Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Market and Valuation Ratios: P/E, Dividend Yield and Earnings Yield

Updated 4 October 2026 · Fact-checked

Market and valuation ratios link a company's share price to its earnings, dividends and book value. They tell investors whether a share looks expensive or cheap. Use the formula, put in per-share figures, and interpret: P/E = market price ÷ EPS, dividend yield = DPS ÷ price, earnings yield = EPS ÷ price.

Understand Market and Valuation Ratios

Most ratios you have studied use only financial statement figures. Market ratios add one more input: the market price of the share. They show how the stock market values the company compared with what the company earns, pays out or owns.

The price-earnings (P/E) ratio tells you how many rupees investors pay for each rupee of earnings per share. A high P/E usually means investors expect high growth or see low risk. A low P/E may mean low growth expectations, high risk, or an undervalued share. It is only meaningful when compared with similar companies or the company's own past.

Dividend yield is the cash return from dividends as a percentage of the current price. Earnings yield is the same idea using EPS instead of dividend. Earnings yield is simply the inverse of P/E, shown as a percentage. Dividend yield ignores capital gain, so it is only part of the investor's total return.

Market value to book value (price to book) compares the market price per share with the net worth per share on the books. A value above 1 means the market values the firm above its accounting net worth. Tobin's Q ratio compares the market value of a firm with the replacement cost of its assets. A Q above 1 suggests the market values assets above what it would cost to replace them, so it can encourage investment.

Key rules to remember

Earnings per share (EPS): EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares; Use profit available to equity shareholders only.
Price-earnings ratio: P/E = Market price per share ÷ EPS; Expressed in times. Also equals Market capitalisation ÷ Earnings available to equity shareholders.
Dividend yield: Dividend yield = (Dividend per share ÷ Market price per share) × 100; Use the dividend per share for the year, not the payout ratio.
Earnings yield: Earnings yield = (EPS ÷ Market price per share) × 100 = (1 ÷ P/E) × 100; Inverse of P/E.
Dividend payout ratio: Payout = DPS ÷ EPS × 100; Dividend yield = Earnings yield × Payout ratio.
Market value to book value: MV/BV = Market price per share ÷ Book value per share; Book value per share = Equity shareholders' funds (net worth) ÷ Number of equity shares.
Q ratio: Q = Market value of the firm ÷ Estimated replacement cost of its assets; Market value of firm usually means equity plus debt at market value. Above 1 means market values assets above replacement cost.

How to solve Market and Valuation Ratios questions

Follow this order for any question on market ratios. Most errors come from using the wrong base for per-share figures.

1List the data given: profit after tax, preference dividend, number of equity shares, market price, dividends, net worth.
2Compute EPS after deducting preference dividend from profit after tax.
3Find DPS if only total equity dividend or payout ratio is given.
4Apply the required formula: P/E, dividend yield, earnings yield, MV/BV or Q.
5Check units: per-share against per-share, totals against totals, and percentage against times.
6Show the formula, substitution and answer on separate lines to earn step marks.
7Interpret in one or two lines: what a high or low value suggests, and compare with industry or past data if given.

Quickest way: Per-share first, then divide by price

When to use it: Use this in MCQs and in the first lines of any written ratio answer.

Convert everything to per-share values first: EPS, DPS, book value per share.
Remember P/E and earnings yield are inverses. If P/E is 8, earnings yield is 12.5%.
Remember dividend yield = earnings yield × payout ratio, so you can skip a step.
For MCQs, be suspicious of yields that look implausibly large, and eliminate options that ignore preference dividend.
In written answers, write the formula first and add a one-line interpretation to secure marks.

