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Market value ratios are responsible for three factors in accounting processes in any business, which will be listed below.
Price-to-earnings ratio (P/E)
Price-to-earnings ratio (P/E) is a financial identification that is always equal to the market price of any stock for a company’s annual profit (Ni, Wang, & Xue, 2015). This element is considered to be one of the most accurate ratios that are intended to compare and evaluate whether a certain investment is beneficial for the owner of the stock or not.
Price/cash flow ratio (P/C)
This element is intended to make almost identical calculations as the price-to-earnings ratio. However, it shows the profit of an organization for a certain period (this phenomenon is called cash flow) (Hong, Kim, & Welker, 2017). This period may be measured in seconds, minutes, hours, and so on. It gives people an understanding of their immediate profit that they will be able to earn after they make their investments.
Price/book value ratio (P/B)
With the help of this identification, individuals are allowed to assess the price of the stock they are interested in at the present moment (Ballings, Poel, Hespeels, & Gryp, 2015). Also, the final result will demonstrate the tendency of its value, which is beneficial for identifying the profit that it can bring to a person after a successful trading operation.
It is necessary to state that the main purpose of market ratios is to measure various risks that an investor can make while deciding on what stocks to purchase. Moreover, these coefficients are able to calculate the finances required to issue a particular stock. However, these changes are dependent on a company’s profit return to its previous shareholders and owners. Market ratios are important to identify whether a particular investment is rational or not at the present moment.
Ballings, M., Poel, D. V., Hespeels, N., & Gryp, R. (2015). Evaluating multiple classifiers for stock price direction prediction. Expert Systems with Applications, 42(20), 7046-7056. Web.
Hong, H. A., Kim, J., & Welker, M. (2017). Divergence of cash flow and voting rights, opacity, and stock price crash risk: International evidence. Journal of Accounting Research, 55(5), 1167-1212. Web.
Ni, Z., Wang, D., & Xue, W. (2015). Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model. Economic Modelling, 50(1), 266-274. Web.