Topic: MARKET RATIOS

Definition
The price/earnings (P/E) ratio measures the amount that investors are willing to
pay for each dollar of a firm’s earnings.

Formula
Price Earnings (P/E) Ratio = Market price per share of common stock ÷ Earnings
per share

Example/Computation
If Bartlett Company’s common stock at the end of 2015 was selling at $32.25,
using the EPS of $2.90, What is the P/E ratio at year-end 2015?
Given: Market price per share = $32.25
Earnings per share = $2.90

P/E Ratio = $32.25 ÷ $2.90

= 11.12

Definition
The market/book (M/B) ratio provides an assessment of how investors view the
firm’s performance.

Formula

where,

Example/Computation
Substituting the appropriate values for Bartlett Company from its 2015 balance
sheet, what is the book value per share of common stock?
Given: Common stock equity = $1,754,000
(Total SHs’ equity is 1,954,000 minus Preferred stock of 200,000 = 1,754,000)
Earnings per share = 76,262
Substituting Bartlett Company’s end of 2015 common stock price of $32.25 and
its $23.00 book value per share of common stock (calculated above) into the M/B
ratio formula, what is the M/B ratio?
Given: Market price per share = $32.25
Book value per share =

M/B Ratio = $32.25 ÷ $23.00

= 1.40

Table 3.2 Bartlett Company Balance Sheets ($000)