## Tuesday, March 29, 2016

### Stock Ratios

It is as if all stocks have their own currency. A stock priced at \$20.00 could be more expensive than a stock priced at \$70.00. Prices are relative. What you need to use to see if a stock is cheap, reasonable or expensive is to compare the stock price relative to some other value.

One of the most popular methods is to compare Price/Earnings per Share (P/E) Ratios. Other ones I use is Price/Graham Price (P/GP) Ratio, Price/Book Value per Share (P/B) Ratio, Price/Cash Flow per Share (P/CF) Ratios, Price/Sales or Revenue (P/S) Ratio and Dividend Yield.

P/E Ratios are relative to different sorts of stocks. Generally speaking a P/E below 10 says that the stock is cheap and one over 30 says it is expensive. However, you can have a very high P/E on a fast growing stock and make lots of money when the stock has momentum.

The P/E Ratio I use in my stock tests is the forward P/E Ratio. That is I am using the EPS estimates to calculate the P/E Ratio. I compare this P/E Ratio to the 5 year low, median and high median P/E Ratios I have in my spreadsheet for a particular stock. I often look at the corresponding 10 year values to see what way P/E Ratios are trending. Sometimes I look at historical values, if I have them.

Sometimes in place of the P/E Ratio, I used Price/Funds from Operations (FFO) Ratio or Price/Adjusted Funds from Operations (AFFO) Ratio. This is especially true for REIT companies. These ratios are like P/E Ratio where I compare 5 or 10 year low, median and high median ratios to a current one based on price and forward FFO or AFFO.

The P/B Ratio is also a common ratio to look at. I look at the 10 year median P/B Ratio. The current one uses the latest Book Value per Share and the current stock price. If the P/B Ratio is 80% of the 10 year median ratio, it shows that the current stock price is cheap. If the current P/B Ratio is around the same as the 10 year median P/B Ratio, then the current stock price is reasonable.

For the P/B Ratio a ratio at 1.50 or below is considered to show that the stock price is on the cheap side. If the P/B Ratio is below 1.00, it implies that the breakup value of the company is higher than the current stock price.

I have previously written about the Graham Price . This calculation is trying to come up with what would be a good price to pay for a stock. It uses both the EPS and Book Value in the calculation. So basically, a P/GP Ratio of 1.00 or below would be ideal. However, some stocks you would like to buy never get to a 1.00 ratio.

What I do is look at the 10 year low, median and high median P/GP Ratios and compare this to the current P/GP Ratio I calculated. Basically, I want a current P/GP Ratio that is at or below the 10 year median P/GP Ratio. A relatively cheap stock would be one where the current P/GP Ratio is at or lower than the 10 year low median P/GP Ratio.

Another common Stock Price Ratio is the Price/Cash Flow per Share Ratio (P/CF Ratio). Here I use a 10 year median P/CF Ratio and compare it to the P/CF Ratio using the current stock price and the forward CFPS which is CFPS estimate for the next year if available. If not I can look at the CFPS of the past 12 months.

At the first of every month I go into check stock prices by dividend yield, so I will not go into details here about this.