When I embarked on my journey of learning and investing in the stock market, I encountered a multitude of terms and abbreviations that often left me feeling confused. One such set of terms includes the PE ratio, PB ratio, and more. As I continue to learn, I am writing this blog not only for my future reference but also to assist individuals who may be struggling with these concepts.
Total revenue refers to the overall amount of income or earnings generated by a company during a specific period of time. An increasing total revenue generally indicates that the company is expanding or experiencing growth.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA represents the total revenue after deducting various expenses, such as the cost of raw materials, power/fuel costs, employee salaries, and selling and administrative expenses. EBITDA is considered a valuable measure as it provides a clearer view of a company's operational performance by eliminating the effects of financing decisions, accounting methods, and tax regulations.
PBIT/EBIT (Profit/Earnings Before Interest & Taxes)
This metric encompasses EBITDA while also accounting for depreciation and amortization. In simple words, it is EBITDA when depreciation and amortization are also considered.
PBT (Profit Before Taxes)
PBT is an important measure as it helps assess the profitability of a company's core operations before accounting for tax obligations. It provides insights into the financial performance and operating efficiency of the company.
Pure profit. Net income, also known as net profit or net earnings, is a financial metric that represents the total profit generated by a company after deducting all expenses, including taxes, interest, and non-operating items, from its total revenue or sales. It provides a comprehensive picture of the company's financial performance.
EPS (Earnings per share)
EPS is calculated by dividing the company's net income by the total number of outstanding shares. It indicates the earnings generated per share.
DPS (Dividend Per Share)
It is a financial metric that represents the amount of cash a company distributes to its shareholders for each share they own as dividends. This metric can be misleading because suppose Company 1 has a current share price of 1000 and gives DPS 10 and Company 2 with a share price of 100 gives DPS 10. Both companies are paying DPS as 1 but as an investor, I may prefer Company 2. That's Why I prefer dividend yield.
Payout Ratio (Total Dividend/Net Income)
The payout ratio is calculated by dividing the total dividends paid by the company by its earnings. The payout ratio is expressed as a percentage. For example, a payout ratio of 50% means that 50% of the company's net income is being paid out as dividends, while the remaining 50% is retained by the company for reinvestment or other purposes.
The dividend yield is a financial ratio that measures the return on investment (ROI) from dividends received by shareholders relative to the market price of a company's stock. It indicates the percentage of return an investor can expect to receive in the form of dividends based on the current stock price.
In the same example from DPS, Company 1 has a dividend yield of 1% while Company 2 has a dividend yield of 10%.
PE Ratio (Price to Earnings Ratio)
Price to earnings ratio. It is calculated by dividing the market price per share of a company's stock by its earnings per share (EPS).
The P/E ratio provides insights into how much investors are willing to pay for each rupee of earnings generated by a company. It is often used as a valuation tool to compare the price of a stock to its earnings potential.
PB Ratio (Price to Book Ratio)
It is used to evaluate the market value of a company relative to its book value. It compares the current market price per share of a company's stock to its book value per share.
It's important to note that the interpretation of the PB ratio can vary across industries. Some industries, such as technology or high-growth sectors, tend to have higher PB ratios due to their intangible assets and growth prospects. Other industries, such as utilities or mature industries, may have lower PB ratios due to their tangible asset base and stable cash flows.