Stock Price Ratios

Using Stock Price Ratios is a method to try to figure out how reasonable a stock price is. My favourites are Price/Earnings per Share Ratio (P/E Ratio), Price/Graham Price Ratio (P/GP Ratio) and Price/Book Value per Share Ratio (P/B Ratio).

The most common ratio is probably the P/E Ratio. I generally use the current stock price and the consensus EPS estimate for the current year. I compare this to the 5 year low, median and high median P/E Ratios. The ratio is sometimes called the Forward P/E Ratio.

There is also a Trailing P/E Ratio. This ratio uses the current stock price and last year’s EPS. To do a comparison, you need to compare this ratio with the 5 year low, median and high median Trailing P/E Ratios.

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.

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 below the 10 year high 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.

There could be reasons why you do not think one of the above Stock Price Ratios gives a valid picture of what would be a reasonable stock price. Say, because of new accounting rules, the book value on a stock is significantly raised or lower. Using the P/B Ratio in this instance may not give you any valid hook on what is a relatively reasonable stock price. So there are other Stock Price Ratios you can use.

Another common Stock Price Ratio is the Price/Cash Flow per Share Ratio (P/CF Ratio). Here you can use a 5 year median P/CF Ratio and compare it to the P/CF Ratio using the current stock price and the CFPS covering the last 12 months.

The Price/Sales per Share Ratio (P/S Ratio) can also be used in the same manner. You can compare the 5 year median P/S Ratio to a P/S Ratio based either on Sales or Revenue estimates for the year or Sales or Revenue earned over the past 12 months.

If you are dealing with a REIT or a Utility company, you might want to use the Price/Adjusted Funds from Operations Ratio (P/AFFO Ratio), Price/Funds from Operations Ratio (P/FFO Ratio) or Price/Distributable Income Ratio (P/DI Ratio). The problem with these ratios is that how to calculated AFFO, FFO or DI has changed over time. Also, not everyone calculates these values in the same manner. To be at all useful, you should get your AFFO, FFO or DI values from the same place. Sometimes a company will include these values in with their section called Management Discussion and Analysis.

To do a comparison I look at the 5 year low, median and high median P/AFFO Ratio, P/FFO Ratio or P/DI Ratio and compare it to the current ratios based on current stock price and analysts' consensus values for AFFO, FFO or DI.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.