What are share price ratios?
Financial markets are not always efficient and sometimes the price of a share or other asset does not reflect its real fundamental value. Market hype or simply a slowness among investors to catch on to a company's true potential can push its share price up or down further than it deserves.
If a company's shares are currently trading at a price that is higher than their real value, this can indicate that they are priced unjustifiably high. This suggests that it might be a good time to sell its shares on the expectation that their price will fall back towards their true value.
If they are trading below their real value, it can mean they are underpriced or cheap and indicate to you a good time to buy.
Using ratios to determine true value of a company
There are a number of ratios that traders can use to alert them to such discrepancies.
Measuring the real value of a company is however subjective – especially when it is based on estimates and forecasts, such as with discounted cash flow – and it can be difficult for traders to decide if a seemingly overpriced share is truly overpriced or is reflecting a fundamental that the trader is as yet unaware of.
These ratios below should therefore always be used in combination with other indicators when you are making trading decisions.