# Profitability Ratios Related to Market / Valuation (Investors' View)
These ratios combine share price data with accounting data to judge how the market values the company.
## A. Price-Earnings Ratio (P/E Ratio)
Reflects investors' expectations about the firm's future earnings and indicates the payback period for investors.
$$\text{P/E Ratio} = \frac{\text{Market Price per Share (MPS)}}{\text{Earnings per Share (EPS)}}$$
A higher P/E may mean either the stock is over-valued or that investors expect high future growth.
## B. Dividend Yield and Earnings Yield
These measure return in relation to the market value of the share (not its paid-up value). Dividend % is based on paid-up value, but yield % reflects the true return because share capital is taken at market value.
$$\text{Dividend Yield} = \frac{\text{DPS}}{\text{MPS}} \times 100$$
$$\text{Earnings Yield (EP Ratio)} = \frac{\text{EPS}}{\text{MPS}} \times 100$$
Note: Earnings Yield is the reciprocal of the P/E ratio (expressed as a percentage).
## C. Market Value / Book Value per Share (MV/BV)
Shows how investors view the company's past and future performance. A higher ratio means a better position for shareholders in terms of return and capital gains.
$$\text{MV/BV} = \frac{\text{MPS}}{\text{BVPS}}$$
Where:
- MPS = Average or Closing Market Price
- BVPS = Net Worth ÷ Number of equity shares
## D. 'Q' Ratio (Tobin's Q)
Represents the relationship between market valuation and intrinsic (replacement) value.
$$\text{Q Ratio} = \frac{\text{Market Value of a Company}}{\text{Assets' Replacement Cost}}$$
- Q = 1 → equilibrium
- Q < 1 → stock may be undervalued
- Q > 1 → stock may be overvalued