p e ratio price to earning ratio if you're someone who is somehow interested in fundamental analysis I'm sure you would have heard this term yes it is another Financial ratio it is a valuation ratio that's exactly what we are going to learn in today's video because in the last video I hope you watched it we have learned about profitability ratios and leverage ratios financially suicide so in today's video the agenda is super clear we are going to learn about the remaining two different kinds of financial ratios which are valuation ratios and operating ratios cool so hi all welcome to the 19th episode of the complete learning series of stock market investing and trading as always I put all these videos into a series the series is put into a playlist the playlist is available here is that I button upper but make sure you watch all the videos in the right order and learn really well let's all invest together and grow together so yeah we are moving ahead with great pace and with a lot of Internet to learn more about fundamental analysis has become successful long-term investors right so yeah the agenda is said let's get right into the video the name of charging screen welcome to Market Phoenix [Music] okay great kudos to all of you who are watching this video I've been seeing this multiple times all of you who are watching are people with great intent to learn fundamental analysis if you actually keep this Spirit Alive I'm sure you'll become great long-term investors for sure you'll compound your wealth over time so all the best and congratulations are the very same time so yeah Mark your attendance in the comment section let's start learning so the presentation is here up here I hope you're watching it so before getting into learning about the ratios that we are going to learn in today's video Let's quickly revise what financial ratios are why they are used at different types of financial ratios quickly let's do it what are Financial issues as we learned in the last video If you haven't watched the last video it is give financial ratios are simple numbers which tells us how a company is performing as simple as that right we took an example of how can we chemists a great batter we can say note by looking into each index he played we just simply say that by looking into his total runs that is called we look into that batting average we look into the strike rate we look into total number of centuries called by him so these are different metrics which tell that is a good batter or not just like that every company has certain specific numbers and these numbers would tell if a company is good or not cool so those numbers are called financial ratios why why is it important very clear right because we need to analyze these companies we need to know if they are good or not so financial ratios will help us as simple as that moving ahead there are four types of financial ratios as we discussed in the last video as well one is profitability ratios those are numbers or ratios which talks about the profitability of the company number two leverage ratios those are numbers so ratios or metrics which will talk about uh where the company is standing in terms of Leverage in terms of how much debt they have taken are those that it loans good or bad all of those things leverage ratios would talk about now just revising refreshing these two ratios we learned in the last video and that's exactly why I'm I'm telling you to go and watch the previous video If you haven't now here in this video we are going to learn about valuation ratios and operating ratios in this valuation ratios is super important I'm sure the p e ratio that I said in the introduction price to earning ratio that comes under valuation ratio talks about the valuation of the company is it valued really high is it valued really low is the valuation good enough to invest we'll get some basic idea using valuation ratios then comes operating ratios talks about the operational efficiency the managerial efficiency of the company really good to analyze the company via operating ratios as well so yeah the agenda is clear if you go to learn about valuation ratios and operating ratios in today's video so the first one we are going to learn is valuation ratios as I said earlier valuation ratios help us easily understand how Market participants value a company's stock price we get a fair bit of an understanding regarding the valuation of a company does it value too high compared to the profit that it is generating is it value too high compared to the sales that it is generating all that is being conveyed by valuation ratios cool so there are three types of or three large famous valuation ratios which are mostly used by long-term investors fundamental analysts and those three valuation ratios are what we are going to learn today number one is price to earnings ratio the very famous PE ratio number two is Price to Book value ratio again a very important ratio I I many times I actually go into tools like a screener and search for companies which falls under a very good Price to Book value ratio and those are Gem of investing opportunities we'll talk about that also uh in today's video number three is price to sales ratio cool let's start learning that the first valuation ratio that we are going to learn is price to earnings ratio p e ratio let's read through this and you'll easily understand what this has said now one of the most popular Financial issues as I have been telling uh since the introduction it is one of the most popular financial ratios also known as PE ratio this is