Financial Management and Business Data Analytics · Financial Ratio Analysis

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

Updated 10 October 2026 · Fact-checked

Market and valuation ratios link a company's share price to its earnings, dividends and book value. Calculate EPS first, then P/E = market price ÷ EPS, dividend yield = DPS ÷ market price, payout = DPS ÷ EPS, and market-to-book = market price ÷ book value per share. Use equity figures only.

Understand Market and Valuation Ratios

Other ratios judge the business from its accounts. Market ratios judge it from the view of the shareholder. They compare what the share costs in the market with what it earns, pays out and owns.

Start with earnings per share (EPS). It is the profit that belongs to each equity share. Preference dividend is deducted from net profit first, because preference holders are paid before equity holders. What remains is divided by the number of equity shares.

The price-earnings (P/E) ratio tells you how many rupees investors pay for each rupee of EPS. A high P/E can mean the market expects growth or sees low risk. A low P/E can mean low expectations or a bargain. It does not prove either on its own.

Dividend yield is the cash return from dividends as a percentage of the share price. Dividend payout shows what share of EPS is paid out; the rest is retained. Yield is measured against price, payout against earnings. Do not mix them up.

Market-to-book value compares the market price with the book value per share (equity shareholders' funds ÷ number of equity shares). A ratio above 1 means the market values the company above its accounting net worth.

Key rules to remember

Earnings per share (EPS): EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares; Use the weighted average number of shares if shares changed during the year.
Price-earnings ratio: P/E = Market price per share ÷ EPS; Answer is in times. Earnings yield = EPS ÷ Market price, the inverse.
Dividend per share (DPS): DPS = Equity dividend ÷ Number of equity shares; Use only equity dividend, not preference dividend.
Dividend yield: Dividend yield = (DPS ÷ Market price per share) × 100; Measures the cash return on the price paid.
Dividend payout ratio: Payout = (DPS ÷ EPS) × 100 = (Equity dividend ÷ Earnings for equity) × 100; Retention ratio = 100% − Payout ratio.
Book value per share: Book value per share = Equity shareholders' funds ÷ Number of equity shares; Equity share capital plus reserves and surplus. Exclude preference capital.
Market-to-book value: Market-to-book = Market price per share ÷ Book value per share; Shown in times.

How to solve Market and Valuation Ratios questions

Use this order for any question on market ratios. Each ratio feeds the next, so a slip early spoils everything after it.

1List the data given: net profit, preference dividend, equity dividend, number of equity shares, market price, reserves.
2Deduct preference dividend from net profit to get earnings for equity shareholders.
3Divide by the number of equity shares to get EPS. Find DPS the same way from the equity dividend.
4Calculate book value per share from equity capital plus reserves, divided by equity shares.
5Apply the formula asked: P/E, yield, payout or market-to-book. Keep the numerator and denominator on a per-share basis.
6Show the formula, the substitution and the answer with units (times or %).
7Add one line of interpretation, such as what a high P/E or low payout suggests.

Quickest way: Per-share first, then one division

When to use it: Use when several ratios are asked on the same data and time is short, as in a 14-mark question.

Convert everything to per-share values first: EPS, DPS, book value per share.
Write the market price beside them.
Get each ratio with one division: P/E = Price ÷ EPS, yield = DPS ÷ Price, payout = DPS ÷ EPS, M/B = Price ÷ Book value.
Check: payout × EPS should equal DPS, and P/E × EPS should equal price.
Write one interpretive line per ratio.

Common mistakes in Market and Valuation Ratios

Not deducting preference dividend before calculating EPS.
Students start with net profit because it is the first figure given.
Fix: Always write 'Earnings for equity = PAT − preference dividend' as your first line.
Dividing yield by EPS or payout by price.
Both ratios use DPS, so the denominators get mixed.
Fix: Remember: yield compares DPS with price; payout compares DPS with EPS.
Including preference capital in book value per share.
Students use total net worth from the balance sheet.
Fix: Use only equity share capital plus reserves and surplus, unless the question says otherwise.
Using the total dividend amount against per-share price.
Dividend is given as a rupee total, not per share.
Fix: Divide by the number of equity shares first, or use total dividend with total earnings for payout.
Using face value instead of market price in P/E or yield.
Face value and market price both appear in the data.
Fix: P/E, yield and market-to-book always use the current market price.

Worked examples

Example 1

Sundaram Textiles Ltd has net profit after tax of ₹18,00,000. It pays a preference dividend of ₹2,00,000 and has 4,00,000 equity shares of ₹10 each. It declares an equity dividend of ₹6,40,000. The market price is ₹56 per share. Calculate EPS, P/E ratio, DPS, dividend yield and payout ratio.

Show the solution

Earnings for equity = 18,00,000 − 2,00,000 = ₹16,00,000.
EPS = 16,00,000 ÷ 4,00,000 = ₹4.
P/E = 56 ÷ 4 = 14 times.
DPS = 6,40,000 ÷ 4,00,000 = ₹1.60.
Dividend yield = (1.60 ÷ 56) × 100 = 2.86% approximately.
Payout = (1.60 ÷ 4) × 100 = 40%. Retention = 60%.

Answer: EPS ₹4; P/E 14 times; DPS ₹1.60; dividend yield about 2.86%; payout 40%.

Example 2

Kaveri Foods Ltd has equity share capital of ₹50,00,000 (5,00,000 shares of ₹10 each), reserves and surplus of ₹30,00,000 and 10% preference share capital of ₹20,00,000. The market price per equity share is ₹24. Calculate the book value per share and the market-to-book value ratio.

Show the solution

Equity shareholders' funds = 50,00,000 + 30,00,000 = ₹80,00,000. Preference capital is excluded.
Book value per share = 80,00,000 ÷ 5,00,000 = ₹16.
Market-to-book = 24 ÷ 16 = 1.5 times.
Interpretation: the market values each share at 1.5 times its accounting net worth per share.

Answer: Book value per share ₹16; market-to-book ratio 1.5 times.

Exam tips

Write the formula, then the substitution, then the answer. Step marks depend on this.
Check whether the question asks for payout on total or per-share basis. Both give the same result if done consistently.
In MCQs, watch for options built from common slips such as EPS without preference dividend removed.
If the question gives bonus or new shares during the year, use the weighted average shares for EPS.
Add a short comment on each ratio. Examiners reward interpretation.

Practice questions from Financial 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

How do I calculate earnings per share?

Subtract preference dividend from net profit after tax. Divide the result by the number of equity shares. If the share count changed in the year, use the weighted average.

What is the difference between dividend yield and payout ratio?

Dividend yield is DPS divided by market price, showing return on the price paid. Payout is DPS divided by EPS, showing how much of earnings is distributed.

What does a high P/E ratio mean?

It means investors pay a high price for each rupee of earnings. This often reflects expected growth or lower perceived risk, but it can also mean the share is overpriced.

What does market-to-book value above 1 mean?

The market price is higher than book value per share. The market values the company above its accounting net worth, often because of expected earnings or intangible strengths.