Market to Book Ratio (Price to Book) - Formula, Examples, Interpretation
Price is what you pay for goods or services you acquire; Cost is the amount of . In the discussion of the relationship between price, cost and value, one point. Price and brand value are intertwined, so what? This blog post explains how retailers and brands can find the price that matches their brand. Price-Value Relationship. the connection that consumers make between price and quality; products with a higher price are commonly perceived to be of better.
Features-The product includes all the specifications that it says it has or that are required, this includes safety measures. Reliability-The product performs consistently. Durability-When the product is being used it has to last under the conditions of normal use. Serviceability-The product is easy to maintain or repair either by the consumer or by providing a warranty which says the company will provide repairs.
Aesthetics-This is important to consumers, products have to look good, and this contributes to a brand equity and identity. The customer has to have positive feelings about the product, the company, the brand name and the employees. Services Responsiveness-Services are performed in a prompt manner. The graph indicates that at this price the quantity would be 30 slices, because only at that quantity is marginal utility equal to the three-cent price point B.
Thus the curve in Figure 1, to a reasonable degree of approximation, may be able to do double duty: Similarly, a 12th slice of bread is worth eight cents see the shaded bars. Thus, the two slices of bread together are worth 17 cents, the area of the two rectangles together. Suppose the price of bread is actually three cents, and the consumer, therefore, purchases 30 slices per day. The total value of his purchases to him is the sum of the areas of all such rectangles for each of the 30 slices; i.
The amount the consumer pays, however, is less than this area. His total expenditure is given by the area of rectangle 0CBD—90 cents. The difference between these two areas, the quasi-triangular area DBE, represents how much more the consumer would be willing to spend on the bread over and above the 90 cents he actually pays for it, if he were forced to do so.
It represents the absolute maximum that could be extracted from the consumer for the bread by an unscrupulous merchant who had cornered the market. Since, normally, the consumer only pays quantity 0CBD, the area DBE is a net gain derived by the consumer from the transaction. Virtually every purchase yields such a surplus to the buyer.
Utility measurement and ordinal utility As originally conceived, utility was taken to be a subjective measure of strength of feeling. It was not long before the usefulness of this concept was questioned.
It was criticized for its subjectivity and the difficulty if not impossibility of quantifying it. An alternative line of analysis developed that was able to accomplish most of the same purposes but without as many assumptions.
Introduction to the price-to-earnings ratio (video) | Khan Academy
First introduced by the economists F. Allen in Great Britain The idea was that to analyze consumer choice between, say, two bundles of commodities, A and B, given their costs, one need know only that one is preferred to another. This may at first seem a trivial observation, but it is not as simple as it sounds.
In the following discussion, it is assumed for simplicity that there are only two commodities in the world. Figure 2 is a graph in which the axes measure the quantities of two commodities, X and Y. Thus, point A represents a bundle composed of seven units of commodity X and five units of commodity Y.
The assumption is made that the consumer prefers to own more of either or both commodities. That means he must prefer bundle C to bundle A, because C lies directly to the right of A and hence contains more of X and no less of Y.
Price Earnings Ratio
Similarly, B must be preferred to A. But one cannot say, in general, whether A is preferred to D or vice versa, since one offers more of X and the other more of Y. Commodities X and Y see text. The consumer may in fact not care whether he receives A or D—that is, he may be indifferent see Figure 3. Assuming that there is some continuity in his preferences, there will be a locus connecting A and D, any point on which E or A or D represents bundles of commodities of equal interest to this consumer.
If the consumer is indifferent between D and E, the gain and loss just offset one another; hence, they indicate the proportion in which he is willing to exchange the two commodities. In mathematical terms, FE divided by FD represents the average slope of the indifference curve over arc ED; it is called the marginal rate of substitution between X and Y. Indifference curves see text. Figure 3 also contains other indifference curves, some representing combinations preferred to A curves lying above and to the right of A and some representing combinations to which A is preferred.