used for valuing companies and understanding how expensive or cheap the stock is trading currently cool let's enter into the calculation the formula and you'll clearly understand what we are talking about PE ratios formula is current stock price divided by earnings per share earnings per share we learned in the last video right so PE ratio is current stock price divided by earnings per share now yeah let's actually put numbers and C of D Mart D March again just telling all of these videos we've been taking example of D Mart to do everything right we learned how to analyze financial statements of dmart the financial ratios also we are doing with the example of D Mart now D Mart's current market price you can go into any Brokers terminal zero the fires Google right you can go anywhere and you can find what price is dmart trading today so that is four four one five as of today divided by earnings per share or EPS where can we find EPS from very simple right you can simply go into the uh p l statement profit and loss statement of D Mart and you can get uh epsc earnings per share from here which is 23.04 right so four four one four five divided by 23.04 that's 191. a p e ratio of 191.62 now let's just understand what does aside this means that for every unit of profit generated by D Mart the market participants are willing to pay rupees 191 to acquire the share that is when you as a market participant when you go into your broker's terminal and buy dmart share when you're paying 191 rupees that 191 Rupees is generating a profit of 1 rupee one rupee profit Generation 4 generating one rupee of profit uh by D Mart you are paying 191 rupees isn't that a high premium don't you feel for generating one rupee profit you're paying 191 Rupees to acquire the share now don't think that when you actually buy uh dmart stock price stock for 415 rupees you're actually going to get 23 rupees in hand 23 rupees will be the profit generated by the company that can completely move into the resource and surplus of the company as decided by the company it can decide whether or not to pay dividend back to you as a shareholder so don't get confused here right don't think that when you're paying 4415 Rupees to buy a stock you're gonna get this 23 rupees no in case of Dima dividend payout is zero you don't want to get anything the the complete 23 Rupees is going to be with the company only but I hope you get the gist of this you pay 4415 rupees and the company with that amount is going to generate 23 rupees of profit only every year I hope your understanding what we are discussing here right so price to earnings ratio compared to the earnings of the company where is the price of the company what are some earnings it's basically net income profit of the company right so compared to the profit of the company or earnings of the company where is the stocks price again coming back into the example so for generating one rupee of profit the price of the company is 191 times so there is a huge premium paid now why is this premium paid maybe people believe in the company believe in the future of future potential of the company so they are ready to pay a premium here is what we can say now I'll give you some thumb rules here a high p e ratio is not that great a high PE ratio means that the company is valued too high a company need not be valued too high right a low p e ratio means that the valuation is less or lesser valuation means that it is good for investing right I'll give you another thumb rule here so it's normally said that when you are analyzing a company it is always good for the PE Ratio to be somewhere between 15 to 20 to 30. that is a good period ratio then you might come back and ask me here 15 to 20 to 30. there's a good p e ratio then 191 that's like out of proportion right is the out of world very high PE for D Mart does it mean that D Mart is valued really high maybe and that's exactly where I want to say it when when I said that when we learn any Financial ratio it is very important to compare the PE ratio of that company with the p e Ratio or with the financial ratio of com of its peers right of its competing companies because maybe some Industries it is okay to have ipe right so when I say 50 to 20 to 30 let's not generalize it uh always compare every Financial ratio of a company with its peers let's do that here no let's go in the screener I've already as we saw in the last video there is a section here saying peer comparison so PE ratio is added here so Avenue supermarts came out at 138 so that's their calculation and if you see trend has a 170 PE met plus Health 140 PHP so as you can see uh all of those similar peer companies have PE uh in the tunes of 100 or above so what we can understand here is it is okay for this industry or it is normal in this industry to have a PE of 100 or above but I I so that is not what I want you to focus here I want you to focus on understanding PE comparing the current price of the stock with respect to the earnings of the company that is it cool if this is understood let's move ahead and learn the second valuation ratio versus Price to Book value ratio now the symbol if you understand that price to earnings ratio is comparing the price of the company to the earnings of the company then what is this seeing where the price of the company is standing with respect to the book value of the company then the only question is what what is the book value of a company right now Book value of the company is exactly the shareholders Equity of the company we've been learning so much we've come so far I