Market test or Valuation ratio | Explanation | Formula

Market test or Valuation Ratios

The followings are the market test or valuation ratios.

  1. Dividend Yield Ratio.
  2. Dividend Payout Ratio or Payout Ratio.
  3. Price Earning Ratio or P/E Ratio (Earnings Yield Ratio).
  4. 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

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