Market test or Valuation Ratios
The followings are the market test or valuation ratios.
- Dividend Yield Ratio.
- Dividend Payout Ratio or Payout Ratio.
- Price Earning Ratio or P/E Ratio (Earnings Yield Ratio).
- Market value to Book Value Ratio.
Dividend Yield Ratio
This ratio is calculated to know the relationship prevailing between dividend per share issued by the company and the market value of the share of the respective company.
Dividend Yield Ratio Formula
The formula to find dividend yield ratio is as follows
Dividend Yield Ratio = Dividend per Equity Share / Market Value per Share
Dividend per Equity Share = Dividend Paid to Equity Shareholders / Number of Equity Shares
2. Dividend Payout Ratio or Payout Ratio
This ratio is calculated to find out the extend of profits retained within the business concern. A portion of profits earned retained within the business is called ploughing back of profits. Such profits helps the company for growth and pay more dividends in future.
Dividend Payout Ratio formula
The formula to find out dividend payout ratio is as follows.
Dividend Payout Ratio = Dividend per Equity Share / Earnings Per Share
3. Price Earning Ratio or P/E Ratio (Earnings Yield Ratio)
This ratio discloses the relationship prevailing between market price per equity share and earnings per share. Generally, this ratio is calculated by the prospective investors to find the appreciation in the market value of shares and decide whether or not to buy the shares in a particular company.
Formula to find P/E Ratio
Price earning ratio is calculated with the help of following formula.
Price Earnings Ratio = Market Price per Equity Share / Earnings Per Share
Earnings Yield Ratio = Earnings per Share / Market Price Per Share x 100
4. Market Value to Book Value Ratio
This ratio is calculated to find out the relationship prevailing between market value per share and book value per share. This ratio is calculated by the following formula.
Formula to find Market value to Book value ratio
The following formula can be used to find market value to book value ratio
Market value to Book Value Ratio = Market value per Share / Book Value per Share
Book Value per Share = (Equity Share Capital+ Reserves and Surpluses – Accumulated Losses) / Number of Equity Shares