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Understanding Key Financial Ratios

The Price Earnings Ratio (P/E) measures the relationship between a company's market price per equity share and its earnings per share, helping to assess if shares are undervalued and aiding in financial forecasting. The Net Profit to Net Worth Ratio evaluates the return on investment by comparing net profit after taxes to shareholders' net worth, reflecting the reward for ownership risk. Both ratios are essential tools for investors to analyze company performance and make informed decisions.

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Abdul Muhaymin Mahdi
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5 views1 page

Understanding Key Financial Ratios

The Price Earnings Ratio (P/E) measures the relationship between a company's market price per equity share and its earnings per share, helping to assess if shares are undervalued and aiding in financial forecasting. The Net Profit to Net Worth Ratio evaluates the return on investment by comparing net profit after taxes to shareholders' net worth, reflecting the reward for ownership risk. Both ratios are essential tools for investors to analyze company performance and make informed decisions.

Uploaded by

Abdul Muhaymin Mahdi
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Price Earnings Ratio: This ratio highlights the earning per share reflected by market share.

Price Earnings Ratio establishes the relationship between the market price of an equity share and
the earning per equity share. The ratio helps to find out whether the equity shares of a company
are undervalued or not. This ratio is also useful in financial forecasting. This ratio is calculated as
:

Price Earnings Ratio=Market Price per Equity Share/Earning Per Share

Net Profit to Net worth Ratio: This ratio measures the profit return on investment. This ratio
indicates the established relationship between net profit and shareholders net worth. It is a
reward for the assumption of ownership risk. This ratio is calculated as:

Net Profit to Net Worth=Net Profit after Taxes/Shareholders Net Worth*100

Shareholder Net Worth=Total Tangible Net Worth

Total Tangible Net Worth=Companies Net Assets-Long-Term Liabilities

(or)

=Shareholders Funds + Profits Retained in business.)

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