hope you know what shareholders Equity is us otherwise I'll tell that in the simplest way possible shareholders Equity or Book value is if a company liquidated all its assets today and paid off all its debts the value remaining would be its Book value understood a company decided to shut shop shut operations stop the company so they liquidated all the assets they generated money they're using that money they paid orders debts and liabilities then what would be remaining that is the actual Book value of the company right so what you have to find out is book value per share so that is basically shareholders equity which is the book value divided by total number of shares you know where to find the total number of shares right you can simply go into the annual report easily find total number of shares so I've done that already so what is price Price to Book value ratio symbol no current share price divide added by book value per share book value per share I already found out which is 211.5 in the case of demand so 4415 divided by 2 11.5 is 20.87 X which means now this last sentence is what you should focus on that is where you actually actually understand what PB ratio is right so this means that D Mart is trading over 20 times its Book value a high ratio compared to peers would indicate over valuation right so compared to its Book value it is trading at 20 times valuation the stock price is 20 times of that very clear just like PE ratio you can simply compare to that so as you can see here a low PB ratio Price to Book value is also called a PB ratio so low PBA ratio indicates company is undervalued which is good now I did say there is a mega jackpot kind of a way of knowing where the company is in terms of valuation right that is by actually looking into PB ratio so you tell me what of the PB ratio is under one that's less than one what does it tell about the company it tells that you need to look into the formula here the denominator is larger than the numerator and what is the denominator Book value and what is the numerator current share price so if the PB ratio is under 1 it means that the book value is larger than the current market price I hope you are understanding this the current market price is lesser than the book value per share of the company now what is current market price into total number of shares market capitalization what does book value per share in the total number of shares total book value of the company current market capitalization is lesser than the book value of the company is what uh what it means when the PB ratio is under one in that case if I had all the money in the world what would I do I would take that money pay the pay of the market capitalization by the entire company maybe practically not possible but I'm just saying right I would buy the entire company so now I paid my money I got the entire company now the book value is higher than what I paid for now what would I do I would liquidate all its assets take that money pay off all its debts even then net money would be left correct because the book value is larger than market capitalization I hope you understand so it is an amazing opportunity I mean mostly mostly you can do more Beauty religions but again it is a great litmus test to do if a company has a PB ratio of under one it does great so in this case anyways uh the PB ratio is 20 times which means that dmart price the current market price is trading at a premium of 20 times comparing to its Book value cool amazing so let's move ahead into the next uh valuation ratio which is price to sales ratio now you understand the exercises right so here you are comparing the current market price of a company compared to its same why is this important is because always comparing the current market price of a company to the earnings or uh the Inc the profit of a company is not always perfect it doesn't always give the exact valuation picture of a company so a lot of time fundamental analysis analysts also compare the price of a company to the sales that it is doing and that's exactly what it tells PS ratio is equal to current share price divided by sales per share how can you find this you go into the piano statement you can find the sales of the company you are divided by the total number of shares in the company you'll get sales per share just like earnings per share this is sales per share and you can get 9.19 in the case of D Mart here and what does it say this means that for every rupees one in sales remote is generating the stock is valued 9.19 rupees higher one rupee sales happening the stock is valued 9.19 Times Higher so what is it I mean simple understanding so far right so if the PSA ratio is lesser it is good it is valued lesser if it is valued lesser it's good for us to invest because the valuation can go up in the coming days if the PS ratio is high it means that it is already valued really high cool so anyways these three are the valuation ratios we are learning today right p e ratio p b ratio and PS ratio very simple in each of the ratios the current market price of the company is compared to a very critical data of the company in price to earnings the current market price is compared to the net income or profit of the company in terms of the pro in terms of profit generated by the company where is the current market price standing in Price to Book value ratio in terms of the current Book value of the company where is the current market price are standing in in PS ratio in terms of the sales being generated by the company where is the current market price standing does it valued really high or is it valued low cool very simple right very very simple in that case let's move ahead and do even simpler Financial ratio which are operating ratios so operating ratios indicate efficiency of the company's day-to-day operational activity it would talk lengths about how well the management as running the company does it operationally efficient or dot that is what we'll understand here these are also called activity ratios or management ratios rightly cold so right now we are going to learn four very famous very important operating ratios in today's video number one is fixed assets turnover ratio number two uh working capital run over ratio number three total assets Renault ratio and number four receivables turnover ratio now I know that names here are a bit complicated but when you actually hear what they are you'll feel that they are even simpler than the financial ratios we learned earlier the very first operating ratio that we are going to learn today is fixed asset turnover ratio now I want you to look into this exact line I'm pointing here and that will clear it in very simple terms what fixed asset turnover ratio is it tells us how efficiently the company company uses its fixed assets like property plant and Equipment a single number which will tell us how effectively a company is using its fixed assets as simple as that now let's quickly get into its formula fixed assets turnover is equal to operating revenues divided by average of fixed asset looking into the mathematical formula what do you understand using average or fixed asset or using fixed asset how much revenue is the company operating revenue is the company able to generate mathematically right using fixed asset how much revenue a company is able to generate how much multiples right that is what the formula is so we are putting operating revenue of the company easily we can find out from the piano statement then we have to put average of fixed asset where can we find it from balance sheet of a company right so company coming into the balance sheet of dmart so you come here in under known current asset we have property planned and equipment and this is the fixed asset of the company you take average of this year and last year basically add that and divide by two right you will get 6854 crores so divide these two and you get fixed asset turnover of 4.51 mathematically converting this mathematical formula into a simple English sentence is what this means that dmart is able to generate rupees 4.51 for every rupees one no fixed asset every unit of asset B Mart is generating an operating revenue of rupees 4.51 good no so this is exactly where we said this fixed asset turnover ratio is a number which will tell how effectively a company is able to generate revenue from its fixed assets what if this was 100 rupees we can say that the company is more effective in converting its fixed asset into Revenue what if this was just 50 PESA or 50 0.5 it means that the company is very less efficient in converting its assets into Revenue cool as in plus that so higher the ratio it means the company is effective effectively and efficiently managing its fixed assets cool if this is understood then you can easily understand total asset turnover ratio because you can like quickly jump here and look at the formula and you can understand what is the formula of total asset turnover ratio total assets turnover is equal to operating revenues divided by total average asset previous of uh ratio we took only fixed assets here we are seeing the company's efficiency in converting all of its assets into Revenue all of the assets here here we are looking so in for taking total average I said we can easily come here we can simply look at total asset right see total assets you take the average of two years and you put it here and in case of dmod we can see the number is 2.12 what does it translate to in English this means that dmod is able to generate rupees 2.12 per total assets of rupees one if they have total assets worth one they're able to generate operating revenue of rupees 2.12 and it is very simple just like the last uh ratio higher this is the more effective the more efficient the compressed the lower it is lesser efficient the company is in converting is total assets into operating Revenue cool quickly moving ahead into the third ratio that we are learning today versus working capital turnover ratio so in order to understand what this ratio is we have have to first understand what working capitalists I know a lot of you know what working capitalists but let's uh quickly understand what working capital has working capital is the capital required by a company to run its day-to-day operations typically inventory is receivables cashed everything comes under working capital now how do you found find out working capital of a company you basically get into its balance sheet and you take current assets and subtract current liabilities from that and you will easily get the working capital of a company no I've done that for dmart and I've got rupees 224 crores so now that is the working capital of a company now just like we did for fixed assets and total assets working capital turnover ratio talks about the efficiency of a company in converting working capital into revenue for the company the higher the ratio is it means that the company is super efficient in converting working capital into Revenue the lower the ratio it means that the company is not that efficient in converting working capital into Revenue right so in case of let's look into the our formula here working capital turnover ratio is equal to revenue divided by average working capital working capital anyways we found out Revenue we can easily get from the piano statement so you divide that and you get 12. now what does this mean this means that dmart is able to generate rupees 12 by using working capital of rupees 1. if they can manage and handle a working capital of just rupees one they can generate Revenue with rupees 12 with that amazing higher the ratio better efficient Company Lower the ratio lesser efficient company moving ahead into the final operating ratio that we are learning today which is accounts receivable turnover ratio so in order to understand accounts receivable turnover ratio first we need to understand what accounts receivable are so we have already learned this in the balance sheet analysis video I hope you remember it anyways let's quickly revise it say there is a company at company a and the company a is supplying something to Company B so the company B should pay money to company a but Company B says that okay I need this on credit I will pay back after six months see this is a one lakh rupees transaction so this one lakh rupees becomes receivable for company a and it is a payable for Company B so this is shown in the balance sheet under receivable for a company a which means that there is a one lakh rupee which which would come in eventually cool so that is what trade receivable is so trade receivable and account receivables are basically the same thing right so accounts receivable turnover ratio tells or indicates how many times in a given period the company receives cash from its debtors and customers very important nope to know the efficiency of a company say there is a company it has really good Revenue it is looking good but it is not receiving money into its bank account balance sheet is showing good amount of receivers but money is not coming in cash is not coming in and we have already learned this right cash is king So it is always important to know how quickly cash is being replenished uh how quickly the receivables are actually coming into the company and that efficiency is what is being measured by accounts receivable again indicates how many times in a given period the company receives actual cash from its debtors and customers we don't want to see a lot of receivables on the balance sheet we actually want to see cash in the bank account right so high number indicate is that the company collects cash more frequently which is high accounts receivable turnover ratio if the number is high it means that the turnover is good or the company is collecting cash more efficiently and quickly if the number is less it means that the company is not collecting very quickly so the formula is revenue divided by average receivables revenue you know how to take from the piano statement receivables you can actually go into the balance sheet you come under assets and see trade receivables you can see so you uh so average receivables is what we are taking you take the average of these two you put it here and I got the answer of 562.92 X which means that dmart receives cash from its customers 562.9 times a year this is a very high accounts receivable turnover ratio mostly because of the nature of the business of dmart but this is good this says that the number is high and the uh the the frequency in which the cash is actually coming into the company is really high and the amount of receivables on its uh balance sheet is kind of less amazing right so yeah this is it then we have come to the end of learning about financial ratios so if you remember the journey it's very interesting right first we learned the importance of long-term investment why you should be investing into long term and where you should be investing and how much you should be investing then we understood the importance of actually investing into good quality stocks finding the muscles and investing into a great portfolio right and for doing that we understood that we need to learn fundamental analysis and to do fundamental analysis why we are doing all this right so we started we understood how to read and analyze and learn the annual report of a company then we learned about the three financial statements of a company uh piano statement balance sheet and then cash flow statement of a company but when we did that or when we learned how to understand all these four one report and three statements we saw that there are a lot of numbers there just having many numbers is not helping us analyze a company and that's exactly where financial ratios came to help us right so if that is the case if you have understood so much amazing because even more exciting content is coming your way as part of the next classes we're actually getting into the Crux of the matter you're gonna learn to Value companies and actually find out great investment opportunity so that is what is coming your way so if you have liked the video as always make sure you smash the like button get to know the comment box ask questions download market feed app for great trade ideas of profitability verified India's top Traders you can learn from them as well or you can even join my exclusive Community where I conduct regular live q a and discussion session so that I said as I always ask do share the video with many people invite them into our growing learning amazing stock market Community right so yeah that does it from my site for this video as always let's learn trade invest and grow together see you in the next class bye foreign [Music]