A stock is a good buy when the value of which of these ratios is low, compared to a market index or company history?
A)Price-to-book-value
B)Price-to-earnings
C)Dividend yield
D)All of the above

Question

Quizplus · Accepted Answer

The price-to-book-value ratio relates the market value of the company to the historical accounting value of the firm. In a company that has old assets, this ratio may be quite high, but in one with new, under-appreciated fixed assets, the ratio might be lower. If the market knows that the earnings have peaked and are expected to fall, the P/E ratio will be low; but if earnings have bottomed out and are expected to move in an upward cycle, the P/E ratio will be high. This phenomenon is the result of expectations and math. When the earnings peak, the market will not move the company's stock price up to really high levels, and the P/E will shrink as EPS rise. When earnings trough, the market won't penalize the stock price as much as the decline in earnings, and the P/E ratio will rise. Low payout ratios are associated with firms in growth industries.

A Stock Is a Good Buy When the Value of Which