Introduction;
What question do market ratios try to answer for potential investors? Market value ratio aims at evaluating a company’s economic status in the extended marketplace scenario. Factors such as; price earnings ratio, earnings per share, price/cash ratio, market value per share and dividend yield. Market ratio allows the management to cross-check on the certainty of an investor future prospect’s and insights about the firm.
Market ratio is a determinant for a firm’s future performance. This influence the current investors to invest more in the business. It is a tool that allows chances of potential investors investing in the firms shares. If the all the company’s ratios are good, then business ratio is at its best so is the stability of the stock price of the firm.
Question B; Yes, a positive trend in profits growth indicates the firm’s nature of stability. P/E ratio is determined by dividing current market price per stock share by total earnings per share. This ratio is a determinant of how much an investor is willing to pay per dollar of current earnings. Investor, who pays out high price for a dollar of current earnings, expects high earnings in future payback.
Therefore, given the financial statement of the firm, potential investors can carry out P/E ratio analysis to determine the chances of realizing maximum returns. A positive and consistent trend of profits in the company’s financial statements shows that; the price per share of the company’s stock is stable. Hence, it cannot be affected easily by market economic forces.
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