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?

Answer 1

Two publicly traded at United States company which are listed on Nasdaq, are Apple and Amazon.

Price to earnings ratio= (price / earnings per share)

P/ E Ratio (Apple)= (116.7/3.33)= 35

P/E Ratio(Amazon)=(3221/26)= 123

Market to book ratio= (market price/book Value)

M/B ratio (Apple)=( 116.7/4.22)= 27.65

M/B ratio ( Amazon)= (3221/147)=21

these ratios tell us that the price to earning ratio of Amazon has been very high and it is reflecting that the investor's discounting a very high growth for the company in the future whereas the price to book value of both the company has been in the line with each other as it is showing that both the companies are available at a price to book value which is almost in the similar zones.

So these companies are reflecting that they have been excessively priced at this point of time if we are considering the price to earning ratio because these are unlikely to sustain in the long run as price to earning ratio of more than hundred is significantly wild for eCommerce company and even if it is having a better growth perspective so this company are highly prone to get under serious pressure at the adverse economic cycles.