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OklaBoston (67.44)

A Question About Ratios

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August 24, 2011 – Comments (7)

   Which ratio should one pay the most attention too? Price/Book, Price/CashFlow or Price/Sales?

   My inclination would be to say Price/Cash Flow, since as I understand it that's less susceptible tomanipulation by unethical types than the others, but feel free to disagree with me. There's a lot I still need to learn, as my current rating here indicates. I want honest opinions, not confirmation of my biases. 

7 Comments – Post Your Own

#1) On August 24, 2011 at 5:57 PM, MarginOfBuffett (< 20) wrote:

My favorite ratio is Price/Market Cap.   That way, capital structure doesn't bias the ratio.   

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#2) On August 24, 2011 at 6:06 PM, MarginOfBuffett (< 20) wrote:

  

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#3) On August 24, 2011 at 6:29 PM, shamapant (80.27) wrote:

I don't understand how Price/Market Cap tells you anything...Price/Market Cap=Price/(Price*shares)=1/shares...the reciprocal of the amount of a shares a company has really does not have any importance to the valuation of a company..

To answer your question though, you should pay attention to all of them. Each ratio tells you something totally different about the company, and a company thats overpriced by one ratio is undervalued by another.  I like P/B and P/CF, but i think Price/Sales usually gives misguided interpretations of a company's value...sales don't matter if cost of sales are too high...

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#4) On August 24, 2011 at 6:31 PM, shamapant (80.27) wrote:

Also, don't be afraid of income statements and balance sheets cuz they are manipulatable, cash flows are less manipulatable but they don't offer nearly as much information to work with as balance sheets and income statements.

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#5) On August 24, 2011 at 6:41 PM, MikeMark (29.39) wrote:

My favorite is SellPrice/BuyPrice. I try to make it as high as possible. ;-)

Seriously though, watch out with ratios right now. It's very easy to find yourself in a Value Trap. The ratios all look good, but the assumptions behind using them may all be wrong.

Caution is the watch word of the times.

-MikeMark

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#6) On August 24, 2011 at 7:10 PM, truthisntstupid (81.85) wrote:

OklaBoston

I agree with shamapant on the questionable value of a ratio that has price on both sides of the ratio.  

Price of one share divided by  price of total shares = ?

On the best of the ones you list, I'd rather not offer an opinion.  5 different sailors in this financial sea may all have different 'stars'  they use to chart their course, and yet all be excellent navigators.

I do know that I've read that price/book is most useful in valuing banks.  

As for price/sales, as shamapant said, you also have to take cost of sales into consideration, because it's all part of a puzzle that everyone adopts favorite approaches to figuring out.

One thing they do all have in common, and the fact that "price" is on the the left side of each of them makes this a dead giveaway:  

They are each and every one "value"  metrics.

As a dividend investor, my favorite "value"  metrics are actually none of the above, although like you I will never stop learning. 

Years ago I slowly began to turn away from value investing, towards an income-oriented approach that I believe suits me personally much better.

My favorites are the plain old P/E ratio and dividend yield.  Those are the value metrics I use, although there isn't much difference between them, other than an inversely proportional relationship.

If you enjoy this (investing) as a hobby, you will read voraciously about it, and the more you read, the more you'll form opinions of your own, and reach your own conclusions that over time will prove to work best for you.

By the time you've spent a couple hundred dollars on investing books, some of these things that are annoying now may or may not be important to you then.

At the end of this blog, i've listed a few good books.  Add to that my new favorite and one that may help you immensely:

Warren Buffet And The Interpretation Of Financial Statements by Mary Buffet and David Clark.

For a lot of great information about all these value metrics that are really bugging you, though...

What Works On Wall Street by James O'Shaughnessy

My favorite value metrics come straight from what I learned in O'Shaughnessy's book.

http://caps.fool.com/Blogs/dividends-vs-capital/344638

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#7) On August 26, 2011 at 4:11 AM, MarginOfBuffett (< 20) wrote:

To each his own, and may your findings flourish you well in the wiley world of investing.  As I always say, "Invest like lightning!" and "may the best man win!", this is your reporter, J.D. Tucker, live, from the New Hampshire trading floor, signing out.   

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