Question

Valuation Ratios:	Dell Company	Industry				Lenovo Company	Industry
Price-Earnings Ratio	0.43	2.04				0.16	0.45
Market to Book Value	-	1.24				11.63	5.16

Compare the valuation ratios across the two firms. How do you interpret the difference between them?

Answer 1

Valuation ratios :P/E and P/B
Price-Earnings Ratio(P/E)	How much price the investor is willing to pay for one $ earnings of the firm. This ratio help to identify whether a stock is undervalued or overvalued.So stock with lowP/E will be considered cheaper in its valuation and vice versa.Investor can choose exposure to growth stock versues value stock basis P/E and P/B ratio. For growth stock we have high P/E and P/B ratio while for value stock we have low P/E and P/B ratio
Dell Company	0.43	Lower than industry means stock may be undervalued. In this it is 0.43 means investor is paying 0.43$ for 1$ earning of the firm but on the other hand as per industry average it is 2.04 which means investor is willing to pay 2.04$ for 1$ earning of the firms in the industry. This means stock is much cheaper than industry
Lenovo Company	0.16	Lower than industry means stock may be undervalued. In this it is 0.16 means investor is paying 0.16$ for 1$ earning of the firm but on the other hand as per industry average it is 0.45 which means investor is willing to pay 0.45$ for 1$ earning of the firms in the industry. This means stock is moderately cheaper than industry
Dell company versus Lenevo company P/E ratio	Lenevo is cheaper than Dell as investor are willing to pay 0.16$ for 1$ earning of firm. Though P/E ratio is indicating that Lenevo is cheaper than Dell but for proper analysis we need to calculate PEG ratio that we need to compare P/ E to earning growth rate for two firms.Since in the given question earning growth rate is not given so we are assuming our interpretation for undervalued and overvalued stock basis P/E ratio only. Otherwise P/E to G ratio <1 means undervalued stock and vice versa.Here Lenevo is undervalued in comparision to Dell basis P/E ratio.
Market to Book Value(P/B)	Here in this ratio we compare the market price of stock of a company with book value of the stock of a company which simply indicates how much price the investor is will ing to pay for what would be left if the company goes bankrupt immediately. This ratio can be used to interpret whether we are investing in growth stock or value stock or whether the stock is unfervalued or overvalued. Higher ratio mean growth stock investment. Lower ratio is value stock investment and stock is undervalued
Industry Comparision :Dell company versus Lenevo company industry P/B ratio	Assumption: P/B ratio for industry comparision considerd as individual Dell P/B ratio not given
1.24 v/s5.16	Means dell industry is undervalued in comparision to lenevo industry