These are like contour lines on a map, each such line being a locus of combinations that the consumer considers equally desirable. Conceptually, through every point in the diagram there is an indifference curve. Figure 3, with its family of indifference curves, is called an indifference map.
This map obviously does no more than rank the available possibilities; it indicates whether one point is preferred to another but not by how much it is preferred.
It is easy to show that at any point such as E the slope of the indifference curve, roughly FE divided by ED, equals the ratio of the marginal utility of X to the marginal utility of Y for the corresponding quantities. Relative marginal utilities can be measured in this way because their ratio does not measure subjective quantities—rather, it represents a rate of exchange of two commodities. The marginal utility of X measured in money terms tells one how much of the commodity used as money the consumer is willing to give for more of the commodity X but not what psychic pleasure the consumer gains.
Prices and incomes One other type of information is needed to complete the analysis of consumer choice: In what follows, it will be assumed that the consumer spends all his money on the available commodities savings bonds being among the commodities. If PX and PY are the prices of commodities X and Y, respectively, and M represents the amount of money available for spending, the condition that all of the money is spent yields the equation or, solving for Y in terms of X, 2 This is obviously the equation of a straight line with slope and with y-intercept.
The line, called the budget line, or price line, represents all the combinations of X and Y that the consumer can afford to buy with income M at the given prices. Equilibrium of the consumer Figure 4 combines this price line and the indifference curves, permitting direct analysis of the consumer purchase decision.
So the market cap, or what the market perceives the value of this equity is, the market capitalization, is these two numbers. And this is the market value of the equity, what the market thinks the equity's worth.
So this is interesting. But the market is saying, no, no, I don't necessarily believe those accountants. Maybe they're throwing some stuff in here that's not really there. In this case, the company's trading at a discount to its book value.
And I won't go into detail on that now, but that's actually a fairly unusual circumstance, unless people are very suspicious about the accounting or the actual book value of the company. Or if they think that this is just a kind of an asset with a useful life that has been shortened. But we'll talk a lot more about that when we deal with real examples. But in this case our market cap is below our book value. And you can even look at it from the price.
Value and Relationship Quality
I said the price doesn't tell you much. But it tells you a decent bit if you think of things in per-share.
Now, what were the earnings of the company? So let me write this down. And let's just say we're looking this from the vantage point that has happened.
This isn't like I'm at the beginning of and modeling. So let's say we're looking at this on January 1, And let's say the company has already released its earnings, although it normally takes a lot longer. Probably closer to 45 to 90 days.
But let's say they released their earnings. Or another thing that you might see a lot when you look at companies, is that this is trailing 12 months earnings. You'll see this TTM sometimes. Because when someone says earnings, are those the earnings last year? Are those the earnings that you're predicting for next year? So this is trailing 12 months earnings. So first, just to learn what the Price to Earnings ratio is, let's just calculate it.
Then we can talk about what it actually means and if we have time, we can have a discussion on why a company might have a higher or lower Price to Earnings Ratio. And that discussion can actually get quite involved. But in this case, you literally just take the price of the stock and you divide it by the earnings per share.
So let me switch colors just to ease the monotony.
So in this case, the Price to Earnings ratio is What does that tell you? One is, you could kind of flip this. No-one ever talks about the Earnings to Price ratio, but that's an interesting thing to even think about.
Because it connects it with a lot of other financial concepts that are out there. So this is kind of a Sal special ratio, but it's a useful one to think about. The Earnings to Price ratio is just the inverse of this. But let's say this company, for whatever reason, it's a really stable company. It's doing the same thing every year. Let's say that not only is this the trailing 12 months earnings, but this is also-- actually, I'll introduce terminology right here. So this is trailing 12 months.
You could also have forward earnings. What are forward earnings? You can probably guess. The earnings I just said, this is actually what happened to the company. This was the earnings of the company last year, or the last 12 months.