Assessing the Fair Value of a Company’s Share

Topic: Financial Management
Words: 369 Pages: 1

Expressed as a percentage, the dividend ratio is one of the financial ratios and is used to show the amount that a company pays out as dividends to its shareholders in a given financial year. Obtaining this ratio requires the company to express dividends as a percentage of prices (Sharma, 2020). In essence, the dividend yield is an estimation of the dividend-only returns that a company acquires from investment in stock. It is based on the assumption that the yield rises when the price of the stock falls, given that the dividend remains constant.

The price-to-earnings ratio is used to value a company and measures the current price relative to the earnings per share in a given financial year. This ratio, also known as the price multiple ratios, is used to determine the relative value of a given organization’s shares through comparison with those of other companies (Sharma, 2020). Moreover, the ratio is used to compare a given firm against its historical records to determine its performance over time.

The book-to-market ratio is used to identify undervalued or overvalued securities by comparing the book value of securities and the market value. In essence, it is the ratio of the book value and the market value that helps analysts determine a firm’s market value relative to its actual worth (Sharma, 2020). This ratio is used to differentiate between the actual value of a company and investor speculation. If the ratio is more than one, the stock is considered undervalued (Liraz, 2019). On the contrary, if it is less than one, then the stock is overvalued. Share price refers to the price of a single share of a given firm’s equity shares. In other words, the share price is the largest amount that an investor is willing to pay for a company’s stock.

In financial analysis, beta is a measure of the volatility of a stock in relation to the overall market. The definition given by S&P 500 Index is that a beta of 1.0 for individual stocks is ranked based on how much they deviate from the market (Sharma, 2020). Based on this view, it is clear that Tesla is a valuable company, and investors should consider buying its stock.

Reference List

Liraz, M. (2019) Financial ratios analysis guide: A step-by-step guide to balance sheet and profit and loss statement analysis. Independently Published

Sharma, R. K. (2020) Ratio analysis: Financial ratios. New York: Amazon Digital Services LLC.