Common mistakes in Market and Valuation Ratios

Not deducting preference dividend when computing EPS
Students take net profit directly because the question gives it prominently.
Fix: Always compute earnings available to equity shareholders first.
Using face value instead of market price
Face value is also a per-share figure and appears in the question.
Fix: Yields and P/E use market price. Use face value only when the question says dividend is a percentage of face value, to find DPS.
Treating dividend payout ratio as dividend yield
Both involve dividends and are shown as percentages.
Fix: Payout is DPS ÷ EPS. Yield is DPS ÷ price.
Dividing total net worth by market price per share for MV/BV
Mixing total figures with per-share figures.
Fix: Divide net worth by number of shares first, or compare market capitalisation with net worth.
Calling a high P/E always good or a low P/E always bad
Students memorise one rule of thumb.
Fix: Say it depends on growth, risk and industry comparison, and compare with peers.

Worked examples

Example 1

A company has profit after tax of ₹60,00,000 and 10% preference share capital of ₹20,00,000. It has 5,00,000 equity shares. Equity dividend paid is ₹3 per share and market price is ₹60. Calculate EPS, P/E ratio, dividend yield, earnings yield and dividend payout ratio.

Show the solution

Preference dividend = 10% × ₹20,00,000 = ₹2,00,000.
Earnings for equity = ₹60,00,000 − ₹2,00,000 = ₹58,00,000.
EPS = ₹58,00,000 ÷ 5,00,000 = ₹11.60.
P/E = 60 ÷ 11.60 = 5.17 times (approximately).
Dividend yield = 3 ÷ 60 × 100 = 5%.
Earnings yield = 11.60 ÷ 60 × 100 = 19.33% (approximately).
Payout ratio = 3 ÷ 11.60 × 100 = 25.86% (approximately). Check: 19.33% × 0.2586 ≈ 5%.

Answer: EPS ₹11.60; P/E 5.17 times; dividend yield 5%; earnings yield 19.33%; payout ratio 25.86%. The low P/E suggests investors expect modest growth or see higher risk, so compare with industry peers.

Example 2

A company has equity share capital of ₹40,00,000 (₹10 shares) and reserves of ₹60,00,000. The share price is ₹35. Its firm's market value (equity plus debt) is ₹5,00,00,000 and the estimated replacement cost of its assets is ₹4,00,00,000. Calculate MV/BV and Q ratio and comment.

Show the solution

Number of shares = ₹40,00,000 ÷ 10 = 4,00,000.
Net worth = ₹40,00,000 + ₹60,00,000 = ₹1,00,00,000.
Book value per share = ₹1,00,00,000 ÷ 4,00,000 = ₹25.
MV/BV = 35 ÷ 25 = 1.4 times.
Q ratio = ₹5,00,00,000 ÷ ₹4,00,00,000 = 1.25.
Comment: both are above 1.

Answer: MV/BV is 1.4 times and Q is 1.25. The market values the firm above both its book net worth and the replacement cost of its assets, which suggests investors expect good returns and may support new investment.

Exam tips

Read whether the question gives total figures or per-share figures and convert before using any formula.
Check for preference shares in every EPS calculation.
Write one interpretation line after each ratio. Questions often ask you to comment.
For MCQs, test your answer using the inverse link between P/E and earnings yield.
Show the formula and substitution in written answers so you keep step marks even if arithmetic slips.

Practice questions from Financial Analysis and Planning - Ratio Analysis

Market and Valuation Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Market and Valuation Ratios: frequently asked questions

What is the difference between dividend yield and earnings yield?

Dividend yield uses dividend per share divided by market price. Earnings yield uses EPS divided by market price. Earnings yield is higher than dividend yield whenever the payout ratio is below 100%; they are equal at 100% payout.

Is a high P/E ratio good?

Not always. It can mean investors expect strong growth, but it can also mean the share is overpriced. Compare with similar companies and the firm's own history.

How is P/E linked to earnings yield?

Earnings yield is the inverse of P/E, shown as a percentage. A P/E of 20 means an earnings yield of 5%.

What does MV/BV greater than 1 mean?

It means the market price is above book value per share. The market expects the firm to earn more than the value shown on its books.