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’.

Search the SEU library or the Internet for an academic or industry-related article. Select an article that relates to these concepts and explain how it relates to doing business in Saudi Arabia.

Answer 1

Two publicly traded US companies listed on NASDAQ: Apple and Microsoft

APPLE:

P/E ratio: 32.5

MB ratio: 25.33

MICROSOFT

P/E ratio: 36.04

MB ratio: 12.82

Both Apple and Microsoft have a high P/E ratio. A higher P/E ratio implies that investors are willing to pay more due to their perception of positive future prospects for the companies. NASDAQ has a P/E ratio of 25.62. Apple has an approximately 7 point extra P/E ratio and Microsoft has approximately 10 point extra P/E ratio implying that Apple and Microsoft are valued more in the aspect of their future prospects as compared to the NASDAQ index.

Similarly, a greater MB ratio implies a higher valuation of the future of there companies by the investors. This is because a greater MB ratio tells us that the market capitalisation of the company or the total value of the shares of the company in the market is greater than the assets possessed by the companies today implying that the investors are optimistic about the future of the company. NASDAQ's MB ratio is 3.5. The MB ratio of Apple is approximately 7 times the NASDAQ MB ratio and the MB ratio of Microsoft is approximately 3.5 times the NASDAQ MB ratio.

NOTE: All the ratios are calculated as of 20.09.2020.