Question

Although Financial Ratio Analysis has limitations, it is a great tool to find the problematic areas in the company so that managers can go back and address the problems. One of the limitations is differences in accounting standards around the world that can distort financial ratios.

Select two publicly traded US companies listed on the NASDAQ stock market and calculate each company’s P/E (Price to Earnings Ratio) and MB (Market to Book Ratio). What do these ratios tell you about how investors value these two companies’ future prospects?

*Make sure your selected companies are different than your classmates’.

Answer 1

Company 1- EBAY

MPS- 48.61

Diluted EPS - 6.62

Book Value Per Share - 4.12

PE Ratio = MPS/EPS

i.e 48.61/6.62

=7.34

PB Ratio = MPS/BPS

i.e 48.61/4.12

=11.81

Company 2- Amazon

MPS- 2954.91

Diluted EPS - 26.01

Book Value Per Share - 147.16

PE Ratio = MPS/EPS

i.e 2954.91/26.01

=113.61

PB Ratio = MPS/BPS

i.e 2954.91/147.16

=20.08

A higher PB ratio implies that investors expect management to create more value from the given set of assets.

PE Ratio shows what Market is willing to pay today for a stock based on its past and future earnings.