a lower P/CF ratio is preferable because that means more cash flow.
- Formulas
There are two methods that can be used to calculate a company’s P/CF ratio. The one method (method 1) compares a company’s market capitalisation to its operating cash flow, while the other method (method 2) calculates the ratio on a per-share basis.
The formulas for the two methods are:
Formula for method 1
Price-to-cash-flow ratio = Market capitalisation/Operating cash flow
Formula for method 2
Price-to-cash-flow ratio = Current share price/Operating cash flow per share
The sources of the information needed for the formulas are:
- Stock exchange: Current share price.
- Balance sheet: Outstanding shares.
- Statement of cash flows: Operating cash flow.
Market capitalisation = Current share price x number of outstanding shares.
The company’s current share price is R20.00
- Example of price-to-cash flow ratio (Method 1)
Company Fidei’s financial statements provided the following financial figures for its past financial year:
- Outstanding ordinary shares: 1 000
- Operating cash flow: R10 000
Market capitalisation = R20 x 1 000 shares
= R20 000
P/CF ratio = R20 000/R10 000
= 2
- Example of price-to-cash flow ratio (Method 2)
The financial data is the same as for method 1.
Operating cash flow per share = Operating cash flow/Ordinary shares outstanding
= R10 000/1 000 shares
= 10
Price-to-cash-flow ratio = R20/10
= 2
Company Fidei’s P/CF ratio of 2 indicates that the company’s ordinary shareholders and potential investors are prepared to pay R2 for every rand (ZAR) of the operating cash flow. Put differently, the company’s market value covers its operating cash flow 2 times.
Price-to-book (P/B) ratio
- What the P/B ratio reflects
The price-to-book (P/B) ratio, also called the market-to-book (M/B) ratio, is a financial measure that compares a company’s current market value to its book value, enabling investors to identify potential investments.
As already mentioned, a company’s market value, also known as market capitalisation, is its current share price multiplied by all its outstanding shares. The market value is an indication of what the company Is worth according to the market.
The book value of a company, also called the carrying value, is the amount of its net assets (total assets minus all the liabilities).
- Formula
Price-to-book ratio = Market price per share/Book value per share (BVPS)
- Example of the price-to-book ratio
Company LLL’s book value per share (BVPS) is R16 and its current share price is R20.
The company’s P/B ratio will look as follows:
P/B ratio = R20/R16
= 1.25
Company LLL’s price-to-book ratio of 1.25 indicates that the market value of its shares is 25% greater than its book value, implying that its shares are overvalued.
A P/B ratio of less than 1 is an indication that a company’s shares might be undervalued, while a P/B ratio exceeding 1 might show that the shares are overvalued.
Typically. companies with price-to-book ratios less than 1 are considered solid investments.
Dividend yield ratio
- What the dividend yield ratio means
The dividend yield ratio measures the portion of dividends that a company pays out relative to the market value per share during a financial year.
The dividend yield ratio can also be described as the return on investment to investors if they were to buy the shares at the current market price.
- Formula
Dividend yield ratio = Total annual dividends per share/Market price of share
The outcome is displayed as a percentage.
- Example of the dividend yield ratio
Company MUM declared and paid dividends of R5.70 and R6.30 during its financial year ended 31 December 2025. The company’s closing share price was R75.00 on December 31, 2025.
MUM’s dividend yield will be calculated in the following way:
(R5.70 + R6.30)/R75.50
= R12.00/R75.00
= 0.16 x 100
16%
The dividend yield ratio of 16% is the return on investment for investors who bought MUM’s shares at R75 per share.
Dividend coverage ratio (DCR)
- What the DCR measures
The dividend coverage ratio (DCR), also called dividend cover, measures how many times a company will be able to pay dividends to its shareholders.
- Formula
Dividend coverage ratio (DCR) = Net income/Dividend declared
Where:
- Net income = earnings less all expenses, including taxes.
- Dividend declared = the amount of dividends entitled to shareholders of the company.
- Example of dividend coverage ratio
Company CCC reported the following:
- Profit before tax: R450 000.
- Dividend to ordinary shareholders: R18 000.
The tax rate for companies is 28%.
Calculation of CCC’s dividend coverage rate:
Net income = R450 000 x 72%
= R324 000
Dividend coverage ratio = R324 000/R18 000
= 18
CCC’s dividend coverage ratio of 18 shows that the company can pay dividends to ordinary shareholders 18 times.
Dividend payout ratio (DPR)
- What the DPR measures
The dividend payout ratio (DPR) measures the percentage of net income a company distributes to its shareholders as dividends.
- Formula
Dividend payout ratio = Total dividends/Net income
The ratio is expressed as a percentage.
- Example of Dividend payout ratio
Company Z generated a net income of R30 000 during its financial year ended 31 December 2025. In the same financial year, the company declared and paid R7 000 of dividends to its shareholders.
Z’s DPR calculation is as follows:
R7 000/R30 000
= 0.23 x 100
= 23%
Company Z’s dividend payout ratio of 23% indicates that it is paying 23% of its net income to its shareholders. The 77% of net income not paid to shareholders is referred to as retained earnings, available to be used by the company
[i] Refer to the article, ‘Accounting Ratios Explained for Dummies’, for an overview of the numerous ratios used in accounting